In a move to strengthen Alltel Corp. in the nation’s wireless telephone market, the company announced last week that it plans to buy 360? Communications Co. of Chicago for roughly $4 billion in its own stock and assume $1.8 billion of 360?’s debt.
The deal would make Alltel the seventh-largest provider of wireless phone service in the country, based on the number of customers. The true beauty of the deal, though, is that the two companies have no overlap in their wireless markets.
“We fit like hand in glove,” Alltel spokesman George Smith says.
In essence, the deal would solidify Alltel’s presence in the Southeast – bringing wireless markets like Norfolk-Virginia Beach, Va., and Greensboro-Winston-Salem, N.C., to fill in gaps in Alltel’s coverage – while introducing Alltel to the Midwest, Las Vegas and part of New Mexico, where it has no customers.
Alltel has been offering wireless services to about 27 percent of the customers in its local telephone service regions. With the purchase of 360?, a company spun off by Sprint Communications Inc. in 1996, 43 percent of Alltel’s customers will have access to wireless service, with the potential 62 percent. And the possibilities for bundling local telephone service, long-distance, wireless and Internet access together on one bill will be greatly enhanced.
At the moment, Alltel provides wireless, long-distance, wireline and Internet services to 3 million customers in 14 states, and information services to financial and communications companies in 47 countries. 360?, on the other hand, provides wireless communications to 2.6 million customers in more than 100 markets in 15 states and also offers residential long-distance and paging services.
According to Alltel, the combined company will have a market value exceeding $12 billion, annual revenue of nearly $5 billion and net income of around $500 million. After the merger, almost 70 percent of Alltel’s revenue will come from communications and 21 percent from information services. Communications will produce more than 80 percent of Alltel’s operating income.
The companies’ combined operations should allow Alltel to reap annual cost savings of more than $100 million by the year 2000, says Joe T. Ford, Alltel’s chairman and chief executive officer.
Dennis Foster, president and CEO of 360?, would join Alltel under the new title of vice chairman, answering only to Ford. Foster would be put in charge of the company’s existing corporate development arm, which is charged with developing ideas for new business.
“I can’t think of anything more important than that,” Smith says.
Legal Roadblock
Already, though, a problem has arisen: The day after the proposed deal was announced, 360? was sued by shareholder Max Grill, who is asking a Delaware judge to stop the acquisition, saying Alltel isn’t paying enough for 360?.
“We don’t comment on pending or possible litigation,” Smith says. “It’s not unexpected; it’s just part of doing business.”
Under the deal, Alltel would exchange 0.74 Alltel shares for each share of 360? stock.
Stephens Group Inc., which owns 16.6 million shares of Alltel, would see its 9 percent stake in the company diluted to 6.1 percent when 90.2 million shares are issued to 360? shareholders. No 360? shareholder will own more than 5 percent of Alltel.
The deal, which must be approved by regulators and shareholders of both companies, is scheduled to be completed by mid-summer. But there could be other complications.
Rumblings about the proposed purchase of 360? sent the value of its stock down $4.38, or 12 percent, to $31.25 on Monday. The company’s shares had climbed sharply Friday in heavy trading, rising $5.81, or 22.9 percent.
According to The Wall Street Journal, rumors had Alltel paying as much as $40 a share for the company. The reality is much less exhilarating: Alltel shares fell nearly 94 cents the day of the announcement to $44.88, the Journal said, because some of the company’s more “risk-averse” shareholders reacted to the prospect of earnings dilution caused by the merger.
At Wednesday’s close of $44 a share, Alltel would be paying $32.56 per share for 360?. The Monday decline in Alltel’s stock followed a Friday dip of $2.13, closing at $45.81 amid rumors of the 360? deal.
Meanwhile, the credit-rating service Standard & Poor’s Rating Group placed Alltel and its business units on credit watch “with negative implications” after the stock devaluation, affecting about $1.9 billion in Alltel debt. Moody’s Investor Service followed suit Tuesday, placing all the debt ratings of Alltel on review for possible downgrade and placing all the ratings of 360? under review for possible upgrade.
The process of merging the companies will be handled by a set of nine transition teams, including employees from both companies, who will try to identify “best practices” and plan for combined operations.
Foster will head the six-member transition office overseeing the teams.
There are 750 employees at 360?’s Chicago headquarters who will be given the opportunity to relocate to Little Rock or other Alltel locations. But it’s uncertain how many will decide to leave Chicago.
“Alltel has made it very clear that they are going to try very hard to integrate the two companies for people who are willing and able to move,” says Margaret Cohen, 360?’s director of communications.
Foster called a meeting of all 360? employees Tuesday, Cohen says, and his key message to workers was “Do what’s right for you.”
“Certainly there was a lot of emotion involved at the meeting,” Cohen says. “But from what I’m hearing, people understand this is business, and in terms of a fit with another company, it couldn’t be better.”
In an interview last week with the Reuters news service, Ford and Foster said Alltel was not trying to dress itself up to become an attractive takeover candidate. They also said the combined company would continue to carve out a niche in secondary markets, avoiding entry into the slugfest markets like Chicago, where 360? is based.
Philip Wohl, an analyst with S&P Equity Group in New York, says he doesn’t think Alltel wants to be acquired. Alltel may have had in mind that acquiring 360? could make it even less attractive to an acquirer because it strengthens Alltel’s position in smaller markets.
“I think they’d rather be good at what they do, and by acquiring 360? I think they’re even better at what they do,” Wohl says. “They stay in the niche markets and they don’t try to go head to head with the big guys because you can’t win doing that.”
Lengthy Merger Talks
Merger discussions between Alltel and 360? began at least as far back as November, Arkansas Business learned. Alltel approached 360? about the possibility of merging the companies, Foster says. Foster implied that 360? also considered other companies as acquirers.
Wohl expects that any acquisition strategy Alltel may have in the near future will be focused on information technology.
“I think that now they are in really good shape with wireless [with the 360? purchase],” Wohl says. “They are fine with wireless, they are fine with local and with long distance. So I think they will pretty much concentrate on the information services and rounding out that in the future.”
As a matter of fact, 360? has had a stated philosophy of emphasizing second- and third-tier markets. Scott Ford, Alltel’s president, says Alltel has a very similar business strategy.
According to Joe Ford, the new company will have about 250 retail stores, 450 kiosks and 2,500 sales personnel.
Foster offered one example of the potential savings.
“Alltel is completing construction on a 6,800-mile fiber-optic network connecting its service areas,” he says. “That network provides a cost-effective backbone for delivering additional communications services as well as carrying voice and data traffic, and it will take only an additional 1,800 miles to tie 360?’s contiguous markets into this network.”
When the network is complete, the companies say, Alltel and 360? will have a large area over which wireless customers will be able to communicate without being charged interconnection fees by competing telecommunications companies. And the cost to establish this network will be minimal, Foster says.
As far as wireless services go, 360?’s 2.6 million customers are spread throughout Virginia, Pennsylvania, Tennessee, Florida, North Carolina, South Carolina, New Mexico, Nevada, Texas, Illinois, Iowa, Indiana, Ohio, Kentucky and West Virginia. Alltel, on the other hand, has only 950,000 wireless customers in Arkansas, North Carolina, South Carolina, Florida, Georgia, Missouri and Oklahoma.
Alltel used Merrill Lynch Pierce Fenner & Smith Inc. and Stephens Inc. as its financial advisers and Skadden Arps Slate Meagher & Flom, based in New York, as its legal adviser. 360? used Lazard Freres & Co. as a financial adviser and Sonnenschein Nath & Rosenthal of Chicago as legal adviser. n
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