Back in January, I surmised that wireless provider Alltel
I theorized that Alltel intended to take Western's revenues and, by dint of Alltel's efficiency at converting its own revenues into profits, begin turning around the U.S.S. Western Ship o' Profits. Of course, it would simultaneously maintain and incorporate Western's revenue growth into Alltel's own business.
Four months later, Western seems headed in a different direction. Earlier this week, the Wall Street Journal (citing unnamed sources) reported that Western is looking to divest the international units that fueled so much of its revenue growth, hiring Deutsche Bank
Why would Alltel back such a move by its intended? First off, Alltel may be unimpressed by the efficiency of Western's international operations. After all, while Western gets 45% of its revenues from abroad, only 29% of its operating profits originate outside the U.S. Clearly, if there's money to be made from Western's business, it's in the Western hemisphere.
Second, you'll note that I mentioned "operating profits" and "Western" in the same sentence. Don't laugh. On an operating basis, Western does generate profits. However, by the time the company has paid all the interest on its enormous debt load, there's no money left for the shareholders. With interest rates on the rise, that situation's going to get worse before it gets better.
Hence, Alltel probably feels a need to raise some cash and pay down some debt. With analysts guesstimating that a sale of Western's international business could raise up to $2 billion, that's a good place for Alltel to start doing some preventative maintenance on its post-merger balance sheet.
By cutting loose Western's international operations, Alltel/Western can raise enough cash to pay off all of Western's debts. The combined company would lose 45% of Western's revenues and much of its revenue-growth prospects -- but they'd keep 61% of Western's operating profits. And that's before Alltel even gets around to tightening up Western's U.S. operations.
So all told, I think Alltel's decision is the right course for shareholders of both companies.
Over the past 16 months, Alltel's shares have returned 20% in capital gains and dividends for Motley Fool Income Investor subscribers who bought it on Mathew Emmert's recommendation. That's nearly triple the return of the S&P 500 -- and it came out of the troubled telecom sector. How'd Mathew know to look there for a deal? Take a free one-month trial and find out for yourself.
Fool contributor Rich Smith does not own shares in any of the companies mentioned in this article.