Alltel will become a pure play in wireless communications, with 11 million customers in 34 states. Its shareholders will also receive 1.05 shares of VALOR common stock for every share of Alltel they own, giving Alltel shareholders 85% of the new VALOR. The transaction is expected to close in mid-2006.
The new VALOR will be a much larger rural telecommunications company. Combined, both parts of the new company have trailing annual revenue of $3.4 billion and operating income (before depreciation and amortization) of $1.7 billion. The new VALOR will assume approximately $4.2 billion of Alltel's $5.9 billion in debt. The projected $5.4 billion net debt will lower VALOR's current cost of capital. The company also expects that reductions in administrative spending and combination of its billing systems should create $40 million in annual synergies. That's nice, but it's still a relative small number compared with its operating income before depreciation and amortization.
Alltel was an ideal split-up candidate, and VALOR was an ideal recipient. While the industry's trailing annual operating margin sits at 8.4%, according to Yahoo! Finance, Alltel's is 23.1%, and VALOR has a strongly profitable 32.5%. Alltel's operating margins are more than 4% higher than those of Verizon
Today, the largest wireless businesses are buried inside behemoths like Verizon and AT&T, whose lower-performing segments dampen their value. In spinning off its wireline segment, Alltel has enabled investors to value its remaining wireless business based on its faster growth prospects. Meanwhile, even though the deal will lower VALOR's annual dividend, it will still sport a healthy yield. That combination of growth and income looks intriguing to me.
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