Hold The Phone: Verizon Is No.1

By Ben McClure | January 06, 2009 AAA

Verizon Wireless will surpass AT&T (NYSE:T) as the biggest U.S. wireless communications operator this Friday, the day that its $28 billion acquisition of Alltel Wireless is expected to close. Size matters in the telecoms business; bigger is better, and the company's new premier status bodes well for Verizon Communications (NYSE:VZ) investors. Let's take a look at Verizon's new position in the wireless communications market compared to its peers.

The Competition
While AT&T has about 71 million customers under its belt, Verizon alone has 67 million, and fifth-ranked Alltel has 13 million, which puts about 80 million customers under Verizon's roof. Verizon can now not only claim to have the "most reliable" network, but also the most widely used one, giving it powerful marketing ammunition.
Besides giving Verizon more revenue - especially in mobile data where growth remains strong - greater size should allow it to squeeze more favorable terms from its suppliers. This could include mobile handset makers, such as Research in Motion (Nasdaq:RIMM) or Apple (Nasdaq:AAPL), which could opt for Verizon's bigger customer base for exclusive product launches.

What's more, by removing a big competitor - as AT&T did when it bought Cingular Wireless back in 2006 - Verizon has the luxury of being able to cut costs without having to fear that a competitor will spend more to poach customers. At the same time, now that the wireless telecom crowd is shrinking and No.3 Sprint Nextel (NYSE:S) is on the ropes, pricing conditions should improve.

The Deal
Overall, the deal appears to tally up financially. Assuming Verizon did its math correctly, the net present value of synergies from the deal are $9 billion over three years. This means that the merger could produce a solid return of 13%. Because the two companies use the same CDMA wireless network technology, the integration and costs synergies certainly look feasible. If the merger's integration follows the same path as AT&T's acquisition of Cingular, which has proven more successful than originally envisioned, investors can hope for even more gains from the Alltel deal. (For further reading, see Analyzing An Acquisition Announcement)

That said, Alltel is sitting atop nearly $22 billion of long term debt and this has some investors worried. To finance the deal, Verizon has issued bonds and is now looking to raise more bank debt, which, in today's tight credit market, could come at a high price. However, the risk seems controllable for Verizon, which generates an avalanche of cash and is not heavily indebted.

You Make the Call
With a whopping 5.3% dividend yield, there is little downside risk on Verizon shares from here. Best of all, it's not too late to tuck some Verizon shares away.

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