Alltel Deal Goes To Fleetest Of Foot

Target: Alltel Corp.

Price: $27.5 billion

Sponsors: TPG Capital and GS Capital Partners

Seller: Alltel Corp.

Financial Advisors: Sponsors: Citi and Goldman Sachs Group; Seller: Merrill Lynch & Co., Stephens Inc. and JPMorgan Securities Inc.

Legal Counsel: Sponsors: Cleary Gottlieb Steen & Hamilton; Weil Gotshal & Manges; Akin Gump Strauss Hauer & Feld; Seller: Wachtell, Lipton, Rosen & Katz

The competition for take-private opportunities has turned into a foot race.

TPG Capital and GS Capital Partners, the buyout arm of Goldman Sachs Group, proved to be the swiftest last month in the big battle for Little Rock, Ark.-based wireless provider Alltel Corp., which the firms won with a $27.5 billion offer tendered two and a half weeks before the auction’s deadline.

TPG and GS Capital agreed to pay $71.50 a share for Alltel in a transaction backed with a debt financing commitment from Goldman Sachs, Citi, Barclays and RBS. The agreement was announced on May 20, more than two weeks before the June 6 deadline. Alltel operates the nation’s fifth largest cellular network.

The early arrival of TPG and GS Capital foiled plans by other potential bidders. The Blackstone Group, Providence Equity Partners, The Carlyle Group and Kohlberg Kravis Roberts & Co. were understood to be putting together offers of their own or as part of clubs. Now, if superior offers do surface, competitors will have to take into account a 2.5 percent break-up fee, equivalent to about $700 million.

While unexpected, Alltel’s early decision is well within the bounds of good practice. Alltel had notified prospective bidders that it had the right to alter, accelerate or terminate the bidding process at any time and did in fact encourage bidders to speed up their offers. However, it’s more common in these situations to collect all bids and decide on the winner after the deadline. That’s why some of the buyout heavyweights that appear to have lost this deal did not see the need to beat the deadline by such a long time.

“TPG and GS Capital listened to what the board said,” said one banker. They acted so quickly, in fact, that they put in a bid without informing JPMorgan and Merrill Lynch, Alltel’s financial advisors.

The main reasons for Alltel’s quick decision was to eliminate uncertainty and market risk, according to analysts. Observers also suspect that TPG and GS Capital made a goodwill gesture of some kind to shareholders, thought it’s not clear yet what that is. “It seems as if the ante has been raised in the context of all of this shareholder agitation in these public-to-privates,” said one partner at a private equity firm not involved in the Alltel deal. “TPG and Goldman must have hit that ante.”

Alltel’s management seems confident that the offer would appease most shareholders. At an enterprise multiple of 9.5x 2007 earnings, it was considered relatively full value by some analysts. The deal represents a roughly 10 percent premium to Alltel’s closing price on May 18 and a 25 percent premium to the share price late last year, when informed rumors of a sale first surfaced. But many are still calling the decision premature, and, not unexpectedly, a handful of shareholders quickly filed lawsuits arguing that the offer undervalued the company.

The transaction is expected to close in the fourth quarter of 2007 or the first quarter of 2008. No detailed financing plan has been announced, but some estimates have put the equity contribution at $4 billion vs. a debt load of roughly $23 billion, which includes Alltel’s existing obligations.

Some market players predict that Alltel’s new owners are buying the company now to flip it once consolidation sets in among telecommunications providers. Even though Sprint Nextel is often rumored to be a takeover target, it could ultimately be a strategic buyer for Alltel, as could Verizon Wireless, according to analysts.

Still, the size of the Alltel deal is a bit worrying even to private equity professionals. “The exit is a question,” said the private equity partner. “How do you get out of a $25 billion LBO? To make a 15 percent return, the equity has to double. The exit challenges get more complicated at these levels.”—Joy Ferguson