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Traditionally, strategic buyers have an edge over financial buyers (that is, private equity funds). Essentially, they have the advantage of revenue and cost synergies. However, when debt became dirt cheap over the years, financial buyers had a big advantage and were able to out bid strategic bidders.
Of course, with the credit crunch, this is over. And, yes, strategic buyers are coming to the table – and even talking to the portfolio companies of private equity funds.
This is the case with Verizon Wireless, which is a joint venture of Verizon (NYSE: VZ) and Vodafone (NYSE: VOD). The company has announced that it will purchase Alltel for $28.1 billion. Keep in mind that the company went private about seven months ago for $27.5 billion. They buyers included TPG and Goldman Sachs (NYSE: GS).
For Verizon Wireless, the deal makes a lot of sense. Basically, it will add 13 million customers and as a result, make the firm the #1 player in the US market. More importantly, Verizon Wireless expects to achieve $1 billion in incremental cost savings in two years after the closing of the transaction.
Oh, and I'm sure that Alltell's financiers – which include Goldman Sachs (NYSE: GS), Citigroup Inc. (NYSE: C), Barclays PLC (NYSE: BCS) and Royal Bank of Scotland Group PLC -- are happy. Simply put, they still haven't sold off $20 billion in outstanding debt. In other words, the sale of Alltel deal should be a big relief.
What's more, Verizon Wireless is going to buy the equity from TPG and Goldman for roughly $5.9 billion. Interestingly enough, these private equity firms originally wrote a check for $4.6 billion. So, yes, they will be making a nice return (considering the short period of time).
Tom Taulli is the author of various books, including The Complete M&A Handbook
and The Edgar Online Guide to Decoding Financial Statements.. He also operates MergerBook.com.
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