Verizon Acquires Rural Cellular for $2.67 Billion

The Rural Cellular acquisition gives Verizon’s 716,000 more customers and expands coverage across Rural’s networks in 15 states. Verizon expects to save more than $1 billion in roaming and operating expenses from the purchase, it said. New markets are expected to offer the company growth opportunities, it said. The acquisition is expected to close in the first half of 2008, if regulators and Rural Cellular shareholders approve, it said.

The acquisition is “not a gigantic transaction,” and Verizon expects smooth sailing, said Verizon CEO Ivan Seidenberg. Vodafone, which owns a 45 percent of Verizon Wireless, “enthusiastically supported” the deal, he said. Rural had been looking for a buyer since May and Verizon had to act fast to win the company, which wanted to complete a deal by the past weekend, he said.

The FCC usually looks at how many entrants a merger would leave in its market and the amount of spectrum the deal concentrates in the new company. Scrutiny of the Rural Cellular takeover “would really depend on what the map looks like,” a regulatory lawyer said. “There’s not a cap but a test where the FCC looks more closely at spectrum over 70 MHz. If it’s over 70 MHz in any markets that would be a factor.” In the past, a merger that gave Verizon more than 80 MHz in a market would have been considered a “dispositive” factor weighing against a merger, the source said. “Now that we don’t have a spectrum cap and now that there’s more spectrum on the market, that factor could kind of goes out the window.”

But Verizon could bump up against an unofficial spectrum cap in some markets. Jessica Zufolo, an analyst with Medley Global Advisors, said she hasn’t looked closely at the possibility. “If it did, Verizon would have to find a way to get around it,” she said. “Verizon has so many different irons in the fire that they'd be reluctant to ask for another waiver when they have all these other asks before the commission on all these different issues.”

Verizon will need to do some “heavy lifting” to integrate Rural Cellular’s network, said William Ho of Current Analysis. Verizon’s network runs on CDMA technology and four of the five Rural Cellular regions are GSM. Verizon plans to build an overlay CDMA network and convert Rural Cellular’s GSM customers, Seidenberg said. The change should be smooth, since Verizon has experience from “converting West Virginia Wireless from a GSM shop to a CDMA one,” Ho said.

Verizon will maintain Rural Cellular’s GSM networks so it can keep providing roaming to other GSM carriers’ customers, it said. That approach would echo Alltel’s successful integration of Western Wireless, Ho said. Alltel kept Western’s GSM networks going mainly for the roaming revenue, he said. Like Alltel, Verizon must expect that “revenue will outweigh the operational cost of maintaining and upgrading the GSM network,” Ho said. But it also might be a move to appease regulators, he said. “Cynically, I think that if GSM roaming were not retained, then the regulatory agencies may frown upon that.” Verizon expects to complete the conversion within 18 months of closing, Ho said.

Verizon already has strong coverage in most of Rural Cellular’s service territory, but it stands to save a great deal from reduced roaming expenses, Ho said. The move could also be a reaction to AT&T’s recent purchase of Dobson Communications and Alltel’s sale to private equity, he said. “The race is on for consolidation and rural growth,” he said. Verizon will continue to look at acquisition opportunities, Seidenberg said.

Verizon’s MCI integration is on target, and the company’s spinoff deal with FairPoint is moving along, Verizon officials said in the company’s Q2 call. Verizon expects MCI’s margins to improve the next two or three years, said Doreen Tobin, Verizon’s chief financial officer. Tobin pegged 2009 for roll off of former MCI consumer long distance customers into the company’s line-loss figures. The FCC has approved Verizon’s spinoff of northern New England landline operations to FairPoint, but the deal awaits approval from shareholders and public service commissions in Maine, New Hampshire and Vermont, Seidenberg said. A shareholder meeting is scheduled for Aug. 22, and Verizon expects state decisions late 2007, Seidenberg said. The deal is expected to close by early 2008, he said.

Verizon operating income climbed 29 percent to $4.1 billion in the second quarter, while revenue rose 6.3 percent to $23.3 billion, the company said. Verizon saw increases in its wireless and FiOS TV businesses. Wireless added 1.6 million retail customers. It now has 60.1 million, leading rival carriers. FiOS TV added 167,000 customers, raising the total to 515,000, it said. AT&T has 51,000 customers on U- verse, its IPTV offering.

Data revenue growth fueled the wireline and wireless businesses, Verizon said. Data represented 19 percent of the company’s wireless service revenue and 35 percent of wireline revenue, Tobin said. Messaging was the biggest spur to wireless data growth, said Denny Strigl, chief operating officer.

Verizon hopes to improve its wireline line loss, DSL net customer additions and position in the business market, Strigl said. Though Verizon has seen a 16 percent improvement in retail resident-access line loss since last year helped by FiOS, bundled offerings and retention plans, the figure “didn’t improve enough,” Strigl said. And DSL adds were lighter than expected at 85,000, he said. DSL suffered from a shift of focus to FiOS offerings last quarter, and Verizon will focus on boosting DSL results in Q3, he said. Verizon’s performance in the business market is also lacking, but the company sees “good growth opportunity in taking share from competitors,” he said.

Seidenberg restated Verizon’s positions on the upcoming spectrum auction. The FCC shouldn’t put “unnecessary restrictions” on any blocks, he said. For now, the company will take a “wait and see attitude,” he said. “What we need to do now is see what the rules say and then develop a bidding strategy accordingly.” Verizon “has had extraordinary growth in the past few years by putting spectrum to use quickly” and looks forward to the auction, he added.

Apple’s iPhone didn’t have a lasting effect on Verizon Wireless number porting rates, Seidenberg implied without naming the device. Porting rates were hit for a “short period of time” in early July, but are positive again, he said. Verizon takes in two numbers for each one it loses, he added.