Description

Thesis
Post-spinoff of Windstream Communications (WIN) on 7/17/06, Alltel Corp. is now the 5th largest wireless operator/largest pure-play wireless operator in US, with a compelling growth profile, strong balance sheet, and a plan for an “aggressive” return of shareholder value within the next 12 months.
• AT has committed to buying back $3B in stock over 2 years, of which $2.3B “must” be returned in the next 12 months related to the Reverse Morris Trust transaction of Windstream
• AT also has a $1B debt buyback in place
• AT is essentially 'debt-free' by YE06 (~1x leverage by YE07); lever-ing up to 1.5-2.0x can be used to return additional shareholder value

Basically, AT is attractively valued with numbers going up, is buying back stock and remains an attractive M&A candidate for the other wireless carriers. I believe AT has 15-20% near-term upside and 35-50% or more upside in the next 12 months.

Investment Highlights: Why Is The “New” Alltel Interesting?

1) Accelerated Share Buyback
Depending on whether AT filed a non-public 10b5-1 plan, Alltel could be in the market buying back stock in the market right now. Otherwise, it would be a “typical” buyback, and subject to blackout dates, although the company wouldn’t be able to accomplish their “aggressive” buyback IMO. Previously, Alltel committed to a two-year $3B share repurchase (~13-15% of equity value) at the close of Windstream spin-off (7/17/06).

Reverse Morris Trust: Windstream
Alltel completed the Western Wireless acquisition and the wireline spin/merger as tax-free transactions. Therefore, for a period of time, AT owners must retain control in order to maintain “safe harbor” with regard to the tax free status. The safe harbor time frame can be for a period of up to two years, but one year is a more realistic window.
• After receiving a net cash payment of $4.2B from Windstream, AT will have YE06 net debt of ~$1.9Bmm (0.6x leverage) before buybacks.
• $2.3B of the net cash payment from Windstream must be returned to AT shareholders within 1 year of the transaction close
• AT has an approved 2-year $3B share repurchase and a $1B debt buyback program in place

A SEC rule states that, on any given day, a company cannot buy back more than 25% of its average daily trading volume from the previous four calendar weeks
• AT’s ADV is ~2mm shares, making the maximum number of shares AT can repurchase daily at ~500k
• Simple math: $2.3B divided by $55/share average share price = 41.8mm shares to be bought over next 12 months
• 41.8mm divided by 500k shares = ~84 business day, or 4.2 months

The reason to complete the buyback sooner, rather than later: to be opportunistic with regards to spectrum, acquisitions, etc. I don't believe AT will be acquired for at least a year.

2) Numbers Going Up
Alltel is seeking to be the roaming partner of choice, as it footprint covers over half of the US today. I believe there is upside to consensus estimates resulting from the success of recent promotions (see “My Circle”) and new roaming agreements with Sprint and Cingular.
• AT’s “My Circle” promotion seems to gaining traction, increasing brand awareness and customer loyalty, while increasing ARPU and driving traffic

Alltel recently signed long-term roaming agreements with Sprint and Cingular that provide more roaming diversity and allows Alltel to offer EV-DO to its customers (60% of its footprint by YE06 vs. 20% in ’05).
• AT pays an asymmetric rate: AT pay roaming partners a much lower rate on their networks than when they use AT’s network
• Growth in data revenues at either CING or S would send significant data traffic on AT’s network (S data revs should exceed $1B in ’06, +80%)

3) Potential M&A/LBO Target
Within the next 2-3 years, I believe Alltel will cease to exist as a standalone entity. Alltel’s roaming agreements with all 4 national carriers increase the company’s strategic value in a consolidating industry. Consensus opinion believes Verizon (VZ) to be the most likely acquirer:
• Both VZ and AT share a common technology platform: CDMA
• AT’s 10.8mm subs would allow VZ to overtake Cingular as the nation's largest wireless provider
• AT’s wireless footprint would increasse VZ’s spectrum holdings and wireless exposure

However, I tend to believe Verizon would prefer to acquire the ~45% of Verizon Wireless that Vodafone currently owns, prior to pursuing Alltel.

Similar to the AT&T Wireless transaction, I believe Alltel could attract multiple bidders, including other national carriers – Cingular, Sprint Nextel – or even private equity. A fair case can be made that AT’s assets fit strategically with several companies would require a premium multiple (8-10x EBITDA), as it represents on of the few remaining large-scale US wireless assets. As a side note, CEO Scott Ford is a former banker, and investors can be assured that value will be maximized in any such transaction.
• For example, at 9x '07 EBITDA of ~$3B (giving effect to announced share buybacks, but no add'l leverage) is ~$81/share

4) "Right-sizing" Balance Sheet = More Shareholder Value
According to my estimates, AT will be at ~1x leverage in 2007 and 0.7x leverage in 2008. Assuming management is comfortable (they have mentioned as such), levering the balance sheet up to 1.5-2.0x, Alltel can cumulatively "payback" between $2.7-4.2B from 2007-2008, or ~15-23% of its current market capitalization! Now that's compelling.

Description
The “new” Alltel is the 5th largest wireless carrier and largest pure-play wireless carrier in the US with 10.9mm subscribers covering a services area of ~77mm people. Alltel’s footprint is strongest in the Southeast and Mountains regions of the US.

AT-WIN Transaction
• AT shareholders receive 1.0339267 shares of WIN
• AT will pay a dividend of $0.50/share going forward
• WIN will pay a dividend of $1.00/share

AT’s “My Circle” Promotion
Alltel’s recently launched “My Circle” program (4/21/06) has been increasing demand and awareness for the Alltel brand both locally and nationally thru its televised ad campaign. Alltel customers can choose any 10 phone numbers on any network, and receive unlimited calling to/from the “Circle” numbers for wireless plans $59.99 or above. The package includes 900 anytime minutes, unlimited mobile-to-mobile and free nights/weekend – basically unlimited calling for $59.99.

Channel checks indicate customers are specifically porting their numbers to AT for the “My Circle” offer and are not worrying about overage charges, allowing Alltel to “expand” their pan-regional presence. While the offer is more expensive than either MetroPCS or Leap, it offers a compelling value proposition and much larger network.

“My Circle” effectively:
• Drives traffic through AT’s distribution network
• Increases customer loyalty (reducing churn)
• Induces calling plan upgrades (increasing ARPU)

Long-Term Roaming Agreements
Alltel recently signed long-term roaming agreements with both Cingular and Sprint Nextel, in addition to the roaming agreements it has in place with Verizon and T-Mobile USA. Currently, Alltel has ~$700mm in roaming revenue, of which ~90% is generated by Verizon Wireless and Cingular ($330-$340mm each).
• Cingular agreement extends a previous agreement to 2012, while also allowing new GSM roaming capabilities in the "classic" Alltel markets (previously only supported CDMA service)
o Cingular’s $330-340mm in roaming is only on 10mm POPs (WWCA), but now expanded to entire AT 60mm POPs – bottom line: it is going up from here
• Sprint agreement is 10 year deal covering CDMA, voice and data revenues; it allows AT to offer EV-DO to its customers and access to Sprint’s extensive EV-DO network (200mm POPs)
o Today, Sprint is ~$50mm or so, and could grow well over $250-300mm over time

Analyst Coverage
• 16 Buys
• 8 Holds
• 1 Sell
• Target Price: $60.37

2006 Guidance (From 2/1 Analyst Day; no update since WIN spin)
• Revenues: $7.85-8.02B
• EBITDA: $2.723-2.823B
• Capex: $1.22-1.32B
• Net Adds: >423k

Bear Case
• M&A: While AT is seen as a consolidation candidate, it may be several years away and there is likely some premium currently built in.
• Technical: Many investors expected Sprint Nextel (S) to rally post-Embarq (EQ) spin, but Sprint is off ~15% post-spin. While the market malaise and stock-specific factors (earnings risk, delayed buyback) contributed to the Sprint case, on the surface many issues seem similar.
• Industry: Much of the long-term outlook for AT is dependent on the outlook for the US wireless industry – its growth, penetration, etc. The industry is poised to face increased competition and slow down at some point.
• Guidance: AT has not yet updated pro-forma wireless guidance and some analysts have yet to fully adjust their model for the spinoff. There is a chance AT’s guidance comes in below consensus guidance given recent deal activity and results.

Valuation
Alltel currently trades at 7.9x 06E EBITDA (excludes H1 WIN numbers) and 7.2x 07E EBITDA, while comparable companies trade at 8.1x and 6.9x, respectively. Assuming a $55/share average share price, Alltel will have repurchased ~41.8mm shares, or ~11% of equity value in the next year, and potentially should management decide to modestly lever up the balance sheet.

Catalyst

• 8/02/06: Q2 06 Earnings release/Potential for update guidance on standalone wireless
• Q3/Q4 06: Aggressive Share Repurchase – possible for entire $3B share repurchase by YE06