Alltel $1.25 billion mandatory convertibles talked at 7.75-8.25% yield, up 18-22%

By Ronda Fears

Nashville, Tenn., April 26 - Alltel Corp.'s $1.25 billion of three-year mandatory convertibles are talked to yield 7.75 % to 8.25% with an 18% to 22% initial conversion premium. The deal is set to price Tuesday via joint book-running lead managers Banc of America Securities, Merrill Lynch & Co. and Salomon Smith Barney.

There is a $187.5 million greenshoe available. The issue will be non-callable.

Moody's rates the Alltel convertible at A2. Standard & Poor's and Fitch rate it at A.

Little Rock, Ark.-based Alltel expects to use a significant part of proceeds, along with other financings, for its pending purchases of Verizon Communications' local telephone business in Kentucky and CenturyTel Inc.'s wireless operations.

Last month, Alltel agreed to pay $1.65 billion to buy rival CenturyTel Inc.'s wireless assets. In November, Alltel agreed to purchase the wireline access lines from Verizon Communications for $1.9 billion. Together, the accquisitions will add some 1.3 million customers, Alltel said.

While financing the acquisitions will weaken credit measures near-term, Moody's anticipates Alltel will generate strong free cash flow and quickly restrengthen its balance sheet. In 2001, Moody's noted, Alltel reduced net debt by almost $800 million despite increasing capital spending by over $100 million.

In addition to the convertible, Moody's expects the balance of the acquisition costs will be financed with debt of varying maturities, including a modest amount of commercial paper.

S&P said that if Alltel's cannot achieve cash flows sufficient to reduce total debt to EBITDA of below 2 times in 2003, the ratings could be lowered. But, S&P added that Alltel has initiated a comprehensive organizational effort to address various requirements for implementing these integrations, thereby mitigating concerns.

Yet, S&P has the Alltel rating on negative outlook.

Fitch also has the Alltel ratings on negative outlook, but said that based on the convertible offering and anticipated operating performance, it anticipates removing the watch and expects to affirm Alltel's current A rating.

Pro forma debt-to-EBITDA for 2002 is expected in the range of 1.8 times to 1.9 times, taking into account the level of equity consideration with the convertibles, compared to a historically strong debt-to-EBITDA over the last 12 months of 1.25 times, Fitch said. Fitch said pro forma EBITDA-to-interest for 2002 is expected to approximate 7 times.

Alltel reported Thursday first quarter net income of $213.8 million, or 68c a share, down from $395.7 million, or $1.25 per share, a year earlier. But the company reported a 19% increase in first quarter earnings from current business. Total revenues were flat at $1.83 billion, but wireless revenues rose 3% to $944.1 million and wireline revenues gained 5% from a year ago.

Also, Alltel reiterated that it expects earnings of $3.20 to $3.35 a share for 2002, on revenue growth of 3% to 5%. For second quarter, the company expects to earn 78c to 82c per share from current businesses, in line with the 80c First Call analyst consensus.

Alltel expects wireless service revenues of $945 million to $965 million in second quarter and wireline revenues are expected to be between $495 million and $505 million. The company expects to add 525,000 to 575,000 gross wireless customers in second quarter.

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