Verizon Wireless plans to buy Rural Cellular

02 August 2007

Verizon Wireless made public today its plans to buy out Rural Cellular Corp. for $757 million in cash, which will expand Verizon''s rural market wireless coverage into Rural''s Unicel network across 15 states.

The deal is slated for approval during the first half of 2008, and is subject to government and stockholder approval. Verizon Wireless is a joint venture of New Jersey based Verizon Communications Inc. and the Vodafone Group PLC based out of West Berkshire, U.K. Three private equity firms — Madison Dearborn Partners LLC, Boston Ventures Management and Toronto Dominion Investments — which had teamed up with Rural Cellular in April 2000, having invested $110 million will now pocket just over $200 million in the sale, $90 million of which are maily accrued dividends.

The acquisition stands to potentially save $1 billion a year in roaming and other charges alone. Though the deal is probably unlikely to translate into savings for most of their customers, it highlights the criticality of seamless network coverage in attracting and keeping users. Roaming charges largely disappeared from customers'' bills around 1998, when AT&T Wireless and other cellular companies adopted a flat-rate monthly pricing for all calls. Today, the only hint Verizon customers get that they are on roaming is when their phones say they are using the company''s "extended network."

The deal gives Verizon a larger customer base, along with the opportunity to sell more services to them. The Rural Cellular acquisition will give the company an additional 716,000 customers across 15 states, including 200,000 in Minnesota. Verizon Wireless said the deal with Alexandria, Minn., based Rural Cellular, is actually worth $2.67 billion, including the cash payment and assumed debt.

In Minnesota, Rural Cellular serves 90 percent of the state that lies outside the metro areas of the Twin Cities, Rochester, St. Cloud and Winona. Besides an expanded service footprint, the reduces roaming costs for Verizon, and positions it to collect more roaming fees from other cellular companies such as T-Mobile and AT&T.

The estimated Verizon Wireless savings on the acquisition include a large chunk of $150 million in roaming charges paid to Rural Cellular last year on behalf of Verizon customers who used their cell phones in Rural Cellular''s 15-state territory. Last year, Rural Cellular got 27 percent of its revenue — or $154 million — from roaming fees.