Alltel said it will spin off its wireline business and immediately merge the unit with Valor Communications Group in a multi-step deal valued at about $9.1 billion.

The combination will create a rural-focused incumbent LEC with about 3.4 million customers in 16 states. At that size, the company will be the second-largest independent after Sprint, which is planning to complete a spin-off of its local wireline group early in 2006. At the announced transaction value, each access line will be valued at $3116. Total combined revenues for the year ending Sept. 30 for the combined properties was $3.4 billion. Operating income before depreciation and amortization was $1.7 billion.

The merged company will be 85% owned by Alltel shareholders and most of the leadership group will come from Alltel. Valor, which was created in 1999 to acquire former GTE properties in Texas and New Mexico, will issue approximately 400 million shares of stock to the Alltel shareholders as part of the transaction.

The deal has been hinted at throughout the year with Alltel announcing in September that it was assessing the future of its wireline group.

Francis "Skip" Frantz, currently executive vice president and secretary of Alltel, will become chairman of the board of the as yet unnamed company. Frantz also serves as chairman of the U.S. Telecommunications Association. Jeffery Gardner, currently executive vice president and CFO of Alltel, will become president and CEO of the group.

After closing the deal, which is expected in mid-2006, the combined company expects to pay an annual dividend of $1.00 per share. For existing Alltel shareholders, who will receive 1.05 shares in the new company for every share they currently hold, that dividend will be $1.05. Combined with the dividend that Alltel’s wireless group plans to pay, existing shareholders actually will see a total dividend of about a penny more than the company is currently paying, said Scott Ford, Alltel’s president and CEO, who will stay with the wireless side.

“We wanted come up with a financial structure that will be good for customers,” he said in a conference call this morning.

That structure, in fact, is key to the new wireline group. One of the biggest issues for Alltel was determining how much leverage to place on the new entity. Several independent telcos have recently adopted a financial structure that is highly leveraged, positioning themselves to shareholders as an investment more valued for their dividend yield.

Gardner said the financial structure of the wireline group puts it “in the sweet spot” in terms of leverage and allows the company plenty of flexibility for future acquisitions and growth.

“We were not in a position to pursue these opportunities as part of a growing wireless company,” he said. “We believe this new company is in position to pursue new opportunities. The criteria will be clear—rural and cash accretion. We’ll pay very close attention to the capital structure that we studied in front of this deal.”

On the wireless side, Ford said the move frees him up to grow a lot faster in both traditional and nontraditional ways. Among the more intriguing ones he mentioned is the possibility that Alltel’s wireless group may end up quickly competing with the wireline side for primary line customers.

“It wouldn’t surprise me if, a year from now, we were offering local service through wireless,” he said.