Notes to Consolidated Financial Statements

NOTE 2

ACQUISITIONS

Alltel Corporation

On June 5, 2008, Verizon Wireless entered into an agreement and plan of merger with Alltel and its controlling stockholder, Atlantis Holdings LLC, an affiliate of private investment firms TPG Capital and GS Capital Partners, to acquire 100% of the equity of Alltel in an all-cash merger. After satisfying all closing conditions, including receiving the required regulatory approvals, Verizon Wireless closed the acquisition on January 9, 2009 and paid approximately $5.9 billion for the equity of Alltel. Immediately prior to the closing, the Alltel debt associated with the transaction, net of cash, was approximately $22.2 billion. Alltel provides wireless voice and advanced data services to residential and business customers in 34 states.

We expect to experience substantial operational benefits from the Alltel acquisition, including additional combined overall cost savings from reduced roaming costs by moving more traffic to our own network, reduced network-related costs from the elimination of duplicate facilities, consolidation of platforms, efficient traffic consolidation, and reduced overall expenses relating to advertising, overhead and headcount. We expect reduced overall combined capital expenditures as a result of greater economies of scale and the rationalization of network assets. We also anticipate that the use of the same technology platform will enable us to rapidly integrate Alltel's operations with ours while enabling a seamless transition for customers.

The Alltel acquisition will be accounted for as a business combination under SFAS No. 141(R). While Verizon Wireless has commenced the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and liabilities arising from contingencies, the fair value of noncontrolling interests, and the amount of goodwill to be recognized as of the acquisition date, the initial purchase price allocation is not yet available.

On June 10, 2008, in connection with the agreement to acquire Alltel, Verizon Wireless purchased from third parties $5.0 billion aggregate principal amount of debt obligations of certain subsidiaries of Alltel for approximately $4.8 billion, plus accrued and unpaid interest. The maturity dates of these obligations range from 2015 to 2017. Verizon Wireless's investment in Alltel debt obligations is classified as available-for-sale and is included in Other investments in the consolidated balance sheet at December 31, 2008.

Alltel Divestiture Markets

As a condition of the regulatory approvals by the United States Department of Justice (DOJ) and the FCC that were required to complete the Alltel acquisition, Verizon Wireless will divest overlapping properties in 105 operating markets in 24 states (the Alltel Divestiture Markets). These markets consist primarily of Alltel operations, but also include the pre-merger operations of Verizon Wireless in four markets as well as operations in Southern Minnesota and Western Kansas that were acquired from Rural Cellular Corporation (Rural Cellular). As a result of these divestiture requirements, Verizon Wireless has placed the licenses and assets in the Alltel Divestiture Markets in a management trust that will continue to operate the markets under their current brands until they are sold.

Repayment of Alltel Debt and New Borrowings

On December 19, 2008, Verizon Wireless and Verizon Wireless Capital LLC, as the borrowers, entered into the $17.0 billion credit facility (Bridge Facility) with Bank of America, N.A., as Administrative Agent. On December 31, 2008, the Bridge Facility was reduced to $12.5 billion. As of December 31, 2008, there were no amounts outstanding under this facility.

On January 9, 2009, immediately prior to the closing of the Alltel acquisition, we borrowed $12,350 million under the Bridge Facility in order to complete the acquisition of Alltel and repay certain of Alltel's outstanding debt. The remaining commitments under the Bridge Facility were terminated. The Bridge Facility has a maturity date of January 8, 2010. Interest on borrowings under the Bridge Facility is calculated based on the London Interbank Offered Rate (LIBOR) for the applicable period, the level of borrowings on specified dates and a margin that is determined by reference to our long-term credit rating issued by S&P. If the aggregate outstanding principal amount under the Bridge Facility is greater than $6.0 billion on July 8th, 2009 (the 180th day after the closing of the Alltel acquisition), we are required to repay $3.0 billion on that date (less the amount of specified mandatory or optional prepayments that have been made as of that date). The Bridge Facility includes a requirement to maintain a certain leverage ratio. We are required to prepay indebtedness under the Bridge Facility with the net cash proceeds of specified asset sales, issuances and sales of equity and incurrences of borrowed money indebtedness, subject to certain exceptions.

On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued a private placement of $3,500 million of 5.55% notes due 2014 and $750 million of 5.25% notes due 2012, resulting in cash proceeds of $4,211 million, net of discounts and issuance costs. The net proceeds from the sale of these notes were used to repay a portion of the borrowings outstanding under the Bridge Facility.

After the completion of the Alltel acquisition and repayments of Alltel debt, including repayments completed through January 28, 2009, approximately $2.5 billion of Alltel debt that is owed to third parties remained outstanding.

Rural Cellular Corporation

On August 7, 2008, Verizon Wireless acquired 100% of the outstanding common stock and redeemed all of the preferred stock of Rural Cellular in a cash transaction. Rural Cellular was a wireless communications service provider operating under the trade name of “Unicel,” focusing primarily on rural markets in the United States. Verizon Wireless believes that the acquisition will further enhance its network coverage in markets adjacent to its existing service areas and will enable Verizon Wireless to achieve operational benefits through realizing synergies in reduced roaming and other operating expenses. Under the terms of the acquisition agreement, Verizon Wireless paid Rural Cellular's common shareholders $728 million in cash ($45 per share). Additionally, all classes of Rural Cellular's preferred shareholders received cash in the aggregate amount of $571 million.

The consolidated financial statements include the results of Rural Cellular's operations from the date the acquisition closed. Had this acquisition been consummated on January 1, 2008 or 2007, the results of Rural Cellular's acquired operations would not have had a significant impact on our consolidated income statement. In connection with the acquisition, Verizon Wireless assumed $1.5 billion of Rural Cellular's debt. This debt was redeemed on September 5, 2008, using proceeds from new debt borrowings by Verizon Wireless (see Note 10). The aggregate value of the net assets acquired was $1.3 billion based on the cash consideration, as well as closing and other direct acquisition-related costs of approximately $12 million.

In accordance with SFAS No. 141, the cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, with the amounts exceeding the fair value being recorded as goodwill. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained. The valuations will be finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to the fair value of the identifiable intangible assets acquired and goodwill.

The following table summarizes the preliminary allocation of the acquisition cost to the assets acquired, including cash acquired of $42 million, and liabilities assumed as of the acquisition date and adjustments made thereto during the three months ended December 31, 2008:

(dollars in millions)

 

As of
August 7, 2008

 

Adjustments

 

Adjusted as of
August 7, 2008

 

Assets acquired

Wireless licenses

 

$

1,014

 

 

$

82

 

 

$

1,096

 

Goodwill

 

 

935

 

 

 

(2

)

 

 

933

 

Intangible assets subject to amortization

 

 

197

 

 

 

1

 

 

 

198

 

Other acquired assets

 

 

1,007

 

 

 

(34

)

 

 

973

 

Total assets acquired

 

 

3,153

 

 

 

47

 

 

 

3,200

 

 

Liabilities assumed

Long-term debt

 

 

1,505

 

 

 

 

 

 

1,505

 

Deferred income taxes and other liabilities

 

 

342

 

 

 

42

 

 

 

384

 

Total liabilities assumed

 

 

1,847

 

 

 

42

 

 

 

1,889

 

Net assets acquired

 

$

1,306

 

 

$

5

 

 

$

1,311

 

Included in Other acquired assets are $490 million of assets that have been divested pursuant to the exchange agreement with AT&T, as described below. Adjustments were primarily related to ongoing revisions to preliminary valuations of wireless licenses and other tangible and intangible assets acquired that were subsequently divested to AT&T, and revised estimated tax bases of acquired assets and liabilities.

Wireless licenses acquired have an indefinite life, and accordingly, are not subject to amortization. The customer relationships are being amortized using an accelerated method over 6 years, and other intangibles are being amortized on a straight-line basis over 12 months. Goodwill of approximately $115 million is expected to be deductible for tax purposes.

Divestiture Markets and Exchange Agreements with AT&T

As part of its regulatory approval for the Rural Cellular acquisition, the FCC and DOJ required the divestiture of six operating markets, including all of Rural Cellular's operations in Vermont and New York as well as its operations in Okanogan and Ferry, WA (the Divestiture Markets).

On December 22, 2008, Verizon Wireless completed an exchange with AT&T. Pursuant to the terms of the exchange agreement, as amended, AT&T received the assets relating to the Divestiture Markets and a cellular license for part of the Madison, KY market. In exchange, Verizon Wireless received cellular operating markets in Madison and Mason, KY and 10 MHz PCS licenses in Las Vegas, NV, Buffalo, NY, Erie, PA, Sunbury-Shamokin, PA and Youngstown, OH. Verizon Wireless also received AT&T's minority interests in three entities in which Verizon Wireless holds interests plus a cash payment. The preliminary aggregate value of properties exchanged was approximately $500 million. There was no gain or loss recognized on the exchange. In addition, subject to FCC approval, Verizon Wireless will acquire PCS licenses in Franklin, NY (except Franklin county) and the entire state of Vermont from AT&T in a separate cash transaction that is expected to close in the first half of 2009.

Other Acquisitions

In July 2007, Verizon acquired a security-services firm for $435 million, primarily resulting in goodwill of $343 million and other intangible assets of $81 million. This acquisition was made to enhance our managed information security services to large business and government customers worldwide. This acquisition was integrated into the Wireline segment.

In connection with the 2006 acquisition of MCI, Inc. (MCI), we recorded certain severance and severance-related costs and contract termination costs associated with the merger, pursuant to Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. At December 31, 2007, there was approximately $36 million remaining for these obligations which were substantially resolved during 2008. During 2008, 2007 and 2006, we recorded pretax charges of $172 million ($107 million after-tax), $178 million ($112 million after-tax) and $232 million ($146 million after-tax), respectively, primarily related to the MCI acquisition that were comprised mainly of systems integration activities.