Britain's Vodafone confirmed on Thursday that U.S.-based Verizon Wireless, in which it has a 45 percent stake, is in advanced talks to buy U.S. rural mobile service provider Alltel.
The deal would make Verizon Wireless the top U.S. wireless service ahead of AT&T.
A source familiar with the talks said on Wednesday that Verizon Wireless was close to buying Alltel for around $27 billion, including around $23 billion of its debts.
Verizon Wireless is 55 percent owned by Verizon Communications and the proportional ownership with Vodafone would not change under the deal, the source said.
"Vodafone confirms that Verizon Wireless is in advanced discussions regarding the potential acquisition of Alltel," it said. "There is no assurance that a transaction will be forthcoming."
But shares in Vodafone, the world's largest mobile phone group by revenue, slipped up to 3 percent to 150 pence on Thursday morning as London-based analysts questioned what the deal would mean for any dividend.
Analysts had been expecting Vodafone to receive a dividend from Verizon Wireless from 2009 or 2010.
"This is likely to put the dividend back further," said one London-based analyst who asked not to be named. "That's why they're down."
Verizon's move was a surprise to many U.S.-based analysts as it came only seven months after Alltel was taken private by TPG Capital and Goldman Sachs' GS Capital Partners. The leveraged buyout saddled Alltel with the debt.
A Verizon deal would value Alltel at eight times its earnings before interest, tax, depreciation and amortisation, compared with its November sale to private equity firms for about nine times EBITDA, the source said.
Some analysts said Verizon could be in a good position to refinance Alltel's debt at a lower interest rate; others said that a deal could also help Verizon create savings from a network and handset perspective.
That $27.5 billion deal in November 2007 was the largest ever private equity investment in the U.S. wireless industry, but it closed amid a mounting credit crisis that has curtailed the leveraged buyout boom.
Despite the surprise, analysts said the deal did make sense.
"Put simply, they can run Alltel more efficiently than Alltel can," said Bernstein analyst Craig Moffett.
Verizon Wireless and Alltel, which had more than 13 million customers at the end of the first quarter, together would have more than 80 million customers. AT&T ended the first quarter with about 71 million subscribers.
The two groups also use the same CDMA wireless network technology.