The Alltel decade.
With Joe Ford's Team At The Helm, Observers Expect The 1990s To Be Golden For Alltel Corp.
On April 25, Alltel Corp. stockholders will gather in Ohio at a Holiday Inn between Akron and Cleveland for their annual meeting.
Less than a week later -- on May 1 -- Weldon W. Case of Hudson, Ohio, will step down as Alltel's chairman.
If there are any doubts that Alltel's growth path is charted in Little Rock, not in Ohio, those doubts should be dispelled at the end of this month.
Although it hasn't been officially announced, most Alltel observers say it is a foregone conclusion that Little Rock's Joe T. Ford, the company's president and chief executive officer, will take on the chairman's duties.
Allied Telephone Co. of Little Rock and Mid-Continent Telephone Corp. of Hudson merged in October 1983 to form Alltel. Even though Allied was about one-fourth the size of Mid-Continent, the Allied management team controlled by Ford quickly began to call the shots.
"When the companies merged, I knew eventually the guys from Allied would end up running the show," says one New York securities analyst. "That's what happened."
Mid-Continent's managers realized in the early 1980s that they faced a succession problem. They viewed the Allied merger as a way to acquire a new generation of corporate leaders.
Ford and Max E. Bobbitt, Alltel's executive vice president and chief financial officer who, like Ford, is an Arkansas native, were the type of young, aggressive leaders in short supply in Ohio.
Company officials traditionally have been careful not to describe Little Rock as the Alltel headquarters, but the entrepreneurial group from Allied took control of most of the company with Case's blessing.
A telling sign is that on the back of Alltel's 1990 annual report, the $1.6-billion company gives a Little Rock address for its corporate headquarters. The 1989 annual report had the Hudson address.
When Alltel officials confirmed on March 19 that they would build a seven-story office tower next to the existing Little Rock facility, it realistically marked the beginning of the post-Case era.
Alltel's corporate headquarters are in Little Rock. The city is also the headquarters of Alltel Mobile Communications Inc., Systematics Inc., Sygnis and the Southwest Region telephone operations.
Nationally, the telephone operations continue to be run from Hudson by Executive Vice President Frederick G. Griech, and Alltel officials say there are no plans for that to change.
But Alltel's power center is clearly no longer the company plane traveling between Little Rock and Hudson. The power center is the corporate suite in Little Rock's Riverdale addition.
Even Case's son, Thomas, calls Little Rock home, serving as president of Alltel Mobile.
It's hard to find anyone -- in Little Rock or New York -- saying anything negative about Alltel these days. As a result of what analysts consider smart acquisitions and cost-effective management practices, Alltel has become a darling of Wall Street.
"As Alltel continues to produce earnings and dividend growth well in excess of the industry average, the company will be hard to ignore," wrote Joel D. Gross, vice president of Donaldson, Lufkin & Jenrette Securities Corp. of New York, in a February report to investors.
Gross believes Alltel's stock, which is trading at about $40 per share, reflects only the values of its telephone and cellular properties and "gives no recognition for its other subsidiaries, which represent the growth aspects of Alltel."
Gross' price target for Alltel is $48.65 per share.
In another Manhattan office, telecommunications analyst Marianne G. Bye of Shearson Lehman Brothers says Alltel should trade at up to $44 per share.
"We continue to believe that telecommunications will be one of the most attractive investment areas within the U.S. economy throughout the 1990s," she wrote. "The company's target of 8 percent to 10 percent earnings-per-share growth annually could prove conservative. We point to Alltel's standout earnings and stock performance track records over the past decade relative to other telephone companies. These attest to Alltel's strong management style and successful use of acquisitions."
Analyst Alexander Alma of Labe, Simpson & Co. in New York values Alltel at $48 per share, pointing to the solid performance of telephone operations, large cash flows in excess of capital requirements, wise investments in cellular properties and a policy of acquisition of growth companies.
Alltel is now the fifth largest non-Bell telephone company in the United States and the 12th largest overall. Telephone service is provided to almost 1.2 million customers in 25 states.
That's a far cry from 1943 when Hugh R. Wilbourn and his brother-in-law, C.B. Miller of Nashville, Ark., began Allied as a telephone service business. At the time, there were more than 120 independent telephone companies in Arkansas, many of which were owned and operated by families.
Wilbourn graduated from Little Rock High School at age 16 and immediately enrolled at what is now Ouachita Baptist University, where he became interested in business by working at an Arkadelphia cleaners and running the concession stand at football games.
He left Ouachita prior to graduation and opened a drive-in restaurant at 14th and Main in Little Rock. The restaurant was a victim of the Depression, forcing Wilbourn to take a job with Kroger. In 1934, he went to Southwestern Bell.
Telephone servicemen were in short supply during World War II, and Wilbourn and Miller took care of their independent accounts on weekends while continuing to carry out their duties with Southwestern Bell during the work week.
Allied's business was so good by the spring of 1944 that Wilbourn and Miller quit their Bell jobs.
Allied's big break came in 1946 when it assumed management of the Grant County Telephone Co. at the request of the owner, W.R. "Witt" Stephens. Wilbourn later would buy the phone company from Stephens. Ironically, the Stephens family is now Alltel's largest stockholder.
Meanwhile, in Ohio, Case began working part time in 1933 in his family business. Case was 12 years old, and the family business was the Western Reserve Telephone Co., which had been founded by his grandfather and was by then being run by his father.
Case went to work for the company full time in 1941. He formed Mid-Continent in 1960 with five small, independent telephone companies serving 50,000 customers in Ohio. Case then began buying other telephone companies until there were 700,000 customers in 13 states.
Back in Arkansas, Ford married Wilbourn's daughter, Jo Ellen, and joined Allied in 1959. The talented, self-effacing Ford learned the ropes, setting the stage over the next two decades for the 1983 merger.
With Case as chairman and chief executive officer and Ford as president, Alltel moved to expand its operations. In 1986, Alltel acquired telephone companies in two Pennsylvania cities. Later that year, it acquired the 60.5 percent it didn't already own in a North Carolina telephone company serving about 20,000 customers.
At the 1987 stockholders meeting, Ford replaced Case as CEO. The company then picked up its acquisition pace.
Analyst James J. Stork of Duff & Phelps Inc. of Chicago had said the previous year that telephone earnings would "flatten out in the near term. The first question becomes: What can they do to provide a boost to compensate for that?"
The Cellular Gamble
How did Ford and his management team answer the challenge and make Alltel one of the nation's hottest telecommunications properties?
For starters, they moved into cellular operations. That choice seems obvious now. In the mid-1980s, however, no one knew the extent to which the cellular segment of the telecommunications industry would explode.
Car phones sold for more than $2,000 and thus did not appeal to general consumers. Cellular was thought to be the province of executives. Alltel also had invested heavily in midsize markets such as Little Rock and Charlotte, N.C. The skeptics said those cities did not have enough executives spending large parts of their days on the highways to make cellular operations profitable. Cellular, they contended, would make money only in the 10 to 20 largest markets, where thousands of commuters spend more than an hour each day on the road.
Alltel's leaders ignored those skeptics and went with their instincts. They sold off several cellular operations in Rust Belt states, concentrating on growing Sun Belt cities and the interstate highways connecting those cities.
These became areas of concentrated cellular usage. The gamble had paid off.
Alltel now provides cellular service in 21 states serving 6.8 million "pops," a gauge of potential customers obtained by factoring into an area's population the percent ownership a cellular company has in that market.
That includes majority interests in nine metropolitan service areas -- Little Rock (63 percent); Charlotte (95 percent); Jackson, Miss. (50 percent); Augusta, Ga. (100 percent); Montgomery, Ala. (100 percent); Springfield; Mo. (100 percent); Gainesville, Fla. (100 percent); Ocala, Fla. (100 percent); and Albany, Ga. (70 percent).
It includes minority interests in another eight metropolitan service areas.
Alltel also has 2.9 million rural service area "pops." The company has clustered its rural properties around its metropolitan markets to maximize marketing and network efficiencies.
Alltel continues to shed non-contiguous cellular properties and minority stakes to increase ownership in what it considers strategically important Sun Belt markets.
The number of Alltel cellular subscribers has almost doubled each year since operations began. From 1989 to 1990, the number of cellular customers jumped 80.3 percent from 24,235 to 43,819.
In the fourth quarter of 1990, cellular revenues increased 44 percent over the fourth quarter of 1989 to $11.8 million.
Operating income rose 91 percent from the previous year's fourth quarter to $800,000.
For all of 1990, cellular operating income doubled from $1.1 million in 1989 to $2.2 million.
Cellular earnings could fall this year due to the start-up costs of rural service areas, but Gross notes that the policy of acquiring rural markets in clusters around metro markets will prove "worth more from an operational efficiency standpoint as well as being of higher value to the user."
Alltel operates paging networks, mostly in Arkansas and Florida. The company once had a larger commitment to the paging business, but it sold off extensive operations in New York, Ohio and Kentucky because of the level of competition and the ease of entry into the market. Alltel's paging operations are now usually offered as an adjunct service to cellular customers.
Alltel went from 529 cellular customers in 1985 to 6,179 customers in 1987 to 43,819 customers last year. Starting from a zero base in 1983, the cellular industry nationwide now has almost 5 million customers. There are expected to be more than 12 million customers by 1993 with growth spurred by the decline in the price of cellular phones and the increased popularity of portable phones.
Car phones are expected to become standard equipment on luxury automobiles by the end of the decade and an option for all other car models.
While Alltel was moving into cellular communications in the 1980s, it was investing in fiber optic cable systems for long-distance telephone service.
In March 1986, the company invested $15 million in the Microtel system in Florida and Georgia. Alltel also put $9.6 million into LCI Communication Inc.'s Litel fiber optic operations serving New York, Pennsylvania, Illinois, Ohio, Michigan, Indiana and Kentucky.
Fiber optics technology transmits voices and data by light signals through a fine, glasslike cable at much greater volumes and speeds than through conventional copper cable.
Mictrotel was purchased by Advanced Telecommunications Corp. in 1988. Alltel has a 26 percent stake in Advanced Telecommunications, which is the largest regional long-distance carrier and the fourth largest long-distance company behind AT&T, MCI and US Sprint.
Advanced Telecommunications serves small and medium-sized businesses in 10 Sun Belt states, having recently expanded to Mississippi and South Carolina. For the three-month reporting period ending Dec. 31, 1990, Advanced Telecommunications had revenues of $88.5 million, up 8 percent over the same period in 1989.
Advanced Telecommunications is a member of the National Telecommunications Network, a regional long-distance carrier consortium that provides an interconnecting digital fiber optic network from coast to coast. Alltel's stake in Advanced Telecommunications, at a cost of $79 million, is now worth almost $88 million.
As part of its continued move away from the Rust Belt, Alltel sold its 34 percent interest in Litel to two investment firms in August 1988.
Observers also say Alltel has made generally smart moves in the area of equipment distribution. Following the 1983 merger, Southern Supply, which was owned by Allied, and Buckeye Supply, which was owned by Mid-Continent, combined to create Allied Supply.
Alltel Supply sells almost 10,000 telecommunications products from more than 300 manufacturers to Alltel's telephone operating subsidiaries and other local telephone companies. Alltel Supply has eight warehouses across the nation.
Due to consolidation in the supply business, Alltel Supply, GTE Supply and United Telephone's North Supply are the only supply firms owned by local telephone companies that, in turn, sell equipment to non-affiliated telephone companies.
In April 1989, Alltel expanded its distribution network with the $143-million acquisition of HWC Distribution Corp., a Houston-based supplier of wire and cable to electrical distributors. The combination of HWC and Alltel Supply gives Alltel a $332-million business unit with $23 million in operating income.
Prior to being acquired by Alltel, HWC was a publicly traded company with a five-year revenue growth of about 30 percent. HWC continues to grow at 15-20 percent per year in revenues. The slower growth is blamed on the current economic downturn, which has led competitors to reduce prices to sustain sales growth.
"The telephone equipment supply business has been characterized by low margins and earnings volatility because of its economic cyclicality and sometimes intense price competition," Stork says. "The consolidation within the industry seems to have helped alleviate the price competition somewhat, although Alltel no longer reports Alltel Supply's results separately following the acquisition of HWC."
Stork says HWC serves "a rapidly growing niche" in the specialty cable business and that the company's long-term growth outlook is "very attractive."
With the addition of HWC, Alltel's distribution sales went from $112 million in 1987 to $332 million last year.
HWC plans to introduce new product lines, sell to about 2,000 additional distributors and possibly expand into Canada and Europe.
Despite the performances being posted by Alltel's cellular, long-distance and distribution operations, the most excitement revolves around the March 1990 merger with Little Rock's Systematics Inc. and Systematics' subsequent decision to provide data processing services to telephone companies (Arkansas Business, April 8).
Of course, Alltel's bread and butter is still its telephone operations, described by one company official as "the roots from which all other efforts grow."
The company's largest number of lines is in Ohio -- 239,406. Ohio is followed by Pennsylvania (190,573), North Carolina (131,170), New York (87,585), Arkansas (74,437) and Florida (55,145).
In 1990, the number of Alltel access lines grew 3 percent over 1989, slower than the average annual growth rate of earlier years. Still, it rated above the industry average of 2.8 percent.
Alltel's telephone service regions often are located around larger cities, which benefit from the population migration to suburban areas.
Because the regulated telephone industry is a mature one with slow growth rates predicted, Alltel has instituted numerous cost-control efforts to improve margins. Alltel went from 162 lines per employee in 1985, to 191 lines per employee in 1989, to 196 lines per employee at the end of last year.
Acquisitions are a part of Alltel's telephone strategy. The 1988 acquisition of CP National Corp. added 70,000 lines in seven western states. Those states now make up Alltel's Western Region. Last year, Alltel bought a 19.8 percent interest in an Ohio telephone company with almost 27,000 customers.
Ford and his management team are focusing on four areas -- telephone operations, cellular, product distribution and information services. That means selling non-core businesses.
In June 1990, for instance, Alltel completed the sale of the Denro Inc. subsidiary of CP National to a Canadian corporation. Denro manufactures air traffic communications equipment for the Department of Defense and the Federal Aviation Administration.
Five months later, Alltel accepted an $85-million offer for the natural gas distribution systems that were part of the CP National acquisition. The sale is subject to final approval by regulatory commissions in three states -- California, Nevada and Oregon -- and the Federal Energy Regulatory Commission. The company served 43,000 gas customers in Oregon, 16,000 in California and 11,000 in Nevada.
Alltel now wants to unload Ocean Technologies Inc., another subsidiary of CP National. OTI, which produces control and communications systems for naval operations, had about $40 million in 1990 revenues. Analysts believe OTI may be difficult to sell because of decreased defense spending and OTI's weak earnings record.
As another part of the CP National transaction, Alltel acquired a 38 percent interest in Luz International, a company involved in the commercialization of solar electric generating facilities. Alltel hopes to sell its interest in Luz.
"One of our concerns had been that because of the number of different and unrelated businesses Alltel now finds itself in, management effectiveness might be diluted," Stork, the Chicago analyst, says.
Yet Alltel has made it clear that it will emphasize those four key areas -- telephone, cellular, distribution and information services. It is unlikely the company will make further significant acquisitions this year.
In fact, its main acquisition in recent months has been the purchase of almost 2 million of its own shares, about half the repurchase authorization announced in August 1990. Excess funds not utilized to purchase shares likely will be used to retire debt.
"We're not going to move outside those four areas anytime soon," says Ronald D. Payne, Alltel's vice president of investor relations. "The opportunities in cellular need to be fully addressed. So do our opportunities with Systematics. We're going to do what we've always done, and that's manage our growth and stress quality."
"Offsetting the telephone industry's inherently slower growth is the excellent growth potential of Alltel's non-telephone business," says Stork. "Information services and cellular operations in particular would appear to offer the potential for strong growth. HWC Distribution should also contribute."
What about earnings projections?
"We don't make projections," Payne says. "We let the analysts do that."
Those analysts expect Alltel to outperform most of its competitors in 1991, with earnings growth driven by non-telephone entities.
And with the retirement of Case as chairman, all of the decisions that guide this potential telecommunications giant will be made in Little Rock.
PHOTO : AT THE HELM: Joe T. Ford of Little Rock, president and chief executive officer of Alltel Corp., is expected to become the company's chairman following the May 1 retirement of Weldon W. Case of Hudson, Ohio. Ford, who joined Allied Telephone Co. in 1959, is described by securities analysts as a shrewd businessman who has made Alltel a major player in the telecommunications field.
PHOTO : NEW FACILITY: Alltel Corp. officials announced last month that the company will build a seven-story office tower next to its Little Rock facility. The new building will be joined to the original by a two-story, 18,000-SF addition housing a reception area, auditorium and employee dining area.
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|Date:||Apr 15, 1991|
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