Verizon profit helped by cellphone subscriptions

By Crayton Harrison Bloomberg News

DALLAS: Verizon Communications, the second-largest U.S. phone company, said profit rose in the second-quarter as the number of cellphone subscribers jumped.

The company said its Verizon Wireless unit, co-owned by Vodafone Group, will pay $757 million to buy Rural Cellular of the United States to lift its subscriber rolls in suburban parts of 15 states after trailing AT&T in new customers last quarter.

Verizon Communications had 62 million wireless subscribers at the end of the second quarter, compared with 54.8 million a year earlier. The deal gives Verizon Wireless 716,000 more clients.

The acquisition will help the company add business in "areas where previously we had little or no presence," the Verizon Wireless chief executive, Lowell McAdam, said Monday.

Verizon has relied on the wireless unit for profit growth as home-phone customers switch to cellphones or voice plans from cable companies. The unit added 1.3 million clients in the second quarter, compared with 1.5 million for AT&T, which began selling the Apple iPhone in June.

"What you're seeing to some degree is a head-to-head battle between Verizon and AT&T," said Bruce Allen, president of Bruce G. Allen Investments in Denver. "They continue to try and maintain customer count, and if they can't maintain it, they're going to look at buying that."

The wireless unit will pay $45 a share for Rural, based in Minnesota, compared with the $31.81 closing stock price Friday. The company has networks in rural and suburban parts of U.S. states like North Dakota, Wisconsin and Alabama. The price offered by Verizon is 41 percent more than Rural's closing stock price on Friday. Verizon shares dropped.

Net income rose 4.5 percent to $1.68 billion, or 58 cents a share, from $1.61 billion, or 55 cents, a year earlier. Sales climbed 6.3 percent to $23.3 billion.

Excluding some items, profit was 58 cents a share, Verizon said.

This is at least the third purchase this year of a U.S. mobile phone service that caters to rural and suburban areas. AT&T, the largest U.S. phone company, last month agreed to buy Dobson Communications for $2.8 billion. In May, Goldman Sachs Group and TPG announced plans to purchase Alltel for $27.5 billion.

Including the assumption of debt, the price for Rural Cellular is $2.67 billion, Verizon Wireless said. The company expects to complete the purchase in the first half of 2008.

Verizon Communications had 26.3 million home phone lines at the end of June, a 10.3 percent drop from a year ago. The phone-line unit's operating profit margin, a measure of the company's efficiency, fell to 9 percent from 9.1 percent in the previous quarter, less than the 9.6 percent forecast of William Power, an analyst at Robert W. Baird & Co. in Dallas.

"Their sales and marketing expense was up" to help lift revenue, said Power, who rates the shares "neutral" and does not own any. "Their view is that the scale advantages of higher revenue will benefit margins over time. The question mark is whether those sales and marketing expenses will stay higher."

Verizon added 203,000 Internet users and 167,000 television subscribers to its new fiber-optic network, topping the estimates of the UBS analyst John Hodulik, who expected 200,000 Internet and 160,000 TV customers.