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Dobson Rides Alltel Rally

Smaller rural wireless stocks surge on news of a big buyout.

The $24.7 billion Alltel (AT) - Get Atlantic Power Corporation Report buyout deal goosed some of the smaller telco stocks, but observers don't see the beginnings of a sweeping private-equity takeover spree.

The Little Rock, Ark., wireless carrier agreed to be acquired by TPG and

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

. The deal offers a 23% premium to closing prices Dec. 29, before rumors of an acquisition emerged. The deal gives shareholders a 10% premium to Friday's closing price. Alltel shares rose 7% to $69.58 on news of the $71.50-a-share takeover bid.

The deal sent other rural wireless players to 52-week highs Monday.

Dobson

(DCEL)

rose 5% and

Rural Cellular

(RCCC)

was up 4% to $30.75.

Even struggling

Sprint

(S) - Get SENTINELONE, INC. Report

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saw some action, rising 3% to $21.42 as investors speculate that private-equity shops might take an interest in the No. 3 wireless player.

But the Alltel deal may not mean lucrative takeouts for everyone in sector.

The Alltel deal was "crafted under unique and favorable circumstances," Bank of America analyst Dave Barden wrote in a research note Monday. Management had been aggressively shopping the company around for years, and the company had "very low debt, stable operations and a visible exit strategy," writes Barden.

This means that the new owners can potentially turn around and sell pieces of Alltel to bigger outfits like

AT&T

(T) - Get AT&T Inc. Report

and

Verizon

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at higher prices down the road.

Barden says the Alltel deal will generate speculation about other leveraged buyout candidates, but few have the appeal of Alltel. Sprint, for example, fails to meet the requirements due to its size, instability and lack of breakup value, says Barden.

Other analysts seemed to agree.

"We believe Sprint's inferior fundamentals and size (triple Alltel's) make it difficult for private-equity buyers," Prudential Financial analyst Rich Klugman wrote Monday.

There's another factor working against Alltel and other rural players. The Federal Communications Commission is considering a cap on extra federal funding to telcos that provide service in expensive, hard-to-reach areas. If implemented, the cap could mean that telcos will collect millions less in no-cost revenue that flows directly to the bottom line.

It takes a bite out of the growth story, says one hedge fund manager who is short Dobson and Rural Cellular.

"This is a monster issue," he says.