One of the premier wireless service providers and a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report) , United States Cellular Corporation (USM - Analyst Report) , recently announced its $480 million deal with Sprint Nextel Corp. (S - Analyst Report) . The agreement entails the sale of U.S. Cellular’s Chicago, St. Louis, central Illinois and Midwest markets to Sprint subsidiaries.
In addition, the deal incorporates handover of personal communications service (PCS) spectrum and approximately 585,000 customers, accounting for about 10% of U.S. Cellular's customer base. The company expects the transactions to close by mid-2013, subject to completion of all regulatory approvals.
The bottom line of this deal will be having to resolve spectrum issues underlying LTE expansions taking place in both these companies. Spectrum constraint is the biggest challenge the wireless industry is currently facing. Therefore, any industry consolidation that takes place through merger acquisition or sale of assets as in the case of this deal has a lot to do with wireless spectrum.
As for Sprint, the agreement means more spectrum that will support its LTE coverage and services in key markets like Chicago and St. Louis. The company would receive 20 MHz of spectrum that would support its 1900 MHz band in Chicago and other markets, and 10 MHz of bandwidth in St. Louis market.
As part of the Network Vision strategy, the company launched LTE services initially in five major markets – Atlanta, Dallas, Houston, Kansas City and San Antonio – in mid-July. Sprint expects to add four more markets – Baltimore, Gainesville, Manhattan/Junction City and Sherman-Denison – before Labor Day. The LTE coverage is expected to reach more than 120 million people (or roughly half of its CDMA footprint) with a deployment of 12,000 sites by this year-end and more than 250 million customers with 22,000 cell sites by the next.
From the standpoint of U.S. Cellular, the deal would enable the company to seek its expansion plans in the LTE space.
In March this year, the company rolled out its first LTE services in Iowa, Wisconsin, Maine, North Carolina, Texas and Oklahoma. Further, it plans to cover an additional 3,600 cities by the second half of the year. Overall, the company expects approximately 58% of its subscriber base to be covered by 4G LTE by the end of this year.
U.S. Cellular completed a spectrum swap with Verizon Communications in September last year that provided U.S. Cellular with eighteen 700 MHz spectrum licenses covering eight states. Besides supporting infrastructure, the spectrum swap is expected to enhance network capacity along with improvement in voice and data services in existing markets.
The company expects the deal to streamline its operations and, thereby improve its profitably. Further, the sale would also entail an increased focus in more profitable markets for the company.
Although these developments would remain accretive to the company’s profitability over the long term, we believe heavy capital expenditures will remain detrimental to its financial position. Further, expenditures on network integration, competitive market,intense pricing and regulatory pressures may pose near-term threats for the company.
We recommend a long-term Outperfrom recommendation on U.S. Cellular. However, the stock carries a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.