Insights From The U.S. Cellular Announcement

In case you haven't heard the news, T-Mobile has announced their intention to acquire most of U.S. Cellular's (USCC) assets and operations in a $4.4 billion deal (including the assumption of $2 billion in debt). This transaction was not unexpected after U.S. Cellular indicated they were evaluating "strategic alternatives" for the business following several quarters of challenging economics during the 5G deployment.

While this wasn't the biggest transaction we've ever seen in wireless, it is arguably one of the largest we will see for some time as another operator subsumes the last "major" regional carrier.?

I was looking at some elements of the deal, and while I haven't pored over it like some in the industry surely are doing as I write this, I found a few tidbits interesting and wanted to share what jumped out at me.

Insight #1: T-Mobile's selection of which spectrum to buy is enlightening

Since they tend to cover more rural areas, USCC’s actual covered population is small relative to a big nationwide provider like AT&T or Verizon. On a comparison chart, their portfolio holdings may seem minimal at first blush. However, since they’ve participated in nearly every spectrum auction, they have amassed a large number of bands which provides some clues as to what T-Mobile wanted in the transaction.

Interestingly, only about 30% of the spectrum will be sold to T-Mobile, as shown in their investor presentation (see image below).

When you review what T-Mobile chose to buy, some selections make sense, like the 600 MHz and 700 MHz A block spectrums. These are both bands in which T-Mobile is a key “anchor” provider and uses widely across their network. Thus, acquiring these bands aligns with their existing portfolio strengths.?

Beyond those, however, here's what I find particularly interesting: T-Mobile didn't acquire either the 3.45 GHz or C-Band spectrum. These are both part of the 5G band 77 used by AT&T and Verizon. T-Mobile already holds these bands, but their decision, combined with a recent swap of other 3.45 GHz holdings, suggests that maybe these bands aren’t so strategic for them. It appears they'll focus their 5G efforts on continuing to deploy their 2.5 GHz spectrum. When it comes to their own band 77 holdings, it’s unclear if they have an appetite for it and may seek to divest that over time.

Insight #2: T-Mobile's terms on the purchase of 600 MHz forecast some uncertainty on FCC approvals

In the investor presentation, USCC indicates that 39% of the 600 MHz acquisitions are subject to a put/call agreement. This likely is due to the fact that T-Mobile potentially exceeds the low-band spectrum threshold in several of these markets, and it is uncertain how the FCC will view that transaction. This, then, gives them the right to buy or sell, depending on the outcomes.

If you want to learn more about this topic, I encourage you to read the analysis that Brian Goemmer, Spektrum Metrics, and I did concerning T-Mobile's 800 MHz e-SMR, where we tackled this low band spectrum issue directly.

The net point here is that if there is any band that could create more scrutiny to this transaction, it’s probably the 600 MHz, given T-Mobile’s extensive holdings. The proposed transaction structure here gives them flexibility to adjust to the FCC’s ultimate decision.

Insight #3: USCC's process to sell the remaining spectrum may take time?

When I look at the retained bands and their perceived value based on public statements, I look at those band 77 frequencies. Let's start with the C-band in the C block we see in red in the web viewer mapping tool courtesy of the Spektrum Metrics.

Essentially, USCC has major holdings in the middle of Kansas, around Kansas City, and in the upper portions of Wisconsin. While all spectrum is valuable, significant buyer demand for these areas might be slow to materialize.

The situation is similar for the 3.45 GHz band (focusing on the B block as an example below), which also has spectrum aggregation limits imposed for four years post-auction. This means the most likely buyer (AT&T) is unable to acquire these bands unless rules are specifically waived by the FCC.?

Overall, it could take some time for USCC to fully monetize their remaining spectrum portfolio.

Insight #4: The USCC "RemainCo" continues to validate the value of wireless towers

If approved, after the transaction is successfully closed, USCC will essentially become a tower business with an anchor tenant from T-Mobile. This is an important point, but first, let me give a small bit of historical context on this point.

Years ago, all operators owned and managed their own tower portfolios. However, in the last decade, they've begun selling their tower portfolios to companies like Crown Castle and American Tower under a leaseback arrangement.

These transaction structures provided large amounts of liquid financing, which at first was a boon to the industry. Over time, however, many operators realized it wasn't so wise to consolidate control of a critical infrastructure asset in the hands of only two to three tower companies.?

Tower companies have had a captive market of operators, which has provided pricing power and control at the expense of cellular companies. In fact, this dynamic has led to the creation of entire teams at each carrier dedicated to managing these escalating costs through strategic procurement strategies, negotiations, and other efforts. This fact also partly explains why tower company valuations have remained high despite economic challenges and the slowdown in 5G investment.

In this light, USCC's decision to retain their entire tower portfolio with T-Mobile as a tenant on at least 2,000 towers validates the value of owning towers. Even though USCC disappears as a mobile service provider, they continue to have a low overhead, cash flow generating model that continues to pay its owners.?

Insight #5: The traditional wireless network model continues to rely heavily on scale

Building a wireless network is a capital intensive business. As the industry has evolved from small regional players, it has naturally moved towards consolidation with (now) three large national providers and a fourth in the wings (Dish).?

Most countries have three large national wireless networks because the economics of sustaining a business below that level of scale is difficult this this high a capital intensity.?

Operating a standalone regional network has become increasingly challenging. For example, without scale, it is difficult to: 1) achieve preferred volume pricing on equipment, 2) negotiate better leases and rents, 3) gain access to the most capable handsets at the lowest prices, or 4) generate scale benefits in marketing and sales, including brand awareness.

This is not to say there won't be competition, but unless network economics can be fundamentally changed, this dynamic is here to stay. The USCC transaction is an example of how the impact of scale, or lack of it, makes operating a wireless network increasingly challenging.

What do you find interesting about the USCC/TMO transaction?

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