T-Mobile makes lurch into uninspiring rural US
Corrects to say U.S. Cellular’s subscriber base is 40% rural in paragraph two. A previous version said U.S. Cellular serves 40% of the rural population. The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, May 28 (Reuters Breakingviews) -T-Mobile US TMUS.O is taking to the back roads. The $200 billion telecom giant is buying its struggling mini-rival United States Cellular USM.N for $4.4 billion. The price rings a bell. Yet the target is tiny, mainly serves rural communities, and nevertheless likely will result in a tough regulatory path to clearance. While T-Mobile is an able acquirer, the mature industry leaves few good options for growth.
U.S. Cellular, whose subscriber base is 40% rural, has been under pressure recently. Last year it shed 138,000 net subscribers to the likes of Verizon Communications VZ.N, AT&T T.N and newer entrant cable companies Charter Communications CHTR.O and Comcast CMCSA.O. Its rate of customer attrition is significantly higher than T-Mobile’s. With the deal, US Cellular can offload some debt. The much larger carrier led by Mike Sievert gets 5 million customers, plus its stores and some spectrum, offering it a toehold outside of urban areas, which it mainly lacks.
The price looks decent. T-Mobile is eyeing $1 billion in synergies mainly in costs and capital expenditures. Taxed at the company’s effective rate of 24% and capitalized on a multiple of 10, the savings represent over $7 billion in net present value. Even after accounting for more than $2 billion of charges it will take to glean those synergies, the value is worth well over the outlay for the deal. Plus the assets that T-Mobile is buying brought in roughly $3.6 billion in revenue last year, putting the deal’s valuation at just over 1 time sales. T-Mobile’s similar valuation is triple that.
T-Mobile has plenty of margin for error. The trouble is pitfalls are aplenty. The mobile business is mature – nearly all of the adult population has a cell phone. With such saturation, companies can only grow by encroaching on a competitors’ territory – effectively price wars – or buying them up. T-Mobile has done both with success: Since closing its deal for Sprint in April 2020, it has dramatically outperformed its peers. The problem is that the company has still underperformed the S&P 500 Index .SPX. For shareholders, going into a new market offers no certainty they will get enough value, even for buyers skilled at executing deals.
Plus, there’s likely a regulatory battle ahead. The mobile business already went from four large carriers to three when T-Mobile snapped up its SoftBank-back 9984.T rival. The entrance of the cable companies has helped make the market more competitive. Nevertheless, it’s telecom services like U.S. Cellular that often give regulators peace of mind. Moreover, T-Mobile has since bought Mint, another small carrier, which took over a year to clear the regulatory process. T-Mobile faces a much more challenging environment, where watchdogs are eager to knock down transactions. It adds unwelcome static to a stagnant industry.
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CONTEXT NEWS
T-Mobile US said on May 28 it agreed to acquire United States Cellular’s wireless operations including its customers, stores and 30% of its spectrum for $4.4 billion.
U.S. Cellular will retain 4,400 towers and 70% of its spectrum assets. The $3.6 billion company has approximately 5 million subscribers. It serves nearly 40% of the rural population in the United States.
Graphic: T-Mobile shares beat rivals but trails the S&P 500 https://reut.rs/4dVN6NH
Editing by Lauren Silva Laughlin and Sharon Lam
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