Market Analysts Look at T-Mobile UScellular Deal

Update From Yesterday’s Bulletin

Nine months ago, UScellular first announced that it was exploring “strategic alternatives.” Those inquiries met with action yesterday as T-Mobile (NASDAQ: TMUS) and UScellular (NYSE: USM) announced that T-Mobile will acquire substantially all of UScellular’s wireless operations. The amount of the transaction, according to UScellular, is approximately $4.4 billion in cash and assumed debt.

(In yesterday’s Inside Towers Bulletin headline, the amount was listed as $4.4B in cash and did not include the amount of assumed debt.)

According to industry analyst Craig Moffett of MoffettNathanson, the fact that T-Mobile is taking only 30 percent of USM’s spectrum portfolio in what he refers to as “a relatively small deal to begin with” is telling. There are important implications for the tower market as well,” Moffett said, “UScellular will retain its towers, with a long-term leasing agreement now in place with T-Mobile.” 

In connection with the agreement, T-Mobile will enter into a new long-term MLA on a minimum of 2,015 incremental towers owned by UScellular and extend the lease term for the approximately 600 towers where T-Mobile is already a tenant. This is designed to ensure continued, uninterrupted service for UScellular’s customers following the transaction and create a long-term contracted revenue stream from a strong anchor tenant for at least 15 years after the close of the transaction, according to UScellular. 

“Will the FCC and DOJ allow a transaction that will put T-Mobile above the FCC’s spectrum ownership “soft cap” in select markets?” Moffett queried. “We don’t know. But it is clear that spectrum concentration concerns are at the very top of the list of issues that made this transaction take so long to announce. The (negative) read-through for the spectrum market here is obvious.”

Moffett said, on its face, the transaction is happening at about 6x OIBDA with no value whatsoever attributed to spectrum. “And that’s based on margins that are fifteen to twenty points lower than T-Mobile’s,” Moffett said.

Analysts say UScellular and T-Mobile networks are compatible. Both companies are deploying 5G over wide areas using low-band 600 MHz spectrum. UScellular is using a combination of C-band and 3.45 GHz mid-band spectrum for high-speed data connections while T-Mobile relies on 2.5 GHz for its 5G Ultra Capacity offering. T-Mobile acquired C-band and 2.5 GHz licenses in rural markets that overlap UScellular’s 21-state operating area.

“With this deal T-Mobile can extend the superior Un-carrier value and experiences that we’re famous for to millions of UScellular customers and deliver them lower-priced, value-packed plans and better connectivity on our best-in-class nationwide 5G network,” said Mike Sievert, CEO of T-Mobile. “As customers from both companies will get more coverage and more capacity from our combined footprint, our competitors will be forced to keep up – and even more consumers will benefit. The Un-carrier is all about shaking up wireless for the good of consumers and this deal is another way for us to continue doing even more of that.”  

According to Jonathan Chaplin of New Street Research, the announced deal value is $4.4 billion, with T-Mobile paying $2.4 billion in cash and assuming $2.0 billion of debt. However, if T-Mobile acquires all the 600 MHz portfolio, which Chaplin said he assumes they will, “They will owe an additional $106 million,” he said. “This means the total transaction value is $4.5 billion.”

“Looking at the transaction from the perspective of T-Mobile,” Chaplin said, “we assume the tower leases have a clear business purpose and so we are not treating the new leases as part of T-Mobile’s deal consideration. T-Mobile has cost-to-achieve of $2.2 to $2.6 billion, which we do think of as part of the cost of the assets to T-Mobile. This puts T-Mobile’s total transaction purchase price at $6.9 billion.”


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