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By Breaking Views
T-Mobile US (TMUS) is heading to the back roads. The $200 billion telecom giant is buying its struggling smaller rival United States Cellular (USM) for $4.4 billion. Price rings a bell. However, the target is small in scale, serving mainly rural communities, yet is likely to lead to a difficult regulatory path for demining. While T-Mobile is a capable acquirer, the mature industry leaves few good options for growth.
US Cellular, whose subscriber base is 40% rural, has been under pressure recently. Last year, it shed 138,000 net subscribers at companies like Verizon Communications (VZ), AT&T (T) and newer cable entrants Charter Communications (CHTR) and Comcast (CMCSA). Its customer attrition rate is much higher than T-Mobile’s. Through this deal, US Cellular can offload some debt. a lot The larger carrier, led by Mike Seifert, gets 5 million customers, plus its stores and some spectrum, giving it a foothold outside urban areas, which it fundamentally lacks.
The price seems decent. T-Mobile is looking to achieve $1 billion in synergies mainly in costs and capital expenditures. The company was taxed at the effective rate of 24% and capitalized at a multiple of 10, and the savings represent more than $7 billion in net present value. Even after accounting for the $2 billion-plus in fees it would take to capture this synergy, the value is worth much more than the deal spend. Additionally, the assets T-Mobile is purchasing generated roughly $3.6 billion in revenue last year, valuing the deal at little more than a one-time sale. T-Mobile’s comparable valuation is three times that.
T-Mobile has a large margin for error. The problem is that the pitfalls are many. The mobile phone business is mature, with almost the entire adult population owning a cell phone. Given this saturation, companies can grow only by encroaching on competitors’ territories – effectively price wars – or buying them out. T-Mobile has successfully done both: Since it struck its deal with Sprint in April 2020, it has significantly outperformed its peers. The problem is that the company’s performance is still underperforming the S&P 500. For shareholders, entering a new market provides no guarantee that they will receive sufficient value, even for buyers who are skilled at executing trades.
Additionally, there will likely be a regulatory battle in the future. The mobile business actually went from four big carriers to three when T-Mobile acquired its SoftBank-backed rival. The entry of cable companies has helped make the market more competitive. However, it’s telecom services like US Cellular that often give regulators peace of mind. Furthermore, T-Mobile has since purchased Mint, another small carrier, which took more than a year to clear the regulatory process. T-Mobile faces a more challenging environment, with regulators eager to undo transactions. It adds unwelcome stability to a stagnant industry.
Context news
T-Mobile US said on May 28 that it had agreed to acquire United States Cellular’s wireless operations, including its customers, stores and 30% of its spectrum, for $4.4 billion. US Cellular will retain 4,400 towers and 70% of its spectrum assets. The $3.6 billion company has nearly 5 million subscribers. It serves approximately 40% of the rural population in the United States.
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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
