Telephone and Data Systems, Inc. (AD) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Cellular and TDS conference call. [Operator Instructions] I would now like to turn the conference over to Colleen Thompson, Vice President, Corporate Relations. Please go ahead.

Good morning, and thank you for joining us. We want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations sections of the TDS and U.S. Cellular websites. As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the safe harbor paragraphs in our press releases and the extended version included in our SEC filings. With me today and offering prepared comments are from U.S. Cellular, LT Therivel, President and Chief Executive Officer; Doug Chambers, Executive Vice President, Chief Financial Officer and Treasurer; and from TDS, Vicki Villacrez, Executive Vice President and Chief Financial Officer. This call is being simultaneously webcast on the U.S. Cellular and TDS Investor Relations websites. Please see the websites for slides referred to on this call. And with that, let me turn it over to LT.

Thank you, Colleen. Thanks to all of you for joining us, particularly given the short notice today. As you know, last August, we embarked on a strategic review. The purpose was to unlock value and best position U.S. Cellular going forward. And I realize that 9 months is a lengthy period for a review like this, but we wanted to be really comprehensive in our assessment of possible paths forward for our business. And since LeRoy Carlson founded UScellular 4 decades ago, we've been laser-focused on our mission of connecting customers to what matters most. And our Boards have always been focused on investing in and growing our wireless business as we felt it was in the best interest of all of our stakeholders. However, several major strategic shifts have occurred recently. First, wireless has increasingly become an industry where national scale is critical. Large national players have expanded into rural America, that creates significant competition where, previously, there might have been only a few players. Second, the rise of convergence has fueled the expansion of cable wireless competitors and their share of gross adds has risen rapidly in the past few years. And finally, the capital investments required to build out the spectrum and the network density to support modern wireless networks has exploded. And all of these trends led us back to the challenge of scale. And our strategic review highlighted that delivering on our mission requires a level of scale that is best achieved by combining our wireless operations with a national player, particularly one that is committed to delivering a great network experience and low prices to our customers and to the areas that we serve. And so as you saw in our press release, we're excited to announce we've reached an agreement with T-Mobile regarding the sale of UScellular's wireless operations and some select spectrum assets. And this is a deal that will unlock significant benefits for the customers of both companies. So let me discuss some details of the transaction. Under the terms of the agreement, T-Mobile will acquire UScellular's wireless operations and select spectrum assets for a purchase price of $4.4 billion. That includes the combination of cash and up to approximately $2 billion of assumed debt. And up to $100 million of the purchase price is contingent on certain financial and operational metrics being attained between signing and closing, and the purchase agreement also includes a number of other adjustments. T-Mobile will acquire UScellular's wireless operations. That includes our subscribers, our network assets and operations, our sales and distribution, customer care operations and a select set of spectrum assets, but we will retain our owned towers. Speaking of towers, T-Mobile will enter into a long-term master license agreement, or MLA. And that's on at least 2,015 incremental towers for an initial 15-year term. And we'll also extend the term for the approximately 600 towers where T-Mobile is already a tenant for at least 15 years post closing. That ensures continuity of the customer experience, while also creating sustained revenue for UScellular and strengthening our tower business. And as I mentioned, T-Mobile will acquire a select set of spectrum assets and that comprises approximately 30% of our spectrum portfolio. In order to provide some financial perspective on the impact of this transaction, in the next few months, we expect to provide both pro forma financial statements regarding this transaction as well as segment financial statements that will separately show the results of UScellular's wireless operations and our tower. The consummation of this transaction is not subject to any financing contingencies. And the agreement has been unanimously recommended by the independent directors of UScellular and unanimously approved by the UScellular Board of Directors. And the Board of TDS, which is an 83% shareholder of UScellular has also unanimously approved the transaction, and TDS has also delivered a written consent to the transaction and its capacity as the majority shareholder. And no further action is required by the shareholders of UScellular or TDS or will be solicited in connection with the transaction. We expect the transaction to close in mid-2025, subject to the receipt of regulatory approvals and the satisfaction of customary closing conditions. We're confident that this transaction provides clear benefits for customers. they'll see a better combined network, they'll see lower prices and a whole variety of broader benefits. And very importantly, T-Mobile is expected to make employment offers to a significant number of UScellular associates following the transaction. And so given the benefits to customers and to associates and the mitigation of spectrum aggregation issues, we're hopeful for a smooth regulatory approval process of the transaction. So I turn to Slide 5. I want to provide a little bit more detail on how this transaction will benefit customers. Our combined resources will grant customers' access to best-in-class wireless service at compelling prices. UScellular customers will have the opportunity to switch to T-Mobile's lower-priced comparable plans with no transaction costs, and that will collectively save customers hundreds of millions of dollars every year. Customers will get a superior performance and speed experience on the integrated network, and it will significantly expand coverage across Rural America. UScellular customers will also gain access to T-Mobile's Un-carrier benefits that includes content offers additional savings for seniors and a robust set of customer service options. And with a partner that shares our commitment to connecting people to what matters most, we're confident this transaction will enable us to move forward in a way that best supports the needs of all of our stakeholders. And that means the combined customers of both companies, the communities that we serve, our associates, our suppliers and, obviously, also the shareholders of both UScellular and T-Mobile. If I turn to Slide 6, I'd like to take a minute to talk about what the remaining assets and business will look like. Put differently, what's staying after our transaction with T-Mobile closes and how we'll further unlock value for all our stakeholders. First, UScellular will retain the majority of our spectrum portfolio. That's 70% of our low and our mid-band spectrum holdings and it's the majority of our millimeter wave spectrum holdings. And you can expect us to opportunistically monetize those spectrum assets. And that process will begin almost immediately, but we have no set time frame in mind for when we will conclude the process. We'll also retain UScellular's existing tower business. That will be enhanced by the long-term revenue generated by the MLA we agreed to with T-Mobile. That agreement covers at least 2,600 U.S. cellular towers. And that as well as our existing third-party co-location revenue, will further solidify our position as the fifth largest tower portfolio in the U.S. And finally, we'll also retain our valuable equity method investment interests in various wireless partnerships that we expect will continue to generate meaningful equity method income and distributions. And with that, let me turn it over to Doug, who will dig deeper into the agreement.

Thank you, LT. Turning to Slide 7. T-Mobile will acquire bands of UScellular's spectrum that seamlessly integrate into their existing network. Customers will see improved speed, performance and coverage as T-Mobile lights up the combined spectrum. As LT mentioned earlier, U.S. Cellular expects to retain a significant portion of our spectrum assets that are not included in this transaction, including spectrum representing approximately 70% of our portfolio. Specific details regarding the retained spectrum are in the slides. Again, we will seek to opportunistically monetize all of this retained spectrum. Turning to Slide 8. This agreement will produce contracted revenue from a strong anchor tenant for at least 15 years under new MLA provisions that include a contracted annual escalator. With a long-term anchor tenant in T-Mobile and a significantly improved financial position, including limited leverage and strong cash flow, UScellular will be well positioned to serve the needs of its tower customers. As discussed, T-Mobile will be a long-term tenant on at least 2,600 UScellular-owned towers with potential to lease additional UScellular towers. That reflects at least 2,015 incremental T-Mobile tenancies that are expected to result in incremental minimum cash rentals of $56 million in the first full year of the new MLA. That is in addition to approximately 600 towers where T-Mobile is already a tenant. For context, our 2023 third-party tower rental revenues were $100 million. To ensure continued uninterrupted service for UScellular customers following the transaction, T-Mobile will also have interim lease agreements on an additional 1,600 towers that are not part of the MLA. Adding the impact of the MLA to existing co-locations as of March 31, 2024, results in approximately 4,400 co-locations. We, of course, will continue to market our towers to other co-locators as well as we remain focused on driving revenue growth in our tower portfolio. On Slide 9, UScellular will also retain its equity method investment interest from its wireless partnerships, which generated $158 million of equity income and $150 million in distributions in 2023. These equity method investments are expected to continue to provide a steady source of cash flow to UScellular. Turning to Slide 10. Following the close of the transaction, UScellular will have a strong balance sheet and cash flow. T-Mobile has agreed to conduct an exchange offer under which debt holders of certain UScellular debt will be offered the opportunity to participate in an exchange offer of their UScellular debt for T-Mobile debt. The offer will be made prior to closing, and details of the expected exchange offer will be provided in due course. With that, I'll turn the call over to Vicki for additional comments from TDS.

Okay. Thank you, Doug, and good morning, everyone. It's a real pleasure to be here this morning. If you turn to Slide 11, let me first say that the TDS and its Board of Directors are in full support of the sale of UScellular's wireless operations and select spectrum assets to T-Mobile. Following our deliberate and thoughtful review of strategic alternatives, we're confident that this is a great outcome for UScellular and TDS. T-Mobile's robust capabilities and offerings will enhance service, choice and value for UScellular's wireless customers, and the financial terms will deliver significant shareholder value. While decisions regarding the distribution of proceeds from the sale of the wireless operations will be determined solely by the UScellular Board of Directors. If there are distributions, TDS will receive such proceeds in proportion to its ownership of UScellular. To the extent cash distributions are made to UScellular shareholders, including from any proceeds related to the expected monetization of retained spectrum assets, TDS will allocate such proceeds in the best interest of its shareholders. Depending on the amount, TDS expects to utilize proceeds to strengthen TDS's balance sheet and continue the advancement of TDS's fiber build-out program and may include return of capital to shareholders in the pursuit of other opportunities to grow the business. We are all very excited about the prospects for TDS in the near term and following the close of the transaction. We have a strong growing fiber business with very attractive returns, and we retain our majority ownership of UScellular, which will own a tower business and partnership investments expected to produce solid cash flow. Additionally, TDS believes now is the best time to reset our capital allocation strategy in a manner that is appropriate for the remain business and our attractive return opportunities. The TDS Board of Directors has declared a second quarter common dividend at 20% of previous levels. which is appropriate in terms of enabling the investments to support the growth prospects and scale of the remaining business. There are no changes to the Series UU and Series VV preferred dividends. TDS is proud of its long history of paying a dividend, and we are confident in our plans to drive growth and create value for all our stakeholders by investing in fiber expansion, and the revised capital allocation strategy will enable us to prioritize growth investments appropriately for the future. As we work to complete this transaction, TDS remains committed to executing on our strategy to grow our fiber footprint across small and midsized communities across the U.S., while increasing broadband penetration and improving profitability. This transaction will be key in accomplishing and potentially accelerating that strategy. With that, I'll now turn it back over to LT for closing remarks.

Thanks, Vicki. Before opening it up for questions, I just want to take a moment to thank all of the UScellular associates for their support and their commitment. As you can imagine, it's been a busy stressful time as we work through the strategic review process, and I'm so proud of what this amazing team continues to accomplish in the dedication they demonstrate every day. We remain committed to keeping our customers connected to what matters most, and we look forward to bringing the best network, connectivity and prices to customers across the U.S. Thank you all for joining me here today and for your continued support of UScellular. And with that, let's go ahead and move to the question-and-answer portion of our call. Operator, could you get us started?

[Operator Instructions] Our first question will come from the line of Sebastiano Petti with JPMorgan.

I just wanted to think out maybe a couple of years out here as we think about the retained spectrum assets, you're thinking about the retained portfolio of towers. You're opportunistically looking to monetize spectrum, but as we think about the go-forward for UScellular, does it make sense to remain a public company? Maybe a question for Vicki in terms of TDS. I mean, at this point, why not combine the 2 entities, what precludes you from perhaps doing so? And then are there any potential details you can perhaps give us on other conversations about increasing co-location and tenants on your existing tower portfolio above and beyond maybe the T-Mobile announcement given this morning? It's been obviously a common theme seems a good opportunity.

All right. Thanks, Sebastiano. A lot of questions there. Let me see if I can tackle them all in the right order. I may jump around a tiny bit. Let me start with, as you said, kind of moving forward a couple of years. Let me start with spectrum, right? As we talked about, we do have a plan to monetize that spectrum. We plan on starting that process immediately. We don't have a time frame for being done with that, but that's certainly an asset we're going to look to monetize in the coming weeks, months, quarters. Towers. So we are really pleased with the way that this transaction solidifies and strengthens and transforms our tower business. What we've been able to do is we've been able to put in place a tenant that will provide us with long-term contracted revenue, a 15-year time frame. We are happy with the way that sets up our tower business for the future. We think it positions that asset extremely well. We obviously will be continuing to work to get more co-locators on our towers. That process, we've done a nice job of growing that tower revenue over time and increasing our co-location metrics. And you can expect that to continue. And so there won't be a change in terms of the overall tower strategy when it comes to trying to add more co-locators and continue to try to grow that business. As far as the portfolio of the business moving forward, I think it's a little bit premature to talk through that. And when I say portfolio, I mean both in terms of the -- as you think about the new strategy for the business as well as your question about UScellular and public company and relationship with TDS and so on. We've got a path in front of us in order to go get regulatory approval for this transaction. We've got a lot of work in front of us to integrate our network to make sure that we have a great and smooth plan for our customer integration. And so that's kind of what we're focused on right now. I don't really have a comment on the path forward for UScellular as a public company or not as a public company. That's something that we can work out in the future.

Your next question comes from the line of Rick Prentiss with Raymond James.

Well, good to know we're finally getting tower reporting. And LT, you can come to the tower show in a different role, maybe. First question for me is -- so obviously, Doug, you touched on it, interim lease for the sites at T-Mobile is not, I guess, committing to long term. Why not have put in place -- well, first, what's kind of the time frame we should be thinking about that as far as the revenues of that business? I guess, there is no revenue now. So what should we think about the time line of those anchor -- previous anchor tenant leases kind of bleeding off. And why not put in place more leases on those sites to get more value to the tower company?

Well, right. So T-Mobile currently has like 600 existing co-locations, and those are subject to 5-year renewals. We really don't expect those to bleed off. They, of course, have the option to renew, but we expect those to be long-term tenancies by T-Mobile. In addition, as I mentioned, we do have 1,600 owned towers that they will be set on an interim basis for a period up to 30 months. And they have the ability to terminate those interim leases on those towers at any time within that 30-month period.

Okay. I missed the 30-month period. When we think about the -- is there a breakup fee in the transaction, I apologize, I'm out of pocket today. Is there a breakup fee in it kind of what's the breakup for you guys? What's the breakup for T-Mobile?

That's $60 million breakup fee, Rick.

Say that again, 6-0 or 5-0?

6-0.

6-0. Is that both ways?

Yes.

Okay. And, Vicki, maybe an update on what do we think the tax basis is -- or Doug maybe it's better for you. What's the tax basis that we should expect on this transaction, so we can start thinking about gross proceeds versus net proceeds?

Yes, Rick, with respect to cash taxes, we expect cash taxes upon the close of the transaction to be in the range of $325 million to $450 million at the UScellular level. That will be somewhat less at the TDS level given NOLs and other factors, but that's our estimate of the tax consequences.

Yes. Thanks, Doug. And Rick, any special dividend would certainly be the decision of the UScellular Board of Directors. But any dividend up to TDS would be an opportunity for TDS really to further advance its fiber deployment program. And I think that this transaction creates significant value for both UScellular and TDS stakeholders and any dividend upward would allow us to continue to focus on our mission, which is really about bringing connectivity to the communities across the United States with fiber broadband services.