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From Breakingviews
T-Mobile US (TMUS) is operating in the back alleys. I am purchasing Struggling smaller rival United States CellularUSM) for $4.4 billion. Bell. But the target is small and serves mostly rural communities, so it likely faces a tough regulatory path to approval. T-Mobile is a capable acquirer, but the mature industry leaves few good options for growth.
U.S. Cellular, with 40% of its subscribers in rural areas, has been under pressure lately. It lost 138,000 net subscribers to carriers like Verizon Communications Inc. last year.VZ), AT&T (T) and new cable company Charter Communications (Chinese) and Comcast (CMCSA(Its customer churn rate is significantly higher than T-Mobile’s.) The deal will allow US Cellular to pay off some of its debt. Mike Siebert’s telecom giant gained 5 million customers, plus storefronts and some spectrum, giving it a foothold outside urban areas where it has largely lacked.
The price seems reasonable. T-Mobile is looking to realize $1 billion in synergies, primarily from costs and capex. Taxed at the company’s effective tax rate of 24% and capitalized at 10x, the savings have a net present value of more than $7 billion. Even excluding the $2 billion-plus it will cost to realize the synergies, the value far exceeds the acquisition outlay. Moreover, the assets T-Mobile is acquiring generated about $3.6 billion in revenue last year, valuing the acquisition at just over 1x sales. T-Mobile’s comparable valuation is 3x that.
T-Mobile has a lot of room for error. The problem is, there are a lot of pitfalls. The mobile business is mature. largely Every adult in the population owns a mobile phone. In such a saturated environment, a company can only grow by encroaching on a competitor’s territory (essentially a price war) or acquiring a competitor. T-Mobile has done both successfully. Since closing its deal with Sprint in April 2020, the company has significantly outperformed its competitors. The problem is that the company is still underperforming the S&P 500 Index. For shareholders, there is no guarantee that entering a new market will provide enough value, even with a skilled buyer to execute the deal.
Moreover, there are likely to be regulatory battles ahead. T-Mobile’s acquisition of a SoftBank-owned rival has already reduced the mobile business from four major carriers to three. The entry of cable companies has made the market more competitive. That said, telecommunications services like US Cellular often provide reassurance to regulators. Moreover, T-Mobile has since acquired another smaller carrier, Mint, but it took more than a year to clear the regulatory process. T-Mobile now faces a much tougher environment in which regulators will be eager to block the deal. This adds unwelcome noise to an already stagnant industry.
Contextual News
T-Mobile US announced on May 28 that it had agreed to acquire United States Cellular’s wireless communications business, including its customers, stores and 30% of its spectrum, for $4.4 billion. US Cellular will retain 4,400 base stations and 70% of the spectrum assets. The company, valued at $3.6 billion, has about 5 million subscribers and serves about 40% of the U.S. rural population.
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
