DISH - U.S. Cellular: Valuing In Light Of A Potential Acquisition

2023-08-22 08:12:31 ET

Summary

• UScellular's board of directors is exploring a range of strategic alternatives, which usually means that it is open to an acquisition.
• For this purpose, I explore the potential bidders as well as the appeal of the wireless service provider's assets.
• I also formulate a value for the stock in view of its frequency spectrum holdings, tower assets and customer base.
• More important, I also highlight the 5G fixed wireless opportunity, which has been progressing mostly under the radar.
• The stock is a buy, but there are downside risks.

At the time of writing, United States Cellular's (USM) stock was trading at around $39.75 or nearly double its July level of $20 after its board of directors plus that of the holding company Telephone and Data Systems (TDS) decided "to initiate a process to explore a range of strategic alternatives for the wireless telecommunications services provider". Still, the stock is still below its 2019 high, as illustrated below.

Part of the upside was also triggered by analysts at JPMorgan (JPM) upgrading their target price for the stock to $52 . Since this would represent a further appreciation of about $12 from the actual level, my objective with this thesis is to assess whether this constitutes a valid target. For this purpose, I scan the market for potential bidders as well as highlight the appeal of US Cellular's assets, including 5G fixed wireless.

Strategic Options and Potential Acquirers

First, looking at the finances for this regional wireless carrier, revenues have grown sluggishly during the last five years while it has contracted large amounts of debt to drive 5G expansion, especially over the Midwest where its primary network is located.

Moreover, the large amounts of capital expenses incurred have not continuously delivered cash thereby making the operating model unsustainable and, what was long awaited has now finally become reality with one of the strategic imperatives likely to take the form of an acquisition. For this matter, US Cellular is the nation's fifth largest wireless communications carrier by revenue behind Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Dish (DISH) as pictured below.

Looking for potential acquirers, with a big debt load and being cash-constrained , it is unlikely for DISH to make a bid even if an acquisition helps it boost 5G coverage rapidly and move closer to the FCC deadline. As for the remaining three nationwide carriers, they may participate in light of US Cellular's assets which are made up of its frequency spectrum and tower sites, while adding its $4.7 million subscribers to theirs could improve their competitive positions.

In this respect, given that the company has not sold its tower sites and its tenancy ratio continues to grow without being skewed towards any single carrier, it could also be of interest to American Tower (AMT). Interestingly, this towerCo also ambitions to be a more vertically integrated company after its acquisition of data center play CoreSite in March last year, and, going a step further with US Cellular, it could this time gain direct entry into the 5G FWA or fixed wireless access market, without necessarily having to partner with WISPs (wireless Internet service providers) for the purpose as is currently the case.

More Potential Acquirers and Highlighting Assets

Now, FWA can be envisioned as using a 5G network to provide high-speed wireless connectivity without actually requiring fiber or cable, which is particularly useful in rural and semi-urban areas like the Midwest where UScellular already has its own network providing both 4G and 5G services as per its coverage map. Furthermore, it has a sizeable addressable market expected to be over 13 million homes, after boasting 100K customers using FWA driven by low-band spectrum in July, before eventually continuing with mid-band later this month.

Talking dollars, with the global FWA market expected to reach $997.5 billion by 2029 from $3.18 billion in 2022, after accelerating at a CAGR of 127% during this period, UScellular grabbing just 0.4% of the opportunities could bring revenues of roughly $4 billion (0.004 x 997.5).

Now, the company is also using mmWave (high-band) spectrum for FWA, and, according to an article by LightReading , it has a whole portfolio of these including 600 MHz. This frequency band could be useful to T-Mobile, which has already acquired related spectrum licenses at a cost of $3.5 billion last year but could need more as it has already reached an advanced deployment stage.

For this matter, even Charter Communications (CHTR) uses 600 MHz and has MVNO (mobile virtual network operator) licenses to provide 5G services atop Verizon's physical infrastructure. Additionally, it is also present in the Midwest with the state of Wisconsin which could provide for merger synergies. However, already having a strategy to leverage its own cable network (together with Comcast (CMCSA)) to provide wireless hotspots in order to be less dependent on Verizon, it seems implausible that the cable company would acquire UScellular assets all by itself simply for the spectrum or to expand its 5G footprint.

Consequently, this leaves open the option of a consortium of companies putting up a consolidated bid, with each one vying for different assets. To this end, it becomes important to assign a value to the assets and I start with the spectrum holdings.

Valuing US Cellular

These are estimated at $2.5 billion by analysts at Raymond James mostly based on unused spectrum. This seems to be a high value but is justified considering that in the last two 5G auctions, the company spent around $580 million in 2022 and $1.5 billion in a C-Band auction in 2021 where the frequencies are yet to be utilized, without forgetting the ones already held before.

There is more if you consider the company's roughly 4,300 cellular towers. Now, since AMT's 226K sites are worth around 82 billion dollars, using simple maths, the value of one of them is $362.8K. Thus, UScellular's 4.3K tower sites are worth around $1.56 billion ((8200/226) x 4300). Well, this may seem a low figure compared to the $2.9 billion estimated by other analysts but I believe it is justified as UScellular's assets are less valuable than AMT's towers which in addition to hosting radio antennae, also possess the infrastructure to offer computing edge services at some locations.

Third, there are the $4.7 million customers. Now, based on Verizon's acquisition of Tracfone in a $6.9-billion deal first announced in September 2020 where it gained over 20 million subscribers, this comes to a CAC or customer acquisition cost of $345. This signifies that UScellular's customer base can fetch up to $1.61 billion (4.7 x 345).

Adding the above figures as shown in the table below, its value totals $5.67 billion which is higher than the actual market capitalization of $3.39 billion by about $2.28 billion. This, in turn, leads to a target of $66.5 (5.67/3.39 x 39.75) based on the current share price of $39.75.

However, this target is 67% above the actual stock value and $14.5 higher than JPMorgan's estimate of $52, which prompts me to adopt some caution. Also, after subtracting the net debt (which takes into account the cash balance) of $3.94 billion , the company could be valued at only around $1.73 billion.

Opportunity Amid Downside Risks

In this respect, the total acquisition price inclusive of debt comes at a hefty $5.67 billion, and at a time when borrowing costs are high after the Federal Reserve hiked interest rates at an unprecedented pace (in recent times) as from last year. For this matter, according to a report by PricewaterhouseCoopers, the M&A market in 2023 has proved more resilient than what people have been expecting, but, the difference compared to previous years is that buyers now come from the ranks of cash-rich corporations.

This is far from being the case in the communications services sector where debt loads remain relatively high, and, unless you are deep-pocketed Alphabet (GOOG) looking to make forays into the 5G infrastructure space, single bidders may be late to show interest, which would imply volatility for the stock in the short term. Noteworthily, it has appreciated merely based on the board's intention to be open to strategic initiatives, not a concrete bid and its subscriber base continues to shrink while it has relatively high debts. Also, with an RSI of 80 , the stock is in overbought territory which implies downside risks.

On the other hand, for those who are holding on to the stock for the last 4-5 years and have the patience to tolerate further volatility, there could be rewards. This specifically pertains to the value of UScellular's assets for adding value to the 5G ecosystem with fixed wireless which is largely progressing under the radar and where there are about 4 billion dollars of opportunities that can offset debts if well executed. Ultimately, this also depends on how the management prepares the wireless provider to be attractive to buyers, and exploring strategic alternatives may have been an excellent way to start. The reason is that this means openness to equity participation with a potential partner in addition to an outright cash acquisition. For this matter, it was a combined cash/equity deal between Verizon and Tracfone three years ago.

In these circumstances, I have a buy position with a target of $66.5 for the longer term and, finally, it would not be surprising to see a consortium of bidders, consisting probably of nationwide mobile network operators and U.S. towerCos.

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