Telephone and Data Systems Inc. said Friday it would pursue a spinoff of its personal communications services business Aerial Communications Inc., a segment that has been a continual drag on its cash flow and earnings.
TDS opted to withdraw its offers to exchange tracking stocks for the outstanding common shares of its cellular business United States Cellular Corp. and Aerial. The company had been studying this option for nearly a year.
TDS President and Chief Executive Officer LeRoy T. Carlson Jr. told analysts TDS was unable to come up with tracking stock that offered a reasonable valuation for an initial public offering in light of the IPO market this year. Special committees representing minority shareholders of U.S. Cellular and Aerial created to review the proposal could not reach an agreement, he said. In addition, shareholders were beginning to sour on the proposal, he said.
Now the company will pursue a tax-free spinoff of its 82.3-percent interest in Aerial, as well as review other undisclosed alternatives.
Western Wireless Corp. also is considering spinning off its 80.1-percent ownership interest in Global System for Mobile communications operator VoiceStream Wireless Corp. to its shareholders tax-free. Analysts say the move would unleash shareholder value and position VoiceStream for consolidation.
Carlson said the removal of Aerial will allow it to focus on its rural and suburban markets where its landline and cellular businesses operate. After the spinoff, TDS may consider stock repurchase programs as additional means of building shareholder value. TDS owns 81 percent of U.S. Cellular and all of TDS Telecommunications Corp.
“Cash flow and debt capacity will be redirected to our core wireline and cellular businesses,” said Carlson. “Without the need to support start-up activity, TDS can pay closer attention to TDS and US Cellular. This will help for stronger earnings momentum. It will be an easier company for Wall Street to understand.”
By the same token, Carlson said Aerial can access capital markets more efficiently as well as align itself closer with GSM providers, and added that when Aerial was formed, TDS envisioned its PCS business having a close alignment with U.S. Cellular.
“Our view now is that there is a much closer association between GSM companies rather than cellular,” he said. “A spinoff could allow Aerial to participate in consolidation. Closer alliances will give Aerial a more national footprint to compete with national offers.”
However, it’s unclear when Aerial could merge with other carriers since an Internal Revenue Service ruling requires companies pursuing a tax-free spinoff to wait two years before making transactions. Carlson said some loopholes may exist in that ruling. Aerial may be allowed to merge with smaller carriers.
TDS said it will assist Aerial in securing financing prior to the spinoff. The company said it is working with investment and commercial banks, but analysts wonder just how much financing the company can obtain with deals tightening up. GSM operator Omnipoint Communications Inc. still is desperately searching for more financing and has asked its vendors for additional money. Analysts say Omnipoint could run out of money by the third quarter.
The market does “make it more challenging,” said David Freedman, telecom analyst with Bear, Stearns & Co. in New York. “Aerial’s performance to date has been characterized by very high churn. That makes it a challenge. At the same time, TDS has said that Aerial owes money, about $484 million. TDS is willing to forgive part of that debt. And to the extent TDS does, that helps. Aerial is making improvement on churn and that would help them.”
The agreement should not have an affect on Finland operator Sonera Corp.’s $200 million investment in Aerial, said Carlson.
While some analysts hailed TDS’s move as a step in the right direction, citing other examples where similar alignments have worked, others were frustrated. Wall Street would be more receptive to a spinoff of U.S. Cellular, they said. The cellular carrier operates in secondary markets, isn’t suffering from intense competition and consistently has generated strong cash flow and earnings.
Freedman said because U.S. Cellular is a publicly traded entity, and its marketing agreements are at arm’s length, TDS should be able to spin off U.S. Cellular and buy into the publicly traded part of the carrier. Public shareholders today own 19 percent of the carrier.
Many analysts have criticized the way TDS has managed its business, saying the company has acted too conservatively and is unwilling to give up control of U.S. Cellular to unlock shareholder value.
“We had no contemplation of spinning U.S. Cellular off,” Carlson said, who consistently defended the company’s decision. “Aerial is a start-up and should be valued as a start-up. It appeals to a different group of investors. TDS and U.S. Cellular today trade on cash flow. They are more mature businesses. They appeal to a different type of investor group … By freeing up TDS cash flow to be addressed toward developmental opportunities to (TDS) Telecom and U.S. Cellular, we will be able to enhance growth. There is an opportunity to buy U.S. Cellular stock back.”
TDS and U.S. Cellular shares fell following the announcement. At RCR press time, TDS was down $4 to $43.25, while U.S. Cellular shares fell $2.44 to $37.50. Aerial shares increased slightly.
