Regional carriers are swapping spectrum to shore up their strength in markets where they already operate and exit markets that are no longer a strategic fit.
In the largest deal announced last week, Alltel Corp. said it would buy both wireless spectrum and assets from Telephone and Data Systems Inc. subsidiaries U.S. Cellular Corp. and TDS Telecom in Florida, Georgia, Ohio, North Carolina, Mississippi and Wisconsin for $143 million in cash.
U.S. Cellular’s interest in the deal, which encompassed $80 million of the $143 million total, included a 25-megahertz cellular license for Florida metropolitan statistical area 208, which covers 340,000 potential customers near Fort Pierce, Fla.,and its 49-percent interest in a 25-megahertz cellular license for Ohio RSA 593, covering 119,000 pop equivalents in Jackson, Gallia, Pike, Ross and Scioto counties. Combined, the two markets serve roughly 37,000 subscribers, include 35 cell sites and generated $5.7 million in revenues for U.S. Cellular during the second quarter.
In addition, U.S. Cellular sold minority interests in five MSA licenses and a pair of rural licenses covering an aggregate of 268,000 pops in Ohio, North Carolina, Mississippi and Wisconsin.
From TDS, Alltel acquired a majority interest in Georgia RSA 382 that Alltel has been operating, representing 133,000 pop equivalents, and a minority interest in Wisconsin RSA 715, covering 5,000 pop equivalents for $63 million. (Because the licenses sold are minority interests, the population equivalents are that proportion of the population.)
Alltel noted that in addition to gaining spectrum for its increasingly important wireless operations, the deal paves the way for the company to expand bundling efforts with its wireline offerings.
“We’re looking for ways to grow in a smart way,” said Kevin Beebe, Alltel group president, speaking at the RBC Capital Markets North American Technology Conference 2004. “Adding to our wireless footprint and gaining overlap with our wireline is important.”
U.S. Cellular said the sale continues the ongoing focus in its core regional operations, which now include a number of rural markets in the Northwest, a strong Midwest presence anchored by its hometown Chicago market, a rural Northeast cluster and a mid-Atlantic presence.
“These properties, while valuable in their own right, do not complement the geographic footprint of the company nor strengthen its competitive position in our larger, more well-established markets,” said John Rooney, U.S. Cellular president and chief executive officer.
U.S. Cellular made a similar pronouncement last year when it sold its south Texas operations to AT&T Wireless Services Inc. as well as a spectrum swap with AWS that included U.S. Cellular’s Florida and Georgia operations. Rooney also noted that the carrier will use proceeds from the sale to fund the cost of building out several of the markets, including St. Louis; Portland, Maine; and Omaha, Neb.; which it acquired from AWS as part of the 2003 spectrum swap. The carrier launched service last month in Oklahoma City using spectrum it bought in the AWS deal.
Analysts were slightly negative on the deal from U.S. Cellular’s perspective, noting the properties sold would reduce 2004 earnings per share by 1 cent and 2005 earnings per share by as much as 4 cents, though the additional cash from the sale should help disperse the cost of planned network expansion.
“We previously projected a $50 million Q4:04 funding requirement,” SG Cowen reported in a research note. “We expect this sale will generate $62 million in after-tax proceeds, filling the funding hole.”
While Alltel’s agreement was made with a fellow regional carrier, Centennial Communications Corp.’s spectrum plans last week involved some of the nation’s largest operators.
The regional carrier exercised an option to purchase 10 megahertz of spectrum from AWS covering 4.1 million pops in markets contiguous to Centennial’s operations in Michigan and Indiana for $19.5 million. The acquired spectrum covers Anderson, Indianapolis, Lafayette and Muncie, Ind., as well as Lansing, Grand Rapids, Muskegan and Saginaw-Bay City, Mich.
In connection with the deal, Centennial said it has entered a definitive agreement with Verizon Wireless to sell the Indianapolis and Lafayette spectrum for $24 million in cash, which will leave Centennial with an incremental 2.2 million pops and $4.5 million in cash after both deals are completed. The deal also will provide Verizon Wireless with additional spectrum in both markets to bolster coverage and capacity as well as the carrier’s plans to launch high-speed CDMA2000 1x EV-DO across its network by the end of next year.
Centennial said it plans to deploy GSM/GPRS technology by the end of the year with the newly acquired spectrum in Grand Rapids and Lansing, which covers 1.4 million pops and bridges the gap in its Midwest footprint. It expects to spend about $45 million in capital expenditures related to the expansion during the next two years.
“This measured expansion substantially improves our footprint and competitive position in our Midwest cluster because many people in our existing territory travel regularly to Grand Rapids and Lansing,” said Michael Small, CEO of Centennial. “This new territory is an attractive growth opportunity in its own right, and it enables us to better market our services to more of our existing footprint.”
The carrier added that it has no immediate plans to build out the additional licenses.
