Telephone and Data Systems, Inc. (TDS)
40th Annual UBS Global Media and Communications Conference
December 3, 2012 1:30 PM ET
LeRoy T. Carlson, Jr. – President and CEO
Kenneth R. Meyers – Executive Vice President and Chief Financial Officer
Jane W. McCahon – Vice President, Corporate Relations
Batya Levi – UBS
Batya Levi – UBS
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LeRoy T. Carlson, Jr.
Thank you very much, Batya. I want to thank you Batya Levi and UBS for inviting us here today. As Batya said, I’m Ted Carlson, CEO of TDS and with me is Ken. Meyers, our Executive Vice President and CFO and also Jane McCahon. Jane, you want to identify yourself there? Okay, as Vice President of Corporate Relations.
I’d like to give you a brief update on some of our important activities. At TDS Corporate, we’re working to identify structural, operational or financial actions that we could take to enhance long term shareholder value and that are consistent with our strategy to have a growing, vibrant business. We completed a TDS share consolidation in January of 2012 which greatly simplified our capital structure and last month we announced an agreement between US Cellular and Sprint to exit some significantly underperforming markets. These are two good steps that position us to consider additional opportunistic steps and we continue to collect and to evaluate a large number and wide variety of possible steps to build additional long term value for our shareholders and we look forward to repotting continued progress.
I’d like to make a few comments on our recent decision to sell certain less perfuming Midwest markets. US Cellular is selling most of its PCS spectrum licenses and more than 500,000 customers in these Midwest markets to Sprint for $480 million. This transaction represents roughly 10% of US Cellular’s total customer base. By selling these markets, we can focus our resources on markets where we typically have stronger competitive positions and where we can anticipate over time improving margins and return on capital.
An important factor in the timing of this decision was the significant investment necessary to upgrade these markets to a 4G LTE network and the need down the road to eventually make additional sizeable investments in Spectrum for data growth. The transaction valuation $820 per customer or $1.74 per megahertz POP is in the range of recent comps and attractive.
Beyond the cash proceeds, US Cellular will retain its direct or indirect ownership interests in the owned tower portfolio in these markets and other Spectrum in the transaction markets. US Cellular expects to receive the cash proceeds at closing in approximately mid 2013.
In terms of the remaining footprint at US Cellular, these are mostly in markets where we have strong market share positions. In fact, of the top 10 remaining markets, we have the number two market share position in eight of the 10 markets. And now the U.S Cellular management team will be able to focus much more of its attention on these important markets.
At U.S Cellular, we continue to execute on our great customer experience, customer satisfaction strategy. Our Hello Better advertising campaign is showing good results so far as evidence by our increase in post paid gross additions year over year. We have a strong device portfolio led by the 4G LTE Galaxy S III and the Galaxy Note II heading into this important holiday season.
New distribution this year into Wal-Mart is providing incremental new customers for us and we’re working a number of initiatives to address our elevated postpaid churn. We’re excited about the effectiveness in rolling out our 4G LTE network. 58% of our customers will be covered by our LTE footprint by this year end and by year end 2013 we plan to cover 87% of our customers assuming the Sprint transaction closes by then.
We’re currently selling 4G LTE Smartphone devices in all of our markets, which is important because once LTE is turned on these markets, then we get more data capacity hence speed benefits immediately. Our goal is to move customers to 4G as quickly as possible so that we can stop spending capital on expensive, incremental data capacity for 3G networks.
Our 4G device subsidies will remain high as we move through this 3G to 4G transition. Going forward, especially given our 10% smaller revenue base at U.S Cellular, we’ll continue looking at ways to bring down our structure. As an example, we recently announced that we’ll be transitioning a call center at Bolingbrook, Illinois to an outsourcing partner. This action will allow us flexibility to better match call center capacity and call volumes and this step alone should reduce our facilities expense by more than $3 million annually beginning in 2014.
And now I’d like to tell you about two exciting TDS Telecom initiatives. We’ve made four acquisitions in the hosted and managed services space. We’re developing a full range of IT services to offer midsized and small businesses and government customers. These services include Cloud, core location, managed and hosted services and solutions provider services.