US Cellular Left in the Lurch by TDS

US Cellular Corp. (USM-AMEX) shareholders were just delivered some less than great news.  Telephone & Data Systems (TDS-AMEX) is ceasing its activity related to acquiring the rest of US Cellular Corp. due to "uneconomic terms." The sad thing is that this has been in the works since February of 2005.

TDS controls roughly 80.7% of the company due to share class structure.  So now the acquisition possibility is off because TDS is saying that an acceptable ratio would need to reflect the relative value between the two and that a substantial portion of TDS’s value reflects its ownership in USM.  This termination of its intent does not preclude TDS from acquiring USM if conditions become more favorable in the future.  That is likely just the teaser to keep hopes alive for those who are willing to use the term ‘hoping’ in the same sentence as investing.

TDS is also saying that it now intends to repurchase up to $250 million in its own shares over the next 3-years.  That should dash other hopes that it will use cash to take out the rest of the USM shares.  USM will have its own share repurchase program that has been ongoing for up to 170,000 shares per quarter.  This will also offset dilution from ESOP plans and from deconsolidation on a tax basis if TDS’s ownership of USM drops to under 80%.

Over the last two years USM shares have climbed from just under $50.00 to over $70.00, while shares of TDS shares have shown very mixed results depending upon when shares were purchased.  If you take a look at a two-year chart or longer you’ll see just how mixed.  This is the risk in investing into what is essentially a quasi-subsidiary and majority controlled company, because the parent is under no obligations to clean the rest of the shares up at a profit and they can hold the threat of future share sales over existing shareholders. 

There have not been any trades yet pre-market, but this is not going to be the news that USM holders were hoping for.

Jon C. Ogg
March 5, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.