Assessing T-Mobile's high-stakes gamble on low-cost spectrum

Although wireless spectrum represents only a small portion of T-Mobile US Inc.'s $4.40 billion deal with United States Cellular Corp., that spectrum is the focus of some big questions regarding the deal's value and its odds of approval.

T-Mobile on May 28 agreed to acquire most of UScellular's wireless operations, including its customers, its stores and about 30% of the carrier's spectrum assets. The purchase price includes a combination of cash and up to $2.0 billion of assumed debt.

There are two major reasons that analysts are so interested in the spectrum component. First, in terms of the overall value of the deal, the spectrum seems to be coming very cheaply, especially in comparison to the tens of billions of dollars carriers have previously dropped on spectrum in federal auctions. Second, the proposed combination of T-Mobile's existing spectrum holdings with those from UScellular will likely prompt a lengthy regulatory review that could delay any potential closing.

"The question isn't so much whether T-Mobile needs the spectrum as it is whether they will be allowed to buy it," wrote MoffettNathanson LLC analysts Craig Moffett and Nick Del Deo in a research note.

'A very low price'

In terms of valuation, at $4.40 billion, the asset purchase is the fourth-biggest M&A transaction to date for T-Mobile, which recently completed the acquisition of Kaena Corp., the parent entity of prepaid wireless brand Mint Mobile LLC and other related brands, in a cash and stock deal valued at up to $1.35 billion.

While there are several ways to value the transaction, including price per subscriber, price over OIBDA, and price over EBITDA, "by almost any measure, this deal is happening at a very low price," wrote Moffett and Del Deo.

Taking a sum-of-the-parts approach, the analysts note that based on the subscribers T-Mobile is getting and the income the assets generate, "there is nothing incremental being paid for the spectrum that T-Mobile will acquire as part of the deal."

Under the transaction, T-Mobile is set to purchase UScellular's spectrum assets in the 600 MHz, 2.5 GHz, 24 GHz, 700 MHz, Advanced Wireless Services (AWS) and Personal Communication Services (PCS) bands. While the deal includes some mid-band spectrum, notably in the 2.5 GHz band where T-Mobile already has a great deal of spectrum, the deal mostly entails high- and low-band spectrum.

Regulatory odds

The type of spectrum involved in the transaction could improve the deal's odds for winning regulatory approval, said Lynnette Luna, a senior analyst with S&P Global Market Intelligence Kagan.

"It's the mid-band spectrum that competitors worry about becoming an unfair advantage to them because that's the sweet spot for 5G innovation," Luna said.

T-Mobile holds the most mid-band frequencies to date, compared to rivals Verizon Communications Inc. and AT&T Inc., according to data compiled by Market Intelligence.

Still, regulatory approval is far from a sure thing.

"Regulators have to question whether T-Mobile is big enough already," Luna said. "The company can no longer be characterized as the 'Uncarrier.' Clearly, it is operating like an incumbent with more expensive pricing and recently announced price hikes on legacy plans."

The challenge for T-Mobile will be in markets where the acquired spectrum pushes the carrier over the Federal Communication Commission's soft cap on spectrum concentration. The cap, which is not a hard limit, requires the agency to more heavily scrutinize deals that increase low- or mid-band spectrum ownership in any market above one-third of total licensed spectrum.

"The issue isn't national. It is local. That's not to say that they can't be approved. But it is certainly an indication of an anti-concentration bias," Moffett and Del Deo said. The pair expect "a long and projected review" — and they are not alone in that view.

The Kaena deal, announced in March 2023, did not win regulatory approval until April 2024. That deal was not only smaller but also did not involve any spectrum.

"The Mint/T-Mobile deal took 13 months, suggesting a likely bigger and more complicated USM deal would take a long time and be heavily scrutinized," Raymond James analyst Ric Prentiss wrote in a research note prior to the T-Mobile/UScellular announcement.

Mitigating factors

Prentiss asked UScellular executives about the regulatory outlook during a May 28 call. UScellular President and CEO Laurent Therivel said, "We've been very thoughtful in the way that we structured this deal in order to mitigate some of the spectrum aggregation issues that regulators might be concerned about."

Therivel said the deal would also benefit customers, who will end up with a better network. UScellular's wireless subscriber base has shrunk in recent quarters, while T-Mobile's has continued to grow.

The transaction is expected to close in mid-2025, following regulatory approvals and the fulfillment of customary closing conditions. The boards of UScellular and parent entity Telephone and Data Systems Inc. unanimously approved the transaction.

For its part, UScellular appears to be moving towards becoming a wireless infrastructure company with its tower properties and spectrum holdings. While its bigger peers have already sold their tower holdings, UScellular continued to hold 63% of its cell sites on owned towers, making it the fifth-biggest tower operator in the US, the MoffettNathanson analysts said.

Therivel said the company plans to "immediately" start looking into monetizing its remaining assets following its deal with T-Mobile.