Breakingviews: T-Mobile makes lurch into uninspiring rural US

T-Mobile US is taking to the back roads. The $200 billion telecom giant is buying its struggling mini-rival United States Cellular for $4.4 billion. The price rings a bell. Yet the target is tiny, mainly serves rural communities, and nevertheless likely will result in a tough regulatory path to clearance. While T-Mobile is an able acquirer, the mature industry leaves few good options for growth.

U.S. Cellular, whose subscriber base is 40% rural, has been under pressure recently. Last year it shed 138,000 net subscribers to the likes of Verizon Communications, AT&T and newer entrant cable companies Charter Communications and Comcast. Its rate of customer attrition is significantly higher than T-Mobile’s. With the deal, US Cellular can offload some debt. The much larger carrier led by Mike Sievert gets 5 million customers, plus its stores and some spectrum, offering it a toehold outside of urban areas, which it mainly lacks.

The price looks decent. T-Mobile is eyeing $1 billion in synergies mainly in costs and capital expenditures. Taxed at the company’s effective rate of 24% and capitalized on a multiple of 10, the savings represent over $7 billion in net present value. Even after accounting for more than $2 billion of charges it will take to glean those synergies, the value is worth well over the outlay for the deal. Plus the assets that T-Mobile is buying brought in roughly $3.6 billion in revenue last year, putting the deal’s valuation at just over 1 time sales. T-Mobile’s similar valuation is triple that.

T-Mobile has plenty of margin for error. The trouble is pitfalls are aplenty. The mobile business is mature – nearly all of the adult population has a cell phone. With such saturation, companies can only grow by encroaching on a competitors’ territory – effectively price wars – or buying them up. T-Mobile has done both with success: Since closing its deal for Sprint in April 2020, it has dramatically outperformed its peers. The problem is that the company has still underperformed the S&P 500 Index. For shareholders, going into a new market offers no certainty they will get enough value, even for buyers skilled at executing deals.

Plus, there’s likely a regulatory battle ahead. The mobile business already went from four large carriers to three when T-Mobile snapped up its SoftBank-back rival. The entrance of the cable companies has helped make the market more competitive. Nevertheless, it’s telecom services like U.S. Cellular that often give regulators peace of mind. Moreover, T-Mobile has since bought Mint, another small carrier, which took over a year to clear the regulatory process. T-Mobile faces a much more challenging environment, where watchdogs are eager to knock down transactions. It adds unwelcome static to a stagnant industry.

(Paragraph two has been corrected to say U.S. Cellular’s subscriber base is 40% rural. A previous version said U.S. Cellular serves 40% of the rural population.)