Executive Summary / Key Takeaways

• Telephone and Data Systems is undergoing a significant strategic transformation, divesting its UScellular (USM) wireless operations and select spectrum assets to focus on its growing fiber broadband business and its valuable tower portfolio.
• The successful closing of the announced transactions, particularly the sale of UScellular's wireless business to T-Mobile (TMUS) (expected mid-2025), is paramount, providing substantial proceeds intended primarily for debt reduction and accelerated investment in TDS Telecom's fiber buildout.
• TDS Telecom is executing an ambitious fiber expansion plan, targeting 1.8 million marketable fiber addresses and 95% gig+ speed availability across its footprint, supported by government programs like E-ACAM and investments in internal construction capabilities.
• The retained UScellular tower business, bolstered by a long-term Master License Agreement with T-Mobile, offers predictable cash flows and long-term growth potential driven by industry densification needs, despite near-term CapEx moderation.
• Near-term financial performance reflects investment pressures in TDS Telecom and competitive headwinds in wireless, while future profitability hinges on successful transaction execution, fiber penetration gains, tower growth, and realization of transformation cost savings.

A Legacy Reimagined: Setting the Stage for TDS's Strategic Pivot

Telephone and Data Systems, Inc. (TDS) has long been a fixture in the U.S. telecommunications landscape, tracing its roots back to 1969 with a foundational mission to bring high-quality communications services to rural and underserved communities. This historical commitment to connectivity in less densely populated areas has shaped its infrastructure footprint and strategic approach, positioning it as a diversified provider operating primarily through its majority-owned wireless subsidiary, UScellular, and its wholly-owned wireline and cable business, TDS Telecom.

The telecommunications industry today is characterized by intense competition, rapid technological evolution, and shifting consumer demands for speed, reliability, and bundled services. Large national carriers like T-Mobile, Verizon (VZ), and AT&T (T) dominate the wireless space, leveraging immense scale, extensive networks, and aggressive promotional strategies. In the wireline sector, cable giants like Comcast (CMCSA) and Charter (CHTR), alongside incumbent local exchange carriers (ILECs) and emerging fiber overbuilders, vie for broadband customers, increasingly bundling services and competing fiercely on price and speed. This environment presents significant challenges, particularly for regional players like TDS, which have historically faced structural disadvantages, including higher costs per subscriber and less developed network coverage compared to their larger rivals.

In response to these dynamics and a comprehensive strategic review initiated in August 2023, TDS is undergoing a profound transformation. The core of this pivot involves the planned divestiture of UScellular's wireless operations and a significant portion of its spectrum assets. This strategic shift aims to unlock value, focus resources on core growth areas, and reposition the company for long-term success in a rapidly evolving market. The future of TDS is increasingly centered on the expansion of its fiber broadband network and the optimization of its retained tower assets, complemented by its equity method investments and remaining spectrum portfolio.

Unlocking Value: The Strategic Divestitures

The most significant development in TDS's recent history is the planned sale of UScellular's wireless business and select spectrum to T-Mobile US, Inc., announced in May 2024 and expected to close in mid-2025, subject to regulatory approvals. This transaction, valued at $4.4 billion (subject to adjustments), represents a fundamental restructuring of TDS's portfolio, exiting the challenging consumer wireless mobility market where scale disadvantages have historically pressured profitability. The divestiture includes the assumption of up to approximately $2 billion in debt by T-Mobile. While $100 million of the purchase price is contingent on performance targets (which UScellular does not expect to fully receive), the deal is anticipated to generate substantial proceeds.

Complementing the T-Mobile transaction are agreements to sell additional spectrum licenses to Verizon ($1 billion proceeds) and AT&T ($1.018 billion proceeds), announced in October and November 2024, respectively. These sales, also contingent on the T-Mobile closing and regulatory approvals, further monetize UScellular's spectrum holdings, realizing value well in excess of book value for certain licenses. As of March 31, 2025, the book value of spectrum licenses to be sold to Verizon and AT&T was $586 million and $859 million, respectively.

Beyond the wireless assets, TDS has also been optimizing its portfolio through smaller divestitures. The sale of OneNeck IT Solutions closed in September 2024, and TDS Telecom has reached agreements to sell certain non-strategic incumbent markets, including copper ILEC companies in Colorado for $18 million (agreements in February 2025, expected to close in 2025). These divestitures align with TDS Telecom's strategy to minimize exposure to legacy copper networks and focus on fiber-centric growth.

The strategic rationale behind these divestitures is clear: unlock significant capital, reduce complexity, and focus investment on areas where TDS believes it has a stronger competitive position and greater growth potential. The expected proceeds are earmarked for critical priorities, including the repayment of approximately $1.2 billion in outstanding TDS bank debt and funding the ambitious fiber buildout at TDS Telecom.

The Future Core: Fiber and Towers

With the wireless divestiture on the horizon, the core of TDS's future business rests on TDS Telecom's fiber expansion and the retained UScellular tower assets.

TDS Telecom: Building a Fiber-Centric Future

TDS Telecom is aggressively transforming into a fiber-focused broadband provider. Its strategy involves upgrading existing incumbent markets from copper to fiber and expanding into new, attractive "expansion markets" where it is not the incumbent provider. This pivot is critical in the face of increasing competition from cable operators and fiber overbuilders who offer superior speeds and reliability compared to legacy copper networks.

The technological foundation of this strategy is the deployment of fiber-to-the-premises (FTTP). This technology provides significant, quantifiable benefits over traditional copper or even hybrid fiber-coaxial (HFC) networks, enabling symmetrical multi-gigabit speeds, lower latency, and enhanced reliability. As of March 31, 2025, TDS Telecom offered 1Gig service to 74% of its footprint, up from 73% a year ago, utilizing both fiber and DOCSIS 3.1 technology in its cable markets. The company's long-term goal is to offer 1 gig or higher speeds to at least 95% of its footprint, a significant increase from its previous 80% target.

Operational execution is key to this buildout. TDS Telecom is targeting the delivery of 150,000 new marketable fiber service addresses in 2025, an increase from 2024 levels, with construction activity expected to accelerate after the winter months. As of Q1 2025, the company had increased its total service addresses by 6% year-over-year to 1.8 million, serving 44% of its incumbent addresses with fiber. A significant driver of future fiber deployment is the Enhanced Alternative Connect America Cost Model (E-ACAM) program, which provides regulatory support through 2038 in exchange for deploying 100/20 Mbps broadband to a certain number of locations. TDS Telecom has begun construction in its first E-ACAM market and expects this program to bring fiber deeper into rural communities, targeting 65% to 75% penetration in steady state in these areas where it expects to be the sole gig-capable provider.

To improve the efficiency and cost-effectiveness of its builds, TDS Telecom is staffing and scaling internal construction crews, expecting them to handle approximately one-third of fiber builds in 2025 with estimated cost savings as high as 30% compared to external contractors.

Driving penetration into these new fiber markets is paramount. While residential broadband net adds were 2,800 in Q1 2025 (8,300 from fiber), lower than prior quarters due to the timing of address delivery, the company is strengthening its sales and marketing efforts, including increasing third-party door-to-door staffing, and is optimistic about driving increased fiber net adds and penetration as builds ramp up. Residential broadband customers are increasingly opting for higher speeds, with 82% on 100 Mbps or higher products and 24% on 1Gig products as of Q1 2025. Residential revenue per connection increased 2% year-over-year due to price increases, though this growth is expected to moderate in 2025 as the focus shifts to penetration.

Strategically, TDS Telecom is also entering the wireless market via an MVNO product, TDS Mobile, launched in limited markets in Q4 2024 with a full rollout planned for 2025. This move, leveraging a partnership with a national 5G player through the NCTC, aims to offer a complementary mobile service to its broadband customers, enabling a full suite of competitive products and addressing the growing trend of convergence and bundling offered by cable competitors.

Longer term, TDS Telecom is targeting 1.8 million marketable fiber service addresses (a 50% increase from its previous 1.2 million target) and aims to reduce its reliance on copper, planning to serve only 5% of addresses with copper over time. Transformation efforts are underway to streamline operations and enhance the customer experience, with $100 million in annual cost savings expected by year-end 2028, providing future margin improvement.

UScellular Remaining Business: Towers and Partnerships

Following the sale of its wireless operations, the remaining UScellular business will primarily consist of its owned tower portfolio, equity method investments in various wireless partnerships, and the remaining spectrum assets not included in the announced sales.

The tower business is a key asset, with UScellular owning 4,413 towers as of March 31, 2025. This segment generates revenue by leasing space to third-party wireless carriers (colocations) and historically to the UScellular wireless segment (intra-company revenue). Third-party revenues increased 6% year-over-year in Q1 2025 due to new colocations and escalators on renewed leases, bringing the number of colocations to 2,469 and the tower tenancy rate to 1.56.

The T-Mobile transaction is expected to significantly strengthen the tower business by adding T-Mobile as a major anchor tenant under a new Master License Agreement (MLA), which includes a commitment to lease space on at least 2,015 incremental towers for an initial 15-year term. This is expected to substantially increase third-party tower revenues post-close. While intra-company revenues from the wireless segment will cease, the long-term outlook for the tower business remains bullish. Management believes the industry's increasing demand for data will necessitate further network densification, driving continued demand for tower space. UScellular's tower portfolio is geographically unique, with lower tenancy rates than the industry average, suggesting significant opportunity for future colocation growth. Post-transaction, UScellular intends to initially maintain leverage ratios relatively consistent with current levels (targeting around 3x net debt leverage), and expects longer-term adjusted OIBDA margins for the tower segment (3-5 years post-close) to exceed 50%. Efforts are also underway to buy back ground leases to manage future expenses.

The equity method investments in wireless partnerships also represent a source of predictable cash flow, contributing $169 million in cash distributions in 2024. While not currently a focus for monetization, management is open to opportunistic transactions if they present favorable post-tax returns.

The remaining spectrum portfolio, predominantly C-band, is another valuable asset. With the first build-out requirement not until 2029, UScellular has time to opportunistically monetize these licenses. Management believes the C-band attributes are attractive and sees potential for sale, though they are open to leasing or other creative uses if market conditions warrant.

Financial Performance and Liquidity

TDS's consolidated financial performance in the first quarter of 2025 reflected the ongoing dynamics across its segments and the costs associated with the strategic review. Total operating revenues decreased 9% year-over-year to $1.154 billion, primarily driven by declines in UScellular's wireless segment.

Consolidated Net income decreased significantly from $38 million to $12 million, and Adjusted EBITDA decreased 9% to $333 million, mainly due to lower operating revenues, partially offset by lower operating and tax expenses.

UScellular's total operating revenues declined 6% to $891 million, with retail service revenues down 3% due to fewer connections and equipment sales down 24% due to lower smartphone upgrades and prices. Operating income for the wireless segment fell 30% to $20 million, and Adjusted OIBDA/EBITDA decreased 7% to $182 million. These declines reflect the intense competitive environment, promotional pressures, and the ongoing loss of handset customers, partially mitigated by cost optimization efforts, including benefits from the 3G CDMA network shutdown in Q1 2024. Capital expenditures for the UScellular segment decreased significantly by 60% to $53 million in Q1 2025, as 5G deployment focuses on adding speed and capacity to existing areas rather than broad coverage builds.

TDS Telecom's total operating revenues decreased 3% year-over-year to $257 million. Residential revenues saw a slight 1% decrease, with growth in expansion markets and price increases partially offsetting declines in legacy markets and the impact of divestitures. Commercial revenues decreased 6% due to CLEC connection declines, and wholesale revenues dropped 12% due to a reserve adjustment and declining special access circuits. Operating income for TDS Telecom was a loss of $1 million compared to a gain of $27 million a year prior, and Adjusted OIBDA/EBITDA decreased 22% to $73 million and $76 million, respectively. This pressure on profitability stems from increased operating expenses (employee-related, stock-based compensation, advertising) and higher depreciation/amortization from fiber investments, partially offset by lower video programming costs. Capital expenditures for TDS Telecom decreased 32% to $59 million in Q1 2025, though full-year 2025 CapEx is expected to ramp up significantly to $375 million to $425 million to fund fiber and E-ACAM builds.

Despite the decline in net income, TDS generated positive Free Cash Flow of $47 million in Q1 2025, an increase from $20 million in Q1 2024, primarily due to lower capital expenditures. The company believes its existing cash, financing agreements, and expected cash flows, supplemented by potential divestiture proceeds, will provide sufficient liquidity for operations and debt service. However, substantial additional funding may be required for future investments, and the ability to obtain financing on acceptable terms remains a key factor. TDS ended Q1 2025 with $348 million in cash and cash equivalents and available undrawn borrowing capacity of $399 million at TDS and $300 million at UScellular under their revolving credit agreements (amended in April 2025 to extend maturity and allow dispositions, with acceleration triggers tied to the T-Mobile deal and spectrum sales). Debt covenants require maintaining specific Consolidated Leverage and Interest Coverage Ratios, which TDS believes it was in compliance with as of March 31, 2025. Post-T-Mobile close, leverage covenants will shift to a net debt basis, not exceeding 3.50 to 1.00.

Outlook and Risks

TDS's outlook is dominated by the execution of its strategic transformation and the performance of its core remaining businesses. While UScellular is not providing 2025 guidance due to the pending sale, TDS Telecom has provided full-year 2025 guidance reflecting its investment phase. TDS Telecom forecasts total operating revenues between $1.03 billion and $1.07 billion, Adjusted EBITDA between $320 million and $360 million, and capital expenditures between $375 million and $425 million. This guidance signals continued top-line pressure from legacy declines and divestitures, offset by fiber growth, and near-term profitability pressure from increased investments in sales, construction crews, and transformation initiatives, which are expected to drive future growth and cost savings.

The successful closing of the T-Mobile, Verizon, and AT&T transactions is the most critical near-term factor. There is no guarantee these transactions will be consummated, and failure to close would require substantial changes to UScellular's business with potentially material adverse effects on TDS's financials. Conversely, closing the deals will trigger significant cash and non-cash obligations related to transaction fees, employee costs (severance, stock awards), debt extinguishment, income taxes ($225M-$325M for UScellular, $325M-$375M for spectrum sales), and tower decommissioning costs, which are expected to significantly impact financial statements in periods following the close.

Beyond transaction execution, key risks include the intense competitive environment across both wireless (for the remaining business) and wireline segments, which could continue to pressure revenues and profitability. TDS's lack of scale in certain areas and structural disadvantages relative to larger competitors remain challenges. The ability to successfully execute the ambitious fiber buildout plan and achieve targeted penetration rates is crucial for TDS Telecom's future growth and profitability. Funding these capital-intensive programs requires access to capital on acceptable terms, which could be limited by market conditions or the company's performance. Regulatory changes, cybersecurity threats, and broader economic conditions also pose potential risks.

Conclusion

Telephone and Data Systems is at a pivotal juncture, strategically reshaping its portfolio to focus on its strengths in fiber broadband expansion and tower asset management. The planned divestiture of the UScellular wireless business is the catalyst for this transformation, promising to unlock capital for debt reduction and reinvestment in the high-growth fiber segment. TDS Telecom's aggressive fiber buildout, supported by E-ACAM funding and operational efficiencies like internal construction crews, positions it to capture demand for high-speed connectivity and defend against competitive pressures in its markets. The retained tower business provides a stable, growing revenue stream, bolstered by the T-Mobile MLA, offering long-term potential from industry densification.

While near-term financial results reflect the costs of this transition and ongoing competitive headwinds, the investment thesis hinges on the successful execution of the announced transactions and the subsequent ability to accelerate fiber penetration and realize operational efficiencies. The path forward involves balancing significant capital needs with financial discipline and leveraging the unique positioning of its fiber and tower assets. Investors should closely monitor the progress of the UScellular transactions, the pace and success of TDS Telecom's fiber deployment and penetration gains, and the performance of the post-transaction tower business as key indicators of TDS's ability to build long-term shareholder value in its reimagined structure.