Executive Summary / Key Takeaways

• Strategic Transformation Underway: Telephone and Data Systems (TDS) is undergoing a significant strategic pivot, divesting its struggling wireless operations to T-Mobile for $2.629 billion in cash and debt exchange, and refocusing on its core infrastructure (Array Towers) and fiber-optic broadband expansion (TDS Telecom).
• Enhanced Liquidity and Debt Reduction: The T-Mobile transaction significantly bolsters TDS's liquidity, enabling substantial debt repayment ($1.68 billion exchanged, $863 million repaid by Array) and a special dividend of $23.00 per share from Array, with further special dividends expected from pending spectrum sales.
• Fiber-Optic Growth Engine: TDS Telecom is positioned as the primary growth driver, with a strong commitment to fiber deployment, targeting $375-$425 million in capital expenditures for 2025 to expand its footprint and deliver high-speed broadband services.
• New Risks and Opportunities: While the divestiture addresses past wireless challenges, Array's remaining tower business is now heavily reliant on T-Mobile , and the monetization of remaining spectrum assets is uncertain. TDS Telecom faces intense competition in wireline markets but benefits from regulatory support for broadband expansion.
• Improved Financial Flexibility: Post-transaction, TDS and Array benefit from improved credit ratings (S&P: BBB-, Moody's: Ba1 stable) and a more favorable net debt leverage covenant, signaling a stronger financial foundation for future investments and shareholder returns.

A New Horizon: TDS's Strategic Transformation Unfolds

Telephone and Data Systems, Inc. (TDS) has long been a fixture in the U.S. telecommunications landscape, built on a mission to deliver high-quality communication services, particularly to rural and underserved communities. Its historical strategy centered on reinvesting operating capital to strengthen competitive positions and financial performance, while consistently returning value to shareholders. This foundational commitment has guided its evolution, from early telephony to modern broadband and wireless services.

The company's journey has seen significant investment in network infrastructure. Between 2019 and 2023, its subsidiary, Array (formerly UScellular), aggressively rolled out 5G coverage using low-band spectrum, followed by mid-band spectrum deployment in 2023 and 2024 to enhance speed and capacity for its mobility and fixed wireless services. Concurrently, TDS Telecom, the wholly-owned wireline subsidiary, has been a driving force in fiber deployment, steadily expanding its service addresses and offering high-speed 1Gig service across a growing portion of its footprint.

However, the highly competitive U.S. wireless market, characterized by aggressive promotions and pricing from larger, more resourced national and cable wireless carriers, increasingly challenged Array's ability to compete effectively. This environment, coupled with the need for substantial ongoing capital expenditures, prompted a pivotal strategic review initiated in August 2023. This review culminated in a series of transformative divestitures designed to reshape TDS's portfolio and unlock shareholder value.

Technological Edge: Fiber Fuels Wireline Growth

TDS's technological differentiation now primarily resides within its TDS Telecom segment, where a robust focus on fiber deployment is the cornerstone of its growth strategy. This commitment is not merely about network upgrades; it's a strategic imperative to deliver superior broadband services, attract new customers, and meet evolving regulatory requirements.

TDS Telecom is actively investing in fiber deployment, a technology that offers significant, tangible benefits over legacy copper infrastructure. Fiber-optic networks provide vastly higher speeds, greater reliability, and lower latency, which are critical for supporting increasing data demands, advanced video services, and emerging applications. The company currently serves 45% of its incumbent service addresses with fiber, a testament to its ongoing build-out efforts. This investment allows TDS Telecom to offer 1Gig service to 75% of its total footprint, a substantial increase from 73% a year ago. The market is responding, with 83% of residential broadband customers now subscribing to 100 Mbps or higher products, and 26% opting for 1Gig speeds.

Furthermore, this fiber-centric approach is crucial for meeting regulatory obligations, such as the Enhanced Alternative Connect America Cost Model (E-ACAM) program, which requires providing 100 megabits per second (Mbps) download and 20 Mbps upload speeds (100/20 Mbps) to a certain number of locations. This technological advantage directly contributes to TDS Telecom's competitive moat, enabling it to offer premium services, potentially command higher average revenue per connection, and secure vital regulatory support. The company's 2025 capital expenditure guidance of $375 million to $425 million is largely dedicated to continuing this fiber expansion, supporting broadband growth, and fulfilling E-ACAM build-out requirements, underscoring the strategic importance of this technological roadmap.

A Transformed Portfolio: The Post-Divestiture Landscape

The most significant strategic move for TDS was the sale of Array's wireless operations and select spectrum assets to T-Mobile , which closed on August 1, 2025. This transaction generated $2.629 billion in cash proceeds for Array, along with a debt exchange of $1.68 billion, significantly de-leveraging the subsidiary. Array subsequently repaid an additional $863 million in outstanding term loan and export credit financing agreements.

The "new" Array is now a substantially smaller, more focused entity, primarily engaged in tower leasing, holding non-controlling interests in wireless operating companies, and managing its remaining wireless spectrum licenses. Its strategic efforts are now concentrated on growing third-party colocations on its 4,418 owned towers, leveraging unique locations and streamlined implementation processes. The Master License Agreement (MLA) with T-Mobile , signed concurrently with the sale, is a cornerstone of this new structure, with T-Mobile agreeing to license space on a minimum of 2,015 existing or to-be-constructed towers for at least 15 years, and extending leases on approximately 600 towers for a new 15-year term. This agreement provides a stable, long-term revenue stream for Array's tower business, albeit making it substantially dependent on T-Mobile .

Beyond the T-Mobile deal, Array is actively pursuing the monetization of additional wireless spectrum licenses through pending sales to Verizon ($1.0 billion, expected Q3 2026) and ATT ($1.018 billion, expected 2025). These transactions, once closed, are expected to deliver substantial additional proceeds, further enhancing Array's financial flexibility and potentially leading to more special dividends.

Financial Performance: A Pivot to Profitability

TDS's financial performance in the first half of 2025 reflects the ongoing strategic shifts and the impending impact of the Array wireless divestiture. For the three months ended June 30, 2025, consolidated operating revenues decreased 4% year-over-year to $1.186 billion, and for the six months, they declined 6% to $2.341 billion. This revenue contraction was largely driven by the Array Wireless segment, which saw retail service revenues decrease 2% in Q2 2025 due to declining connections, and equipment sales fall 13% year-to-date due to lower upgrade volumes.

Despite the revenue headwinds, consolidated net income attributable to TDS common shareholders improved significantly in Q2 2025, reporting a profit of $5 million compared to a loss of $14 million in Q2 2024. This improvement was primarily driven by lower operating and tax expenses, and higher equity in earnings from unconsolidated entities. Year-to-date, however, net income attributable to common shareholders was $16 million, down from $32 million in the prior year, reflecting the earlier revenue pressures. Adjusted EBITDA for the consolidated entity decreased 5% in Q2 to $340 million and 7% year-to-date to $673 million, largely mirroring the revenue trends.

The Array Towers segment, a key component of the post-divestiture strategy, demonstrated positive momentum. Third-party tower revenues increased 12% to $28 million in Q2 2025 and 9% year-to-date to $56 million, driven by new colocations and lease escalators. The number of owned towers grew 1% to 4,418, and colocations increased 6% to 2,527, pushing the tower tenancy rate up to 1.57. This growth in tower operations provides a glimpse into the future revenue stability for Array.

TDS Telecom, the other core growth engine, saw total operating revenues decrease 1% in Q2 to $265 million and 2% year-to-date to $522 million. This was influenced by declines in legacy voice and video connections and divestitures, partially offset by strong growth in fiber expansion markets and price increases, which boosted residential revenue per connection by 1%. The segment's operating income decreased 27% in Q2 to $14 million and a substantial 70% year-to-date to $14 million, primarily due to increased depreciation from fiber capital expenditures and higher employee-related and advertising costs.

Liquidity and Capital Allocation: A Stronger Foundation

The T-Mobile transaction has fundamentally reshaped TDS's liquidity and capital structure. The $2.629 billion in cash proceeds, combined with the $1.68 billion debt exchange, has significantly improved Array's financial standing and, by extension, TDS's consolidated position. On August 1, 2025, Array declared a special dividend of $23.00 per share, of which TDS, as the 82.5% owner, will receive its pro-rata share. This substantial cash infusion and debt reduction are expected to provide TDS with additional opportunities to invest in its remaining businesses, further improve liquidity, and return value to shareholders.

TDS's capital expenditures for the six months ended June 30, 2025, totaled $282 million, a 39% decrease from the prior year. This reduction was largely driven by Array's wireless segment, where capital expenditures decreased 55% to $132 million as 5G deployment focused on adding speed and capacity to existing areas. TDS Telecom's capital expenditures were $149 million, down 9% year-over-year, but the full-year 2025 guidance of $375 million to $425 million signals continued robust investment in fiber. TDS intends to finance these expenditures primarily through operating cash flows, dividends from subsidiaries, and existing cash balances.

The company's financial flexibility is further enhanced by improved credit ratings, with Standard & Poor's upgrading TDS and Array to BBB- with a stable outlook, and Moody's confirming Ba1 ratings with a stable outlook in early August 2025. Post-T-Mobile sale, TDS and Array are also subject to a more favorable net debt leverage ratio covenant of 3.50 to 1.00, replacing the previous gross debt covenant. These factors collectively point to a stronger financial foundation for TDS as it executes its refined strategy.

Competitive Landscape and Strategic Positioning

TDS operates in highly competitive industries, and its strategic transformation is a direct response to these dynamics. In the wireline sector, TDS Telecom faces intense competition from other cable companies, fiber overbuilders, incumbent carriers, and a growing array of wireless communications providers offering broadband alternatives. Overbuilding activity is increasing, fueled by venture capital, private equity, and government funding. The rise of high-speed wireless networks and fixed-mobile bundled services poses a particular threat, as larger competitors often possess greater financial resources and scale to adapt to these trends. TDS's MVNO offerings, while a strategic move, rely on third parties and may struggle against the more established wireless options of larger players.

In the tower industry, Array Towers competes with a robust field of public and private tower companies, as well as owners of non-communications sites. Many of these competitors are larger, with greater financial resources, more advantageous tower locations, and broader national scale. This intense competition can lead to pricing pressure, increased tenant churn, reduced tenancy rates, and higher operating and capital expenditure costs for Array. The post-divestiture Array is now substantially dependent on T-Mobile for a significant portion of its tower revenues, introducing a new concentration risk.

Across both segments, TDS acknowledges its "lack of scale relative to larger competitors" as a pervasive disadvantage. This impacts profit margins, operating and capital expenditure costs (due to less leverage with vendors and dispersed geography), ability to meet build-out requirements, access to content, influence on industry standards, and R&D investment. The strategic divestiture of the wireless business aims to mitigate the most acute competitive pressures from that segment and allow for a more focused allocation of resources to areas where TDS can build sustainable competitive advantages, primarily through fiber and tower infrastructure.

Outlook and Key Risks

TDS's outlook is defined by its ongoing transformation. For TDS Telecom, the focus remains on aggressive fiber deployment, with full-year 2025 capital expenditures projected between $375 million and $425 million. This investment is crucial for broadband growth and meeting E-ACAM program requirements. The recent U.S. Supreme Court ruling affirming the constitutionality of the Federal Universal Service Fund program provides much-needed predictability for TDS Telecom's federal funding. Additionally, the enactment of the One Big Beautiful Bill Act (OBBBA) in July 2025, with provisions like 100% bonus depreciation and domestic research cost expensing, is expected to result in favorable deferral of cash taxes in future periods.

For Array, the immediate future involves closing the pending spectrum sales to Verizon (VZ) and ATT (T), which are expected to generate substantial proceeds and potentially lead to further special dividends. However, these transactions are subject to regulatory approvals and customary closing conditions, with no guarantee of consummation. Array also faces the challenge of opportunistically monetizing its remaining spectrum assets, which carry FCC build-out requirements and ongoing retention costs, without an operating wireless business.

Significant risks remain. The "new" Array, being of a significantly smaller scale, faces potential operational, cost, and borrowing disadvantages. It expects to incur substantial exit and disposal costs, a loss on the T-Mobile transaction, and significant decommissioning costs for certain towers and related ground lease obligations in future periods. Furthermore, Array's substantial dependence on T-Mobile via the MLA introduces a concentration risk; any failure by T-Mobile to meet its obligations would severely impact Array's business. Across the entire enterprise, delays in fiber network construction, inflationary pressures on costs, and the ongoing "lack of scale" relative to larger competitors continue to pose challenges. The company also faces ongoing legal proceedings and the ever-present threat of cyber-attacks.

Conclusion

TDS stands at a critical juncture, having executed a bold strategic transformation to shed its capital-intensive and competitively challenged wireless operations. The divestiture of Array Wireless to T-Mobile marks a decisive pivot, injecting significant liquidity, reducing debt, and allowing TDS to sharpen its focus on its remaining, more defensible assets: the growing Array Towers business and the fiber-driven expansion of TDS Telecom.

The core investment thesis for TDS now centers on its ability to leverage its infrastructure assets and capitalize on the insatiable demand for high-speed broadband. TDS Telecom's aggressive fiber deployment, underpinned by a clear technological advantage and supported by regulatory programs, positions it as the primary engine for future growth. While the "new" Array faces the challenge of managing its tower portfolio and monetizing remaining spectrum, the long-term MLA with T-Mobile provides a stable foundation. The improved financial flexibility, credit ratings, and capital structure resulting from the divestiture provide TDS with the resources to execute its refined strategy. Investors should closely monitor TDS Telecom's fiber build-out progress, the successful closure and deployment of proceeds from Array's pending spectrum sales, and the management of post-divestiture costs and T-Mobile (TMUS) reliance as TDS embarks on this new chapter of value creation.