TEXT-S&P: U.S. Cellular, parent ratings unaffected by sale
Nov 7 - Standard & Poor's Ratings Services said today that its 'BBB' corporate credit rating and negative rating outlook on Chicago-based diversified telecommunications services provider Telephone and Data Systems Inc. (TDS) and its subsidiary United States Cellular Corp. are unaffected by the announcement that U.S. Cellular will sell certain of its wireless markets to Sprint Nextel Corp. for $480 million. The markets to be sold, which include Chicago, St. Louis, central Illinois, and certain Midwest markets, account for roughly 10% of the company's subscriber base. We view these markets as having very low penetration by U.S. Cellular, and therefore subject to higher customer churn and lower profitability. In addition, to date the company has not rolled out 4G long-term evolution (LTE) in these markets, which would require material further capital investments with uncertain returns. As a result, we expect the transaction to minimally affect debt leverage, and could modestly benefit discretionary cash flow, which we still expect to be negative through at least 2013. The transaction doesn't alter our already "strong" assessment of the company's liquidity (based on our criteria). Pro forma for the transaction, consolidated cash balances were slightly north of $1 billion as of Sept. 30, 2012. The healthy cash balances provide greater flexibility for the company to invest in its core markets and support its LTE rollout, although we believe there is also increased potential for shareholder returns. The negative rating outlook, which indicates a one-third possibility of a downgrade over the next two years, continues to focus on business fundamentals. The rating could be pressured if competition at U.S. Cellular intensifies, leading to higher subscriber losses and depressed EBITDA margins.
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