TEXT - Fitch comments on Telephone & Data Systems Inc

Wed Feb 27, 2013 10:23am EST

Feb 27 - Fitch Ratings believes Telephone and Data Systems, Inc.'s (TDS)
 proposed acquisition of substantially all the assets of Baja Broadband,
LLC (Baja) does not affect the company's credit profile in the near term given
its relatively small size. Baja is a cable company with operations in New
Mexico, Texas, Utah and Colorado. The acquisition combined with possible similar
future investments could have long-term positive benefits in improving the
revenue and earning diversification of TDS's subsidiary, TDS Telecommunications
Corp. (TDS Telecom), at a moderate level of risk. TDS's Issuer Default Rating
(IDR) is 'BBB' and the Rating Outlook is Negative.  

TDS has an agreement to acquire Baja's assets in a $267.5 million transaction 
that, pending regulatory approval, is expected to close in the third quarter of 
2013. The transaction is expected to be funded primarily using existing cash 
(and cash equivalents), of which there was $740 million at year-end 2012 on 
TDS's balance sheet. Baja generated $82.4 million of revenue in 2012, but 
neither operating income nor EBITDA levels have been disclosed. Assuming a 
typical cable transaction multiple in a range of 8x to 10x EBITDA, and based on 
using existing cash for the acquisition, pro forma year-end 2012 leverage could 
be reduced by up to 0.05x from actual year-end 2012 leverage of 1.66x.

The Baja acquisition fits the more rural operating profile of TDS's wireline 
business, while using a different technology platform. The opportunity for TDS 
is the potential growth in revenues and EBITDA it can generate from Baja's 
underpenetrated video, broadband and voice services. Fitch believes there is a 
moderate level of execution risk with respect to achieving improved penetration 
levels. To some extent this risk is lessened by Baja's recently modernized 
plant, including the deployment of DOCSIS 3.0. Commercial services, particularly
in the small- to medium-sized business area, provide an additional avenue for 
growth. 

In Fitch's view, the acquisition of Baja is another step in the company's 
strategy to invest in areas that will provide growth and are complementary to 
its traditional business, such as cable and managed hosting.  Potential 
investments are expected to be in markets that are core rural and smaller city 
markets similar to those in which TDS already operates.

Fitch believes acquisitions in the rural cable area, as well as managed hosting,
could further diversify the revenues of TDS Telecom, which are exposed to 
competitive pressures on voice revenues, particularly from residential customers
migrating to wireless services. TDS Telecom is also experiencing pressure on 
wholesale revenues due to universal service funding reform.  

In Fitch's opinion, beyond the execution risk TDS faces with respect to 
increasing Baja's penetration rates, there is the potential for unexpected 
operating or capital expense requirements present as in any acquisition. In the 
broader picture, TDS's goals to develop revenue and EBITDA growth in adjacent 
businesses hinge on the availability of assets that suit its operating profile, 
the price of those assets, and the company's ability to grow revenues in the 
acquired assets.  

TDS's existing rating reflects its solid financial profile that has afforded the
company some flexibility to withstand operating challenges at its current rating
category. TDS has a good cash position, undrawn committed revolver lines, no 
material maturities in the next 20 years and a significant level of other assets
that could be monetized.

The company's Negative Outlook reflects Fitch's longer-term concerns with the 
U.S. Cellular's (USM) wireless operations. Postpaid subscriber additions at USM 
have been under material pressure for nearly three years. USM has taken steps to
address these operational shortfalls with a planned divestiture of the Chicago 
and St. Louis markets, new branding campaign, targeted churn initiatives and 
broader third-party distribution.
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