U.S. Cellular to sell Midwestern markets, spectrum to Sprint for $480M

U.S. Cellular adds 9,000 net subs during Q3
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U.S. Cellular (NYSE:USM) said it will sell some of its major Midwestern markets and spectrum to Sprint Nextel (NYSE:S) for $480 million as it seeks to streamline its operations. The Tier 2 carrier made the announcement in conjunction with its third-quarter earnings, in which it reported a modest gain in subscribers. U.S. Cellular also said that it will cut the majority of its retail, engineering and business support workers, or about 1,000 jobs, after the deal closes.

As part of the deal, U.S. Cellular will offload its Chicago, St. Louis, central Illinois and three other Midwest markets to Sprint. The deal includes a transfer of PCS spectrum and around 585,000 customers, or about 10 percent of U.S. Cellular's total customer base. U.S. Cellular also said it will transition its Bolingbrook Customer Care Center operations to an existing vendor partner as of Jan. 1.

Sprint will acquire 20 MHz of 1900 MHz PCS spectrum in various Midwest markets including Chicago, South Bend, Ind., and Champaign, Ill., and 10 MHz of PCS spectrum in the St. Louis market. The deal also includes customers and spectrum in other parts of Illinois, Indiana, Michigan, Missouri and Ohio.

U.S. Cellular CEO Mary Dillon said that the company needed to make substantial investments in these markets to deploy LTE. Dillon said that after the deal the company will be smaller but more profitable. She said it was a difficult decision by the right one in the long term as U.S. Cellular focuses on markets where it is stronger.

In an interview with FierceWireless, Dillon said the company is looking to divest underperforming markets where it does not have a strong position relative to the Tier 1 carriers and where postpaid churn is high. "We're focused on a strategy of driving profitable growth," she said." And a step like this is a step very much in the direction of achieving that." 

The deal will allow U.S. Cellular to focus on its remaining 5.2 million customers and use its high call quality and customer satisfaction to its advantage, she said. The deal will not impact U.S. Cellular's ongoing deployment of LTE, Dillon added.

Following the market divestitures, U.S. Cellular said it will continue to have more than 1,400 workers in the Chicago area at its headquarters and additional facilities in the surrounding suburbs. The carrier said it may decide to keep certain retail locations in the markets and will provide certain transition services to Sprint, but that over time, both company and agent-owned stores will be closed. The deal requires approval from regulators at the FCC and Department of Justice and is expected to close by mid-2013.

Sprint CEO Dan Hesse said in a separate statement that the deal will strengthen Sprint's business. "Acquiring this spectrum will significantly increase Sprint's network capacity and improve the customer experience in several important Midwest markets including Chicago and St. Louis," he said. "We welcome the new customers in these markets and look forward to providing them with Sprint's unique combination of unlimited plans, an iconic device portfolio and unmatched customer service."

Here is a breakdown of U.S. Cellular's key quarterly metrics:

Smartphones: The carrier said smartphone penetration increased to 38.6 percent of all postpaid customers, up from 36.8 percent in the second quarter and 26.2 percent in the year-ago quarter. U.S. Cellular said that smartphones represented 53 percent of all devices sold in the third quarter, up from 39.9 percent in the year-ago period. In addition, 50 percent of smartphones sold were LTE smartphones and the company sold 267,000 LTE devices.

LTE: U.S. Cellular's LTE network now covers 30 percent of its customer base, and the carrier reiterated that it will expand that to 58 percent of its customer base by year-end. On Monday the carrier expanded its LTE service to 30 new markets. The expanded LTE footprint includes select cities in Iowa, Wisconsin, North Carolina and Oklahoma, and the carrier is bringing LTE coverage to some of U.S. Cellular's leading markets in Illinois, Maryland, Missouri, New Hampshire, Vermont, Virginia and West Virginia. The next wave of market launches will follow shortly in Rockford, Ill., Medford, Ore., Yakima, Wash., and Knoxville, Tenn. By the end of 2013, U.S. Cellular expects to have 87 percent of its customer base covered with LTE.

Subscribers: U.S. Cellular had 9,000 net subscriber additions in the quarter, an improvement after successive quarters of net subscriber losses and up from 36,000 net subscriber losses in the third quarter of 2011. The carrier gained 19,000 net retail customers, compared to a loss of 23,000 in the year-ago period. The company ended the third quarter with 5.8 million subscribers.

Churn: The company's postpaid churn rate increased slightly to 1.7 percent, up from 1.6 percent in the second quarter and 1.5 percent in the year-ago quarter.

ARPU: U.S. Cellular's total average revenue per user increased $59.57 from $58.09 in the year-ago period. Postpaid ARPU was $54.34, up from $52.41 a year ago.

Financials: U.S. Cellular reported a net profit of $35.5 million, down 43 percent from $62.1 million in the year-ago period. Total revenue increased 3 percent to $1.14 billion. Service revenue was flat at $1.03 billion.

For more:
- see this earnings release
- see this separate release
- see this Phonescoop article

Special Report: Wireless in the third quarter of 2012

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