S&P upgrades Telephone and Data Systems to ’BBB-’ after wireless sale

Investing.com -- S&P Global Ratings has upgraded Telephone and Data Systems Inc (NYSE:TDS). to ’BBB-’ from ’BB’ following the company’s sale of its wireless business to T-Mobile.

The ratings agency removed TDS from CreditWatch, citing a substantial reduction in leverage and improved business prospects. The company sold its US Cellular wireless operations and 30% of its spectrum to T-Mobile for $4.4 billion, which includes T-Mobile’s exchange offer for US Cellular’s $2 billion of long-term bonds.

TDS is also in the process of selling about $2 billion ($1.6 billion after taxes) of spectrum licenses to AT&T (NYSE:T) and Verizon (NYSE:VZ). As a result, S&P expects TDS’ adjusted net leverage to be approximately 1x on a consolidated basis.

S&P views the sale positively from a business risk perspective, noting that US Cellular’s wireless operations were subscale compared to competitors and had weaker margins in the mid-20% range. The U.S. wireless industry faces increasing competitive pressures as cable providers bundle mobile service with home broadband at discounted prices. These factors led to postpaid phone subscriber losses of about 114,000 over the 12 months ended March 31, 2025, and ongoing service revenue declines.

Following the sale, US Cellular will retain its tower operations and wireless partnerships with AT&T and Verizon in high-density markets like New York and Los Angeles. These partnerships provide stable EBITDA through dividends of $150 million-$180 million annually.

The tower business consists of about 4,400 towers with a solid EBITDA margin of about 50%, though this is lower than larger tower operators who achieve 60%-70% margins. As part of the transaction, T-Mobile agreed to collocate on 2,015 sites, in addition to 600 existing sites, for 15 years.

S&P expects TDS will maintain the remaining US Cellular business lines to support wireline operations with their strong free cash flow generation, which will help fund negative cash flow at TDS Telecom (BCBA:TECO2m) related to fiber deployments. The company’s gross leverage target at US Cellular is about 3x.

TDS Telecom, which will account for about 55% of consolidated EBITDA after the wireless sale, is expanding its fiber-to-the-home (FTTH) passings to 1.8 million from 1.2 million over the next five years. Currently, it covers about 942,000 passings with FTTH, representing 52% of its footprint. The company can offer 1 gigabit per second speeds to about 74% of total homes passed, with plans to reach 95% when its build program is complete.

Capital expenditure is expected to increase to $550 million-$600 million in 2026 and 2027, resulting in negative free operating cash flow at TDS Telecom. The company faces competition from cable providers like Charter Communications (NASDAQ:CHTR) and Comcast (NASDAQ:CMCSA), as well as fixed wireless access broadband from Verizon and T-Mobile.

The spectrum sales will significantly improve TDS’ liquidity position, with S&P estimating $1.5 billion-$1.7 billion of cash when these transactions close. The company also has about $1.8 billion of spectrum (book value) that it will likely monetize over the next couple of years.

S&P’s stable outlook reflects TDS’s sufficient cushion at the current rating due to low leverage and good financial flexibility. The agency could lower the rating if adjusted net debt to EBITDA rises above 2.5x on a sustained basis, while an upgrade is considered unlikely over the next couple of years given TDS’ financial policy and elevated capital expenditures.

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