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Telephone & Data Systems
High Quality Telecom with Takeover Appeal

Takeover activity was the bright spot in an otherwise gloomy year for communications, with two more deals closing in December, notes utilities expert, Roger Conrad, Conrad’s Utility Forecaster.

Conrad’s New Aggressive Holding Telephone & Data Systems (NYSE: TDS) is this year’s most eligible candidate for a high premium offer. The company’s most valuable asset is its 71.25 percent stake in US Cellular (NYSE: USM), which serves roughly 5 million 4G and 5G wireless customers across 20 states.

“With the Biden Administration unlikely to permit communications mergers the size of T-Mobile US (Nasdaq: TMUS)/Sprint, the acquisition value of systems like TDS/ US Cellular will only rise this year. We’ll likely get an idea of how much later in Q1, when an arbitrator sets the price T-Mobile will pay for Shenandoah Telecom’s (Nasdaq: SHEN) wireless network.

When the deal closes, TDS/US Cellular will be the only remaining independent wireless carrier of size left in the US. And the company’s dominant position in rural and small town markets means it will be much easier for an expansion-minded giant to make a serious offer for US Cellular (now trading at 61 percent of book value) than to spend on a new network to compete in markets it does not know.

Buying TDS – now trading at 46 percent of book – would also convey a fixed-line and broadband network serving 1.2 million customers in 25 states with similar competitive characteristics. The unit’s fiber broadband system now reaches more than one-third of its wireline customers, and management intends to double the expansion rate in 2021.

Fiber growth is fueling a boom in data and entertainment traffic. It’s entrenching TDS’ market share against would-be rivals. And the more fiber is laid, the greater odds of a high premium takeover offer, as much smaller and financially Alaska Communications and Otelco Inc (Nasdaq: OTEL) received last year.

M&A is only worth betting on if the company can grow on its own. TDS demonstrated resilience in pandemic 2020 with steady earnings and modest dividend growth. And guidance delivered by management at a Citi conference earlier this month points to a similar strong result in 2021, starting with a low single digit dividend boost next month. Buy TDS up to 20 for a ride to 30 by December.”

Editor’s Note: Roger Conrad has provided in-depth analysis of the utility sector to individual and institutional investors for more than 20 years. Conrad’s Utility Investor delivers high-quality analysis and rational assessment of the best dividend-paying utilities, MLPs and dividend-paying Canadian energy names. For more information and a FREE sample issue of Conrad’s Utility Investor, visit www.ConradsUtilityInvestor.com.

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