Numerous hedge fund managers bought Telephone & Data Systems Inc. (NYSE:TDS) during the fourth quarter of 2013, including Jim Simons of Renaissance Technologies, Spencer Waxman of Shannon River Fund Management and Stephen Raneri of LionEye Capital Management. Other shareholders of the telecommunications company include Mario Gabelli of GAMCO Investors, Chuck Royce of Royce & Associates, and Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital.
Telephone & Data Systems Inc. (NYSE:TDS) is a $2.7 billion market cap company that provides wireless, cable, broadband, TV, voice, and hosted and managed services to 5.9 million customers nationwide. It provides wireless services to 4.8 million customers in 23 states through its subsidiary U.S. Cellular Corp. (NYSE:USM), a $3.3 billion market cap wireless telecommunications service provider in which TDS has an 84% ownership stake. Mario Gabelli of GAMCO Investors, who is the second largest shareholder of both TDS (owning 8.2 million shares or a 7.5% stake) and U.S. Cellular (4.7 million shares or a 5.6% stake), has a long history of activism with TDS and most recently disclosed its intention to nominate one or more candidates to its board in December.
U.S. Cellular Corp. (NYSE:USM), which has steadily lost customers (both postpaid and prepaid) due to competition from larger competitors as well as service disruptions from a billing system conversion during the second half of 2013, has been selling some non-strategic assets to focus on less-crowded mid-sized and rural markets. Following the sale of its airwave licenses in the Midwest to Sprint Corp. (NYSE:S) for $480 million in May, it declared a special dividend of $5.75 per share, the majority of which went to Telephone & Data Systems Inc. (NYSE:TDS). U.S. Cellular also agreed to sell most of its Mississippi Valley spectrum to T-Mobile U.S. Inc. (NYSE:TMUS) for $308 million in June. Although these transactions are value adding to shareholders, Gabelli’s renewed campaign to obtain a board seat signals he is not satisfied and could call for more drastic action from management. For instance, following AT&T Inc. (NYSE:T)’s $1.2 billion acquisition of Leap Wireless in July 2013, there has been speculation that U.S. Cellular Corp. (NYSE:USM) could be the next takeout candidate, given its ownership of valuable wireless spectrum.
From a valuation perspective, Telephone & Data Systems Inc. (NYSE:TDS) looks attractive, trading at a forward EV/EBITDA multiple of 6.2X versus 7.2X for its peer group of wireless telecommunication services stocks. While it faces declining revenue and below-average margins and returns, TDS has a healthy balance sheet and strong cash flows that can support it while management continues to monetize its non-core assets and right-size its cost base. With a 2.2% dividend yield (versus 0.0% for peers) and an ongoing share repurchase plan, investors are being paid for their patience, while an activist shareholder could provide an accelerated boost to the stock price over the near-to-intermediate term.