DIMUSE
I’ve been buying Telephone and Data Systems (NYSE:TDS) 6.00% Series VV Cumulative Preferreds (NYSE:TDS.PR.V) since the back end of 2023 with a view to holding these for at least five years. They stand to capitalize on possible dual near-term catalysts from the pending sale of the United States Cellular (NYSE:USM) and Fed cuts to base interest rates set to kick off this summer. TDS owns 83% of the combined total of the outstanding common shares of USM and initiated a sales process for this asset last year.
Telephone and Data Systems Fiscal 2023 Form 10-K
US Cellular is the fourth-largest full-service wireless carrier in the US, reporting revenue of $1 billion for its last reported fiscal 2023 fourth quarter and net income of $0.16 per share. TDS initiated the strategic review of USM in August with the main update since then being that the process has garnered interest including from T-Mobile (TMUS), AT&T (T), and Verizon (VZ). However, the sales process has an ill-defined timeline for completion, and TDS has experienced some weakness in recent weeks on the back of this. The most relevant suitors would likely face heightened regulatory scrutiny and the diverse nature of USM’s assets including 4,373 cell towers and a range of spectrum licenses including 700MHz, C-Band, Cellular, 37GHz, and 39GHz bands means there are many moving parts to the closing of a potential deal. USM’s third-party tower revenues crossed $100 million for the first time in 2023, growing 8% over its year-ago comp.
USM – TDS Fiscal 2023 Fourth Quarter Presentation
Risk, A Deep Liquidity Event, And The Preferreds And Bonds Series
New Street Research has placed the value of USM’s spectrum licenses alone at roughly $3.2 billion, partially based on T-Mobile’s 2023 purchase of 600MHz spectrum from Columbia Capital. USM’s cell towers could also fetch bids from tower-specific REITs like American Tower (AMT) or Crown Castle (CCI). American Tower recently offloaded its loss-making Indian unit to an affiliate of Brookfield Asset Management (BAM) for $2.5 billion, and could be looking to build up its US portfolio.
New Street Research 
However, the identity of the potential acquirer or acquirers is still unknown, and I believe a deal will likely take longer than initial expectations, with the end of astronomical summer in September my current working timeline for a close. USM’s bonds and TDS’ preferreds would likely see a deep rally on any such close, as they currently offer high yields with heavy discounts to their $25 liquidation price. Critically, the TDS’ preferreds form compelling buys within the pending liquidity event from the sale of USM.
| Preferred / bond series | Discount to liquidation price ($25) | Annual distribution | Yield on cost % | Call date |
| USM 6.25% Senior Notes due 9/1/2069 (NYSE:UZD) | -17.2% ($20.69) | $1.5625 | 7.55% | 9/01/2025 |
| USM 5.50% Senior Notes due 06/01/2070 (NYSE:UZF) | -25% ($18.74) | $1.375 | 7.33% | 6/01/2026 |
| USM 5.50% Senior Notes due 3/1/2070 (NYSE:UZE) | -24.8% ($18.79) | $1.375 | 7.32% | 3/01/2026 |
| TDS 6.625% Cumulative Preferred Stock (NYSE:TDS.PR.U) | -28% ($18.13) | $1.65625 | 9.14% | 3/31/2026 |
| TDS 6.00% Cumulative Preferred Stock (TDS.PR.V) | -37% ($15.66) | $1.50 | 9.58% | 9/30/2026 |
The 6.00% Series VV preferreds offer a $1.50 annual coupon, which means a 9.58% yield on cost as they’re currently swapping hands for roughly 63 cents on the dollar at $15.66 per share. The steep discount to their liquidation value is an opportunity for the longs, and should tighten in response to cuts to a Fed funds rate that currently sits at a 22-year high of 5.25% to 5.50%. Preferreds are essentially quasi-fixed income securities with positive duration risk, so their value dipped in response to aggressive rate hikes through 2022 and 2023. The Series VV were trading hands a dollar above their liquidation value in late 2021 just before the Fed embarked on its fight against soaring inflation. A black swan reinflation event could see the opposite happen and sap the possibility of any rate cuts this year. This remains a core risk for TDS preferreds.
CME FedWatch Tool 
We won’t return to zero interest rate policies for a while, but inflation coming back down to the Fed’s target and rate cuts through 2024 should boost the preferreds value. The CME FedWatch Tool is placing the probability of rates remaining unchanged at their current level to exit 2024 at 0.25% with base expectations being for rates to be cut back by at least 75 to 100 basis points with the first possible cut set for some time in the summer. TDS spent $69 million in preferred share payments through 2023, around $17.25 million per quarter. This was to both series and set against cash from operations of $219 million generated in the fourth quarter. However, TDS’s capital expenditure on growth initiatives at $305 million during the quarter meant its overall free cash flow profile was more varied. I think the risk and return profile of the TDS preferreds skews solidly to the reward side in light of rate cuts and the closure of the sale of USM. The near-10% yield on the Series VV seems out of step with these catalysts, and I think their value two years from now will be higher.
