As Telephone and Data Systems Inc. pursues a spinoff of personal communications services operator Aerial Communications Inc., it is dealing with sticky issues involving Sonera Ltd.’s investment in Aerial.
Aerial announced last week Finland-based Sonera’s right of first negotiation to acquire the company terminated after the two ended merger discussions late last month.
The merger discussions were part of TDS’s examination of the spinoff, which is planned for the third quarter, said Mark Steinkrauss, vice president of corporate relations with TDS. The company announced in December it would pursue a spinoff as well as examine other alternatives.
Sonera declined to comment on why it did not submit a merger proposal to Aerial. However, analysts believe Sonera will look to invest in other U.S. companies rather than putting more money into Aerial, which is suffering from high churn and decreasing subscriber additions.
Sonera also is upset over TDS’s planned spinoff of Aerial and has threatened litigation, according to Aerial’s recent filing with the Securities and Exchange Commission.
“They were surprised by TDS’s announcement,” said J. Clark Smith, Aerial’s vice president of finance and administration. “They felt when they made an investment, they were entering into a longer-term relationship with TDS.”
Start-up Aerial has been a constant drag on TDS’s cash flow and earnings. The deep-pocketed company, which also owns United States Cellular and landline company TDS Telecommunications Corp., pursued a spinoff because it was unable to come up with a tracking stock that offered a reasonable valuation.
Sonera would not comment on its relationship with TDS and Aerial. The Finnish mobile phone operator in September completed its $200-million investment in Aerial Operating Co. Inc., a wholly owned subsidiary of Aerial through which Aerial conducts its PCS business.
The investment represents an approximate 19.4-percent equity ownership of Aerial Operating Co. After five years, Sonera’s stake becomes incrementally exchangeable for up to approximately 18.5-percent of the equity of Aerial, reflecting a purchase price of $12.33 per common share of Aerial.
Sonera has told TDS certain matters related to its investment-including an adjustment of the $12.33 purchase price-should be re-negotiated in light of the spinoff. Neither Sonera, TDS nor Aerial would elaborate on the details of Sonera’s concerns, but the three companies indicated they are negotiating the matters.
“We are in discussions with them and have been since [December],” said Steinkrauss. He said TDS has set up a special committee, involving lawyers and investment bankers, to settle the dispute.
“TDS and Aerial intend to attempt to reach a mutually acceptable resolution of the concerns raised by Sonera,” said Aerial’s SEC filing. “There can be no assurance that this matter will not lead to litigation, or that it will not have a material adverse effect on Aerial or on the plans relating to the refinancing and spinoff of Aerial.”
TDS, which owns 82.3-percent of Aerial, and Aerial’s board of directors approved a tax settlement in March calling for payment of $114.5 million from TDS to Aerial.
