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U.S. Cellular to sell Chicago, St. Louis, other Midwest markets to Sprint Nextel

In a move that marks a significant operational shift, U.S. Cellular Corp. said it was selling its operations in Chicago, St. Louis and a handful of markets in the Midwest to Sprint Nextel for $480 million. The transaction, which is expected to close mid-2013, will include both spectrum assets in the 1.9 GHz band and approximately 585,000 customers.

The deal has U.S. Cellular abandoning many of its core Midwest markets in favor of more rural areas where it has deeper penetration and less intense competition from larger rivals, however it will maintain its operational headquarters in the Chicago area. The carrier said the announcement is “designed to increase focus on markets where it has strong positions and streamline operations to increase overall efficiency and effectiveness.”

“In the dynamic wireless marketplace, we have a clear strategy to accelerate profitable growth and increase return on investment over the long term, and we are taking decisive steps to achieve it,” said Mary Dillon, president and CEO of U.S. Cellular. “Exiting these markets enables us to play to our strengths in markets where we have higher penetration and where we can effectively sharpen our proven strategy to differentiate the U.S. Cellular customer experience from other wireless carriers.

U.S. Cellular explained that the markets it plans generated 11% of its service revenues, but were operating at a loss. The carrier noted that postpaid customer churn in those markets were twice as high as in other markets and it had significantly lower penetration. U.S. Cellular did not enter the Chicago market until 2002.

As part of the deal, U.S. Cellular also said it would be shuttering its Bolingbrook, Ill., customer care center Jan. 1, 2013, and moving those operations and most of those employees to an existing vendor partner. U.S. Cellular operates additional customer care centers in Cedar Rapids, Iowa; Knoxville, Tenn.; Tulsa, Okla.; and Waukesha, Wisc. U.S. Cellular had previously closed a call center in Medford, Ore., as part of a previous transaction with Alltel Corp.

The carrier also said it will continue operating retail operations in the markets to be sold through the transition period before closing those outlets, engineering and business support services in those markets. U.S. Cellular noted that the deal will result in a savings of $3 million annually beginning in 2014.

Overall, U.S. Cellular said the deal would result in approximately 980 job cuts across the sold markets, including 160 job cuts in Chicago and 640 total job losses in the greater Chicago area.

The carrier did note that it will retain its current ownership interests in approximately 560 cell towers and other spectrum assets in the sold markets. Those spectrum assets will include 700 MHz spectrum holdings the carrier controls as part of its ownership stake in King Street Wireless that it is using to roll out LTE services.

Analysts noted the deal shows U.S. Cellular’s retrenchment to less competitive rural markets.

“In terms of [U.S. Cellular], it is most interesting the company is abandoning one of its core markets in Chicago,” said Wells Fargo Securities senior analyst Jennifer Fritzsche, in a research note. “[U.S. Cellular appears to be placing its focus on the rural markets where it is apparently much more profitable due to the higher penetration it has as well as the roaming revenue it generates from other carriers.”

For Sprint Nextel, the deal bolsters the carrier’s 1.9 GHz spectrum holdings in a number of key Midwest markets, as well as slightly bolsters its customer base. Sprint Nextel is relying on its 1.9 GHz spectrum for its initial LTE rollout, though the current service is tapping into its nationwide G-Block license. The carrier is looking to bolster its other holdings in that band in an attempt to strengthen the current LTE deployment that is limited to just 10 megahertz of spectrum. Sprint Nextel has plans to begin reusing its other spectrum holdings in both the 1.9 GHz and 800 MHz band for LTE services once it has begun transitioning current customers from its CDMA and iDEN services.

The U.S. Cellular deal is expected to be a smooth transition for Sprint Nextel as both operators currently offer CDMA services using the 1.9 GHz spectrum band and U.S. Cellular customers already possess devices compatible with Sprint Nextel’s CDMA network.

The move could also temper rumors about Sprint Nextel making a play to counter T-Mobile USA’s current offer to acquire rival MetroPCS. Many had thought Sprint Nextel would at least take a stab at trying to outbid T-Mobile USA for MetroPCS, which has more than 9 million customers and spectrum holdings in the 1.9 GHz and 1.7/2.1 GHz spectrum bands spread across a number of larger markets. Sprint Nextel could still make a play seeing as it is in the process of being financially fortified through Softbank’s $20 billion deal to acquire a 70% stake in the operator.

As for the customers, the additional 585,000 customers represent about 1% of Sprint Nextel’s current customer base, so the deal will not be vaulting the carrier past any of its rivals. For U.S. Cellular, the deal represents approximately 10% of its customer base and solidifies its position as the No. 8 carrier in the country.

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