[February 27, 2013]

Fitch: TDS's Purchase of Baja Broadband Neutral to Credit Profile

Fitch Ratings believes Telephone and Data Systems, Inc.'s (TDS) proposed acquisition of substantially all the assets of Baja Broadband, LLC (Baja) does not affect the company's credit profile in the near term given its relatively small size. Baja is a cable company with operations in New Mexico, Texas, Utah and Colorado. The acquisition combined with possible similar future investments could have long-term positive benefits in improving the revenue and earning diversification of TDS's subsidiary, TDS Telecommunications Corp. (TDS Telecom), at a moderate level of risk. TDS's Issuer Default Rating (IDR) is 'BBB' and the Rating Outlook is Negative.

TDS has an agreement to acquire Baja's assets in a $267.5 million transaction that, pending regulatory approval, is expected to close in the third quarter of 2013. The transaction is expected to be funded primarily using existing cash (and cash equivalents), of which there was $740 million at year-end 2012 on TDS's balance sheet. Baja generated $82.4 million of revenue in 2012, but neither operating income nor EBITDA levels have been disclosed. Assuming a typical cable transaction multiple in a range of 8x to 10x EBITDA, and based on using existing cash for the acquisition, pro forma year-end 2012 leverage could be reduced by up to 0.05x from actual year-end 2012 leverage of 1.66x.

The Baja acquisition fits the more rural operating profile of TDS's wireline business, while using a different technology platform. The opportunity for TDS is the potential growth in revenues and EBITDA it can generate from Baja's underpenetrated video, broadband and voice services. Fitch believes there is a moderate level of execution risk with respect to achieving improved penetration levels. To some extent this risk is lessened by Baja's recently modernized plant, including the deployment of DOCSIS 3.0. Commercial services, particularly in the small- to medium-sized business area, provide an additional avenue for growth.

In Fitch's view, the acquisition of Baja is another step in the company's strategy t invest in areas that will provide growth and are complementary to its traditional business, such as cable and managed hosting. Potential investments are expected to be in markets that are core rural and smaller city markets similar to those in which TDS already operates.

Fitch believes acquisitions in the rural cable area, as well as managed hosting, could further diversify the revenues of TDS Telecom, which are exposed to competitive pressures on voice revenues, particularly from residential customers migrating to wireless services. TDS Telecom is also experiencing pressure on wholesale revenues due to universal service funding reform.

In Fitch's opinion, beyond the execution risk TDS faces with respect to increasing Baja's penetration rates, there is the potential for unexpected operating or capital expense requirements present as in any acquisition. In the broader picture, TDS's goals to develop revenue and EBITDA growth in adjacent businesses hinge on the availability of assets that suit its operating profile, the price of those assets, and the company's ability to grow revenues in the acquired assets.

TDS's existing rating reflects its solid financial profile that has afforded the company some flexibility to withstand operating challenges at its current rating category. TDS has a good cash position, undrawn committed revolver lines, no material maturities in the next 20 years and a significant level of other assets that could be monetized.

The company's Negative Outlook reflects Fitch's longer-term concerns with the U.S. Cellular's (News - Alert) (USM) wireless operations. Postpaid subscriber additions at USM have been under material pressure for nearly three years. USM has taken steps to address these operational shortfalls with a planned divestiture of the Chicago and St. Louis markets, new branding campaign, targeted churn initiatives and broader third-party distribution.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Rating Global Telecom Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=682323

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