United States Cellular Corporation

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United States Cellular Corporation

8410 West Bryn Mawr Avenue
Suite 700
Chicago, Illinois 60631
U.S.A.
(312) 399-8900
Fax: (312) 399-8936

Public Company
Incorporated: 1983
Employees: 1,175
Sales: $164 million
Stock Exchanges: American
SICs: 4812 Radiotelephone Communications

United States Cellular Corporation is one of the country’s smaller cellular communications companies. It is also one of the fastest growing companies in the industry and is distinguished by its exceptional tenacity in acquiring operating licenses and participating in cellular partnerships. United States Cellular Corporation, or USCC, as the company is commonly referred to, is largely controlled by Telephone and Data Systems, Inc., an independent telephone holding company based in Chicago. Originally established as the cellular communications division of TDS, USCC maintains a close relationship with its parent company.

TDS was established in 1968 by Chicago entrepreneur LeRoy T. Carlson who, over a period of years, assembled a small rural telephone conglomerate consisting of fifty independent companies. TDS realized tremendous economies through centralized purchasing and system standardization. The policy of collecting companies in adjacent areas, along with consistent growth in rural areas, amplified these benefits.

By 1982 TDS had invested heavily in cable television services, operating 16 individual cable companies. The diversification was spurred by a fear that cable companies might one day usurp traditional telephone companies by offering their own telephone services. At the time, cable companies were unwilling to develop telephone services out of their own fear that such a move would provide justification for the huge Bell companies to storm into the cable television industry.

By 1982 cellular communication, still in its embryonic stages, was beginning to emerge as a much more serious and immediate threat to the business of wireline telephone companies. One of the first companies to recognize this was TDS, whose senior management quickly devised plans to establish its own cellular communications franchises. There was no shortage of companies willing to compete for licenses to provide cellular service. Start-up costs were high, but economies of scale were extremely impressive, particularly in metropolitan areas. The Federal Communications Commission (FCC), which granted the licenses, established a bidding process for the thirty most populous market service areas (MSAs), and proclaimed that only two companies would be licensed to compete in each one. The first license was reserved for the local wireline company (most often a Bell company), while the second would be awarded to another bidder.

The FCC was monumentally ill-prepared to handle the deluge of applications it received. While TDS applied for a license to serve Indianapolis, a fierce turf battle erupted throughout the industry. Because MSAs often covered several different wireline franchises, dozens of perplexing questions arose over the FCC’s as-yet-unofficial definitions. The commission finally asked its vast pool of applicants to hammer out their own partnership agreements prior to requesting a license. As a result, TDS opted to abandon its bid for Indianapolis in favor of a five percent stake in the hugely profitable Los Angeles MSA. Because it was obliged to provide detailed engineering and market surveys, TDS poured a quarter million dollars into its first application. By the time the second set of 30 MSAs was put up for grabs, however, the company had become experienced in such matters, and soon the average application cost fell below $10,000.

No longer able to support its growing activities in the cellular industry by itself, TDS created a separate subsidiary called United States Cellular Corporation. The new company began operations on December 23, 1983, with Rudy Hornacek, a TDS executive, as its president.

The FCC’s call for pre-arranged agreements among applicants eliminated years of comparative studies and appeals processes. It also emboldened the larger, predominantly metropolitan Bell companies into running roughshod over smaller companies. Such cavalier disregard for companies such as US Cellular hit a nerve with LeRoy Carlson. He took such an aggressive position in negotiations that larger companies were forced to make room for US Cellular. One bemused representative complained that Carlson didn’t realize how small his company really was. As the process rambled on, the public grew more vocal and critical of the FCC’s seemingly endless formalities. Finally, the commission decided to award remaining licenses through a series of lotteries.

In a separate agreement signed by the Bell companies, TDS, and other independents, TDS was allowed to operate cellular networks in Knoxville and Tulsa. In October 1984, before the FCC formally granted the licenses, USCC began to assemble its management team. This team was responsible for the selection of cell sites, construction of towers, installation of operating systems, establishment of business offices, and staffing. Accordingly, USCC moved its operations out of TDS headquarters and into a new building in Park Ridge, near Chicago’s O’Hare Airport.

By March 1985 the senior management of TDS had become convinced that the cellular industry was poised for tremendous growth. The company decided to make the development of its cellular unit a major priority. In order to be a more serious bidder, the company needed access to greater investment funding. Rather than raising the necessary financing through additional debt or selling additional shares to an equity partner, USCC turned to TDS. At that time, the parent company elected to abandon the cable television market and devote the proceeds of the sales of its systems to USCC. In addition, funding that was earmarked for the development of new cable systems was diverted to cellular investments.

TDS decided to concentrate on the cellular industry, at the expense of cable television, because cellular promised considerably higher growth and rates of return. Moreover, cellular communications posed a greater threat to TDS’s established wireline services than cable, since the technologies needed to provide telephone service over cable systems had not been developed. TDS disposed of its cable operations during 1985, and sold its last system in November 1986.

USCC’s Knoxville system commenced in June 1985, and its Tulsa system went on line in August. Meanwhile, the Los Angeles system, which was activated the previous year, turned its first profit in October. That year, the company filed applications for five of the nation’s largest markets, and applications for seventy more in smaller markets. The licenses for smaller MS As were important because they covered areas adjacent to larger existing systems or formed corridors along heavily traveled highway routes.

In addition to the two MS As USCC operated in 1986, the company was a minority partner in an additional nine. The following year, it completed eight more cellular networks, including systems in Peoria, Des Moines, and Poughkeepsie. To meet the company’s growing organizational demands, USCC established five operating regions in 1987, including a Midwest Region headquartered in Davenport, Iowa; a Southeast Region in Knoxville; a Southwest Region in Tulsa; and a North Central Region located in Minneapolis. That year, Don Nelson, head of operations at USCC, succeeded Hornacek as president of the company and took on the title of CEO as well.

In an effort to derive additional revenue from its systems, USCC negotiated numerous roaming agreements with other cellular providers, which allowed customers to continue calls even if they strayed outside their provider’s service area. In addition, the company began implementation of enhanced “vertical” services, such as voice mail and information services. By 1987 USCC had been recognized as a formidable player in the cellular communications industry. Clearly in a position to win additional licenses, the company had exhausted its credit lines and would be unable to maintain its growth without a sizable issue of equity capital. The company therefore sold 6.2 percent of its capital stock to Coditel, a Belgian cable television company, for $10 million.

Late in the summer of 1987, USCC planned a public stock offering to raise additional capital. While the company was preparing its prospectus and working with the Securities and Exchange Commission to make the offering, the stock market took an enormous plunge. The date, October 19, became known as Black Monday. The Dow Jones Industrial Index fell by more than 500 points, to about 1700 points. The collapse of confidence in the markets not only torpedoed USCC’s prospective share offering, it ruined public offerings of at least three other cellular companies. The company finally went forward with its public share offering on May 4, 1988. Three million shares were distributed, mostly in the United States, at $15 per share, and the company was listed on the American Stock Exchange. The share offering diluted TDS’s control of USCC to just over 80 percent.

By December 1988, USCC was active in 31 MS As, including Wichita, Atlantic City, and Columbia, Missouri. This rapid growth forced the company to move out of its Park Ridge offices and into a larger facility in Chicago. To bolster its identity in the increasingly crowded industry, USCC adopted a new logo and promotional materials that included the no-nonsense tag line “Mobile Telephone Network.”

To augment its growth in the market, USCC began issuing additional blocks of shares. During one 18-month period, the number of USCC shares increased by 61 percent. TDS maintained its ownership in USCC at 82.3 percent. Due to the high start-up costs associated with cellular systems, investments in new franchises had severely hampered TDS’s earnings potential. USCC was a constant drain to TDS, but these investments were necessary to ensure that USCC had a good position in the industry. If the company did not invest in new systems while they were available, it risked losing opportunities to build the enterprise.

When the cellular market had been exhausted of the most desirable franchises, the market value of existing licenses began to climb. In fact, USCC bought into the market at relatively low prices. Later, the value of its cellular properties climbed so dramatically that if it were to sell the licenses it had acquired, it would realize a tremendous gain.

After USCC secured the necessary licenses and completed the establishment of new networks, it prepared to collect on its substantial investments. A portion of the earnings from these operations was channeled back toward the servicing or retirement of debt and the settlement of obligations to TDS. A second, but rapidly growing portion of USCC’s operating income was distributed to its shareholders, the largest of which was TDS. As a result, TDS began collecting an increasingly large dividend from USCC, which registered a 58 percent increase in subscribers, to 182,500, in 1992. TDS used its share of the earnings to retire its own debt and finance new investment opportunities, including additional wireline franchises.

Between 1989 and 1992, USCC expanded from interests in 33 cellular systems to 129. Forty percent of this growth occurred in areas where TDS had a presence in the wireline market, or through settlements with other companies. The remaining licenses were acquired directly through acquisitions of licenses awarded to TDS and other companies.

As the supply of available cellular licenses continued to dwindle, and the prices increased, USCC was faced with the possibility of actually making money. As the investment stage of the company’s development drew near an end, positive cash flow was likely to follow. The primary beneficiary of this profitability would be TDS, whose shares were favored over those of USCC because its business was more thoroughly diversified. In 1993 USCC had interests in 193 cellular systems, 129 of which it had a hand in managing. Of that number, the company maintained a majority interest in 91 franchises. This makes USCC the eighth-largest non-Bell cellular company in the United States.