TDS Telecom will opportunistically use M&A to enhance its fiber reach
Key Highlights
- TDS Telecom plans to pursue small, highly synergistic M&A opportunities to bolster its fiber network, avoiding large-scale deals typical of bigger providers.
- The company added 42,000 fiber addresses in Q3 and aims to reach 1.8 million by 2025, with 80% of addresses served by fiber.
- TDS is leveraging FCC's E-ACAM program to accelerate rural fiber deployment, targeting copper-to-fiber conversions and new customer growth.
- Fiber net additions are improving sequentially, with efforts underway to double construction crews and increase build activity in the coming months.
- Despite some delays, TDS expects to rebound in fiber net adds in Q4, driven by expansion efforts and increased infrastructure investments.
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TDS Telecom nears its 1.8M fiber service location target in Q2
TDS Telecom sees M&A as another tool in its fiber expansion toolkit, focusing on regional providers that could bolster its reach.
However, don’t expect TDS Telecom to make any large-scale deals like its larger counterparts, AT&T and Verizon, which made multi-billion-dollar deals for Lumen’s consumer fiber business and Frontier.
Speaking to investors during its third-quarter earnings call, Vicki Villacrez, EVP and CFO of TDS, said M&A is part of a three-part capital allocation plan that includes investing in its fiber business and returning capital directly to shareholders, which will be “opportunistic and disciplined.”
“We’re only considering those opportunities that are accretive and meet our return objectives,” she said. “To that end, we would specifically be interested in smaller, highly synergistic, accretive M&A fiber opportunities, particularly adjacent to our existing markets.”
TDS’s M&A strategy focuses on assets aligned with its fiber goals. In recent years, the service provider has divested assets, including its cable operations in Oklahoma and Texas.
“As we have demonstrated in the past, TDS will remain financially disciplined and business-case-driven in any M&A pursuits,” Villacrez said. “Clustering to achieve synergies will remain an essential strategy at TDS Telecom. The company has recently divested ILEC markets that were not a strategic fit to its fiber objectives.”
Enhancing fiber reach
Fiber network expansion was a key focus for TDS Telecom, which added 42,000 fiber addresses in the quarter, bringing the service provider halfway to its full-year goal of 150,000.
Ken Dixon, who recently took over as CEO of TDS Telecom, said “fiber net adds have improved sequentially every quarter this year.”
“We generated 11,200 residential fiber net adds in the quarter, contributing to a 19% growth in residential fiber connections since last year,” he said.
Despite this growth, TDS did not reach the goals it initially set for the quarter. “On the sales and build front, we recognize that performance isn't where we want it to be. We are taking actions to change this trajectory,” Dixon said. “Since the end of the second quarter, we have nearly doubled the number of construction crews we have across our markets and are continuing to increase crew counts through the end of the year.”
Another key factor giving TDS Telecom confidence that it can meet its FTTH expansion goals is its participation in the FCC’s Enhanced ACAM (EA-CAM) program, which will enable it to bring fiber to its most rural markets over the next several years.
Among other things, TDS’s E-ACAM builds will focus on replacing a significant portion of its legacy copper infrastructure with fiber. TDS Telecom estimates it will add approximately 300,000 new fiber addresses, including E-ACAM addresses and addresses acquired along the route.
“This directly supports our long-term goal of reducing copper to less than 5% of our total network footprint, improving network reliability and the customer experience,” Dixon said. “As construction activity ramps up, we expect to see strong copper-to-fiber conversions as well as new customer growth throughout our rural footprint.”
Dixon added that since the markets it is using E-ACAM funding for have no cable competitors offering gigabit speeds. “We anticipate penetration rates between 65% and 75%, which translates into attractive returns,” he said. “It allows us to bring world-class fiber services to communities that were previously cost-prohibitive, while delivering meaningful value to both our customers and to our business.”
Fiber to drive broadband growth
Having passed the 1 million fiber address mark this quarter, TDS has set an ambitious goal to reach 1.8 million marketable fiber service addresses. Across its entire footprint, TDS plans to get 80% of total addresses served by fiber, up from 55% at the end of the third quarter.
Kris Bothfeld, Vice President of Financial Analysis and Strategic Planning for TDS, said that it expects the number of addresses it reaches with fiber to “grow as our EA-CAM deployments ramp.”
Likewise, as the provider grows the number of homes equipped with fiber, it expects to offer speeds of 1 Gbps or higher to at least 95% of its footprint.
“We finished the quarter with 76% of our footprint at gig speeds, Bothfeld said, adding that “we will use a combination of fiber and coax technologies to reach this target.”
While TDS is behind schedule on network builds, the company expects to rebound in the fourth quarter. “We have seen year-over-year and sequential improvement in residential fiber net adds this quarter, and we hope to see improvement in fiber net adds in the fourth quarter,” Bothfeld said. “Connections have nearly doubled over the last 3 years, driven by our expansion efforts and copper-to-fiber conversions.”
As TDS Telecom invests in fiber, the company expects continued growth in broadband connections. “Broadband penetration remains a key metric for our fiber program,” Bothfeld said. “With our expansion markets hitting 20% to 25% penetration on average within the first 12 months of launch and approximately 40% in steady state by year 4 to 5.”
As we shared earlier this year, we anticipate more modest growth in residential revenue per connection as we focus on driving penetration. As a reminder, divested markets accounted for a $6 million decrease in revenues compared to the prior year.
For the quarter, TDS Telecom’s total operating revenues were $255 million, down 3% in the quarter compared to the prior year. Taking out the impact of its divestiture of some of its assets that are not core to its fiber plan, the company’s revenues declined 1% due to what Bothfeld said were “declines in our legacy cable and copper markets, partially offset by growth from our fiber investments.”
TDS Telecom expects capital spending and address delivery service to increase in the fourth quarter as it accelerates construction to meet its 2025 address target. “Over 80% of our 2025 capital expenditures will be focused on fiber,” Bothfeld said.
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Sean Buckley
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