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Forum Report: TDS
Meeting's Definition of Value
Enhancement Alternatives
and Questions for Directors
Participants in yesterday’s open meeting
established an unexpectedly clear consensus view of TDS shareholder
interests, based on similarly consistent expert analyses of strategic
alternatives. Applicable equally to public investors and beneficiaries of
the controlling family voting
trust, the conclusions reported below suggest that value realization
will depend on the timing of the family trustees’ ultimately inevitable
responses. Simply stated, everyone will get more money if the company, or
at least the subsidiary wireless system, is sold while it still has
competitive value.
In this context, meeting participants were encouraged that representatives
of the company’s independent directors were listening to our discussion.
Understanding the views of TDS investors will be a critical foundation for
the directors’ responsibility to define the public shareholder interests
that must be considered by a controlling shareholder.
Questions for TDS directors
The following questions are being presented to TDS directors based on the
valuation issues discussed at yesterday’s Forum meeting, requesting their
responses before or at the May 21 annual meeting of shareholders:
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Is there a strategic plan that you consider likely, in your own
business judgment, to generate a risk-adjusted value in excess of what
can be expected from a sale of the company, or of its interest in US
Cellular? If so, please tell us what you can about the plan
without compromising the company’s competitive position, and also what
value ranges you assume for sale alternatives.
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What do you consider to be the relative benefits of the current
81% ownership interest in US Cellular, compared with either 100%
ownership or divestment? For divestment alternatives, please
indicate the types of transactions on which you base your views.
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What do you consider to be the benefits to TDS shareholders of the
multiple classes of TDS and US Cellular stock? It is suggested
that you consider the alternative structure proposed by Southeastern
Asset Management, but you should feel free to offer any examples you
consider useful for comparison.
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What steps do you consider appropriate to assure investors as well
as prospective buyers, commercial partners, employees and others that
the company’s controlling shareholder is objectively receptive to
explorations of potentially beneficial proposals? Please
address this in its broad application, beyond opportunities for business
combinations, dealing with the elimination of marketplace perceptions
that may discourage the initiation of explorations.
Consensus
conclusions about alternatives
These questions for directors were developed based on meeting discussions
of suggested strategic alternatives, considering both the general
acceptance of viability and the significance of value impact. This is a
summary of consensus conclusions:
§
Sale of TDS: Responding to an initial $92 per share
estimate, one of the meeting participants explained how a major strategic
buyer would expect to generate significantly higher profit margins from
TDS operations, and would value the business based on that to justify a
$120 price. That analysis was supported by observations of other meeting
participants. Noting the absence of any dispute, the chair explicitly
confirmed that nobody present considered the valuation to be unreasonable.
§
Sale of only the US Cellular subsidiary: It was
observed during the meeting that the wireless business constitutes most of
the current economic value and very little of the controlling family’s
“heritage” value. A separate disposition of US Cellular could therefore
provide all shareholders, including holders of the family voting trust
certificates, with fair value realization while allowing family members to
retain control of the founder’s rural wireline legacy.
§
Simplify stock structure, with continued family control:
The
simplified capital structure explained at the start of the meeting by
Jeff Engelberg of Southeastern Asset Management was considered a practical
initial step to set a foundation for more significant alternatives. Some
value enhancement could be expected from making the securities more
marketable, but the most significant value would be from the message to
the marketplace that the controlling shareholders are responsive to
shareholder interests.
There was also extensive discussion about the significance of timing in
relation to the sale alternatives, with these observations:
§
Natural course of family-controlled business disposition:
Ultimately, it can be assumed that family controlled businesses will be
sold as passive family members become increasingly concerned about their
economic opportunities, which stimulates the controlling members to think
more about their responsibilities to respect those concerns. Panel member
Barry Sine offered several examples of local telecom companies that had
followed this pattern recently, supported by observations of other
participants as well as several Forum programs.
§
Natural course of telecom marketplace: The value of
wireless operations to strategic buyers can be expected to decline as the
larger telecommunication companies progress with their development plans.
Simply, the major players will complete their national systems with
whatever elements are available, and there will be little or no demand for
the remaining elements. It can also be assumed, too, that the competitive
position of local operations will be increasingly weakened relative to
national companies with more efficient systems and broader product
resources.
Regarding the shareholder proposal presented by Southeastern Asset
Management in the TDS proxy
statement for next week’s annual meeting, the alternative was viewed
as significantly value enhancing
but unlikely to be approved by the controlling family trust with 52%
voting rights. It was intended primarily as an investor referendum on the
need for change, and will be addressed as such in
this afternoon’s Glass Lewis
“Proxy Talk” for governance issues.
Also presented for discussion was a lawsuit filed the night before the
meeting by Grant & Eisenhofer, a firm recognized for its representation of
pension funds in securities claims, seeking US Cellular’s recovery of
possibly excessive charges by TDS for services and equipment.
Although the attorney’s explanations did not support expectations of any
meaningful benefit to shareholders of either TDS or US Cellular, it was
noted that the claims were supported by an apparent legal assumption that
the existing governance conditions do not effectively address the
interests of public shareholders.
Participant interests
The 30 people who attended the meeting have earned our thanks for helping
define TDS investor interests, and each is invited to offer comments on
this report or any other issues addressed at the meeting.
To those of you who were unable to attend the meeting, please understand
that attendance must be limited to a number of people that allows
effective discussion. Arrangements are being made to provide an audio or
transcript record of the meeting, which should be available by early next
week.
GL – May 15, 2009
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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