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US Independent Operators - All losing ground - is further consolidation inevitable?

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Note -- this news article is more than a year old.

Several of the smaller US operators have reported results in the recent past. We focus on the financial and operational results from US Cellular (the largest of the four) in a separate piece in this comment, we will deal with the numbers from Suncom Wireless, Cincinnati Bell and Ntelos, the 11th, 14th and 15th largest US operators respectively.

Suncom is in the process of being bought by T-Mobile USA, but ahead of that, it has reported a mixed set of results. The company's customer base reduced by 1.0% from 799k to 791k, as churn jumped from 2.3% to 3.0%. However, this was offset by a 1.1% rise in ARPU, from $57.98 to $58.64 - one of the highest levels of spend in the US market and far higher than T-Mobile's average.

The company also operates in the Caribbean, in Puerto Rico and the US Virgin Islands. The results from this operation went in the other direction: ARPU was marginally down, falling 1.7% to $54.44, but customer numbers compensated, rising 2.9% to 347k to give the business an overall total of 1.139m. In an earlier issue of TMW Briefing, we have considered whether this size base is sufficient for long term prosperity: in Suncom's case, clearly the answer was no.

The chart shows the growth in Suncom's US base since the beginning of 2004, compared with its overall market share; it has given ground, relatively, in every quarter bar one.

Cincinnati Bell is an independent full service operator base in the eponymous US city. It is a minor player in the US mobile market and is predominantly involved in fixed line operations, including a growing DSL business. Of the $351m third quarter revenue, $202m came from the wireline side, with the balance being almost equally split between Wireless ($75m) and the company's "Technology Solutions" business ($74m). Group EBITDA is heavily biased towards the fixed side, which generated all but $27m of the $126m total, with wireless contributing $19m.

The wireless side has been growing at a modest rate for several quarters now, as the chart suggests. As with Suncom, we have shown customer growth compared to national market share. The overall base increased by 1,900 in the quarter, to 557.4k, an increase of less than half a percent. Cincinnati has done better than Suncom when it comes to market share - but only just. It has gained market share in just three of the quarters shown here and the overall direction is inexorable.

Cincinnati's likely fate is underlined by the fact that it has one of the lower ARPUs in the US industry - its contract customers spent just $47.41 each per month in the last quarter, while the prepaid connections averaged just $22.96. Cincinnati doesn't report a blended number, but a quick calculation suggests it is around $40.00 per month.

Ntelos is the smallest US operator in The Mobile World Database, but it produces some of the best and most detailed KPIs. The latest quarter has seen the overall base grow from 391k to 396k, with all of this growth being concentrated in the contract side, which saw 5.7k new adds, to take the total to 286k. Ntelos also enjoys some of the highest ARPUs in the US industry with an average in the quarter of $57.65 at the contract base. Prepaid customers hardly spend less - this is the one metric Ntelos doesn't give quarterly, but it does give the cumulative year to date number - $54.64. This is marginally lower than the level from prior quarters (the overall blended number is $56.37, which implies a prepaid spend of about $53.09) but this is still exceptional. And $30 more than Cincinnati manages.

The downside is that Ntelos is experiencing one of the highest churn rates from this base. While contract customers are disconnecting at a rate of 1.9% per month (up from 1.7% in Q2), the prepaid base is losing three time that amount, or 5.8% to be precise.

Ntelos accounts for less than 0.2% of the US mobile market, so it is clearly a marginal player. But is it at risk?

The second chart we show here is the cash margin that the company is achieving - ARPU minus cash costs - and although there is a degree of volatility here, the overall trend is clearly in the right direction. As it is, all of the positives the company has achieved may count for little as the future of the business may well be determined by private equity. Citigroup Venture Capital has recently sold its 27% stake in the company to an entity called Quadrangle Group LLC, a private equity partnership, and we imagine that they will, at some stage, look for an exit. Such an outcome is probably inevitable in the long run, as the US industry continues to consolidate.

Suncom, as we have seen, has been bought by T-Mobile, while AT&T has taken out Dobson, the number nine in the market and Verizon has swallowed up Rural, the number twelve. Although MetroPCS has withdrawn its offer for Leap Wireless (numbers seven and eight, respectively) that is unlikely to be the end of the matter given the scale advantages those four enjoy. Even USC, the sixth largest company may not be immune (though here a takeover would be made more complex by the fact that it is controlled by TDS, a leading fixed line operator). The last chart in this section shows the same data for USC - it is experiencing the same downward slide as all of the others we have featured.

Suncom Wireless: Venture Customers vs National Market Share

Cincinnati Bell: Venture Customers vs National Market Share

Ntelos: Venture Customers vs National Market Share

US Cellular: Venture Customers vs National Market Share

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