September 18, 2014 — Only a year after saying its towers would not be on the block anytime soon, Verizon is hinting that it is open to monetizing those coveted assets. Crown Castle International, known for acquiring ample carrier assets over the years, would be quite willing to take those towers off of Verizon’s hands, according to Jay Brown, CFO of the tower company.
“We have told them that we are interested in owning and operating their towers. We like carrier-owned assets and think they offer great, attractive growth opportunities,” Brown said at the 2014 Media, Communications and Entertainment Conference, Sept. 16, in Beverly Hills, California.
A potential tower asset purchase is analyzed based on the price relative to the growth rate. For example, Brown discussed Crown’s first carrier portfolio purchase in 1999 from Bell South and Bell Atlantic and the transaction a year later when it bought towers from GTE –– towers that had a 4 percent yield. Those assets are now yielding between 15 percent and 17 percent, which is a measure of run rate and annual cash flow versus the cash invested (initial purchase price and capex).
“We have done phenomenally well, adding 1 percent yield annually over a long period of time,” he said. “The more recent transactions with T-Mobile (two years ago) and AT&T (one year ago) we bought at a 5 percent yield.”
The T-Mobile and AT&T deals were underwritten with a similar yield growth expectation of 1 percent annually, which equates to adding one tenant per tower over a 10-year period. “The activity in terms of lease up and growth in cash flow has been right at what we underwrote,” Brown said.
If Verizon decides to sell its assets, Brown said Crown would go through a similar process of due diligence. “This is an analysis of the lease up opportunities of the assets against the price that has to be paid. If that results in the long-term dividend of the firm being enhanced by the transaction, we would be very interested in buying the towers,” he said.
Verizon owns 12,000 towers or 25 percent of its portfolio, according to estimates.
If CCI bought 12,000 towers from Verizon at $500,000 per tower (AT&T tower purchase valuation), the result would be a $6 billion deal. How could Crown fund such a deal only one year after purchasing AT&T’s towers? Financing the deal is not beyond Crown’s current means, Brown said.
“If we took leverage to the high end of our stated target range of 6 times, that would provide $2 billion in debt funding on the base,” Brown said. “Assuming a 20 multiple cash flow [of the towers to be purchased], if we financed six times that EBITDA, that would give us another $1.8 billion. We might take leverage above the target level for a short period of time and de-lever within a year [to make up the difference].”
More Growth to Come as Sprint and T-Mobile USA Join the 4G Roll Out
By Don Bishop
Growth, both organic and through acquisitions, was the dominant topic as executives from the big three tower companies spoke at the Wireless Infrastructure Show on Tuesday in Orlando, Florida. Ben Moreland, president and CEO of Crown Castle International; Brendan Cavanagh, senior vice president and chief financial officer of SBA Communications; and Rod Smith, senior vice president and chief financial officer of American Tower’s U.S. tower division, spoke with PCIA President and CEO Jonathan Adelstein during “The View from the Top: An Executive Roundtable,” a plenary session.
“We’re up to our ears in integration,” Moreland said, speaking of Crown Castle’s acquisition of a portfolio of towers from AT&T. “We’re integrating 9,700 sites we acquired from AT&T at the end of last year.” He said with an acquisition of this size, it normally takes six to nine months before a tower company is able to accept applications for antenna space rental on the acquired sites at the same speed as other sites.
Smith spoke about American Tower’s acquisition of towers from Global Tower Partners, saying, “At this point we’re ahead in terms of capturing our selling, general and administrative expense synergies that we originally had in our investment case. That provides a tailwind for future margin expansion. We also posted strong growth in those assets in the first quarter of 2014. The core organic growth for the GTP assets was 9.9 percent for the first quarter. That outpaces the core organic growth for the quarter for the legacy American Tower sites, which was 9.2 percent.” He said both numbers are well ahead of the 6 to 8 percent core organic growth rate that American Tower targets for the long term.
Cavanagh addressed the issue of 4G network build outs and their effect on the tower business. “Although we’ve seen record growth during the past couple of years from our Big Four carrier customers in the United States, the backlog remains at a record level,” he said. “The growth trajectory for continued deployment is significant for the next few years. Many amendments have been for 4G upgrades, and it is still going on. And the carriers are engaging in a lot of coverage builds, too. We expect to see growth during the next few years comparable with what we’ve seen during the past few years.”
Moreland said Crown Castle expects a record application volume this year. “We’ve never seen it as busy as it is now,” he said. “A lot of amendments are carrying out 4G deployments, depending on which carrier. We’re seeing significant collocation activity return to the market.” Leading the way are Verizon and AT&T, he said, adding that he expects it to continue with Sprint and T-Mobile USA later on. He said the carriers and Wall Street recognize that the use of towers for network build outs represents an efficient use of capital.
Smith said that during the past several years, American Tower has invested $7 billion in U.S. infrastructure. He said the company also has assets in 12 countries in four continents. He said 64 percent of the company’s acquisition capital has been spent in the United States in the past several years. “We absolutely are bullish on the U.S. market,” he said.
Smith said Verizon has completed its initial roll out of LTE. “We describe its network as a mile wide and an inch deep,” he said. “They’re going to have to come back in and densify the network.” He said AT&T is moving rapidly through its initial LTE upgrade. Sprint and T-Mobile also are working on LTE upgrades. “It’s been a long time since we saw all four wireless carriers as active as they are,” he said. “We believe that will continue.”
The executives spoke about progress with loosening restrictions on wireless infrastructure. “There definitely seems to be a shift at the FCC to appreciating what wireless infrastructure does and to try to speed the process for deployment,” Moreland said. “Even so, you have things that fly in the face of that, whether it’s rules about public notices for towers’ effects on migratory birds that seem to be the opposite of the overall theme. But there’s a positive shift.”
Cavanagh said there has been a recognition of the value that wireless infrastructure brings to the consumer and the economy that is significant. Smith added that the U.S. government seems to recognize the value of bringing broadband services to people across the country.
Moreland tied innovation at the consumer wireless device level with growth for the wireless infrastructure business. He also noted spectrum owned by the First Responder Network Authority and Dish Network look like future opportunities for antenna space rental. “Over time, that spectrum will be deployed in some shape or form that will result in further sharing of our infrastructure,” he said.
Cavanagh said the clearer growth opportunity lies with the four large U.S. commercial wireless carriers. “It’s nice to know that there are other guys out there with additional swaths of spectrum that will ultimately be deployed,” he said. “Whether it’s in partnership with an existing carrier or independently, that will help to sustain the growth rate for years to come.”
In past years, the “View from the Top” roundtable has featured as many as five executives from large tower companies, but with consolidation reducing the number of large tower companies and concentrating tower holdings among Crown Castle, American Tower and SBA Communications, this year’s roundtable had fewer figures on the stage.
With strong leasing activity from the big four carriers, Crown Castle International saw site rental revenue increase $132 million, or 21 percent, to $747 million for the first quarter 2014 from $615 million, year over year, tower company executives said during last week’s earnings call.
“CCI reported strong 1Q14 results (excluding $5 million of one-time benefits) with site leasing revenue, site cash flow, EBITDA and AFFO above expectations,” wrote Jonathan Atkin, RBC Capital Markets analyst.
During the quarter, Crown Castle spent $111 million on revenue-generating capital expenditures, including $75 million on existing sites and $36 million on the construction of new sites, primarily small cell construction activity. About 85 percent of new leasing activity is coming from new installations.
“Our current application pipeline leads us to expect new leasing activity per quarter for the remainder of the year to be approximately 15 percent higher compared to the level we experienced in the first quarter 2014,” said Ben Moreland, Crown Castle president and CEO.
Jay Brown, company CFO, added, “Most of that is new tenant installation on sites rather than amendments as we’ve seen over the last several years. So it’s site densification and them adding additional sites.”
Crown Castle’s first quarter results were the first since it closed on the deal in which AT&T leased the rights to 9,000 of its wireless towers and sold 600 more to the tower company for $4.8 billion.
“Adjusted EBITDA increased 20 percent, driven by the inclusion of the AT&T towers, an increase in site rental gross margin and strong performance of our network services business, and offset to a small degree by increased G&A, which was up about 8 percent year-over-year,” Brown said. “This increase in G&A includes the effect of increased staffing to manage our T-Mobile and AT&T tower transactions, which increased our tower portfolio by nearly 75 percent, and the significant growth of our small cell networks.”
Verizon Wireless and AT&T are currently focused on network densification, while T-Mobile and Sprint work to complete their LTE coverage deployments so they can begin their densification efforts, according to Moreland. Based on the 3G build out, which ran from 2002 to 2009, LTE is still in the early stages of deployment, he added.
“Given the revolutionary nature of 4G, we have reasons to believe that the 4G LTE deployment cycle will be even longer than the 3G cycle,” Moreland said. “And in order to meet Cisco’s projected 8-times increase in mobile data demand, we believe carriers will continue to invest over a multiyear period. This multiyear deployment cycle gives us confidence in the long runway of sustained organic revenue growth.”
Sprint and T-Mobile are expected to begin densification of their LTE networks in 2015 once coverage build outs have been completed.
“We expect increasing contributions to sector demand starting in the late second half of 2014 from T-Mobile’s 700-MHz build out and Sprint’s deployment of 8T8R LTE technology, though we believe CCI’s ability to monetize 700-MHz amendments from TMUS could be slightly impaired versus peers,” Atkin wrote.
Crown Castle expects 3 percent of its run-rate site rental revenues to be negatively affected by the iDEN network decommissioning, which is spread evenly throughout 2014 and 2015.
HOUSTON, Oct. 20, 2013 (GLOBE NEWSWIRE) — Crown Castle International Corp. (NYSE:CCI) announced today that it has entered into a definitive agreement pursuant to which Crown Castle will acquire rights to approximately 9,700 AT&T towers for $4.85 billion in cash at closing (subject to certain limited adjustments). Under the definitive agreement, Crown Castle will have the exclusive right to lease and operate the AT&T towers for a weighted average term of approximately 28 years. In addition, Crown Castle will have the option to purchase the towers at the end of the respective lease terms for aggregate option payments of approximately $4.2 billion, which payments, if exercised, would be primarily between 2032 and 2048.
“We are very pleased with our agreement with AT&T, which strengthens our position as the largest provider of shared wireless infrastructure in the US, which we believe is the largest, fastest growing and most profitable wireless market in the world,” stated Ben Moreland, Crown Castle’s President and Chief Executive Officer. “Consistent with our focus on the top 100 U.S. markets, nearly half of the AT&T towers are located in the top 50 markets, where we expect the majority of network densification and upgrade activity to occur.
“With an average of only 1.7 existing tenants per site, we expect the AT&T tower assets to provide significant growth opportunities driven by the continued consumer demand for wireless data services. While this transaction increases our tower count by approximately 33%, the transaction consideration represents only approximately 15% of our enterprise value. Additionally, we believe this transaction strengthens the credit quality of our revenue, with pro forma 84% of our consolidated site rental revenue coming from the Big 4 US wireless carriers. Further, we expect the impact from the contemplated transaction and related financings to be slightly accretive to our 2014 adjusted funds from operations per share and 5% accretive to our long-term adjusted funds from operations per share,” he added.
AT&T has contracted to maintain its communications facilities on the towers for a minimum of 10 years with monthly rent of $1,900 per site and fixed annual rent escalators of 2%. AT&T will also have access to additional space on the towers for its future use, subject to certain restrictions. Crown Castle will have the right to sublease other available capacity on the towers to additional tenants and believes the AT&T towers have sufficient capacity to accommodate at least one additional tenant per tower.
Crown Castle estimates the AT&T towers will contribute approximately $245 million to $255 million to its Adjusted Funds from Operations (“AFFO”) before financing costs in 2014. Crown Castle expects to fund the transaction with cash on hand and equity and debt financing, including borrowings under its revolving credit facility. Following the contemplated transaction, Crown Castle will continue to be the largest wireless infrastructure operator in the US with approximately 40,000 towers throughout the US and extensive small cell operations in over 50 markets. The transaction is expected to close in the fourth quarter of 2013, subject to customary closing conditions.
Crown Castle has scheduled a conference call for Monday, October 21, 2013 at 7:30 a.m. Eastern Time to discuss the transaction, as well as its third quarter 2013 results. Crown Castle plans to release its third quarter 2013 results on Monday, October 21, 2013, at 5:00 a.m. Eastern Time. The conference call may be accessed by dialing 480-629-9722 and asking for the Crown Castle call at least 30 minutes prior to the start time. The conference call may also be accessed live over the Internet at http://investor.crowncastle.com. Any supplemental materials for the call will be posted on the Crown Castle website at http://investor.crowncastle.com.
A telephonic replay of the conference call will be available from 12:30 p.m. Eastern Time on Monday, October 21, 2013 through 11:59 p.m. Eastern Time on Monday, October 28, 2013 and may be accessed by dialing 303-590-3030 using access code 4644535. An audio archive will also be available on the company’s website at http://investor.crowncastle.com shortly after the call and will be accessible for approximately 90 days.
Crown Castle is being advised by Cravath, Swaine & Moore LLP as legal advisor.
The sale of AT&T’s towers was predicted Jonathan Atkin, RBC Capital Markets last spring. The drums are again beating for a sale, according to Bloomberg, which reported that TAP Advisors and JPMorgan Chase & Co. are working on the sale.
The sale of the AT&T’s towers is an obvious way for the carrier to raise cash to fund its network upgrades, said to have a price tag of $14 billion.
In March, Atkin estimated that a deal could bring in mid-$5 billion or more for AT&T’s assets which include 14,500 sites, assuming roughly $400,000 per site. The portfolio includes 10,500 wireless tower sites plus additional assets such as wireline towers, distributed antennas systems and other infrastructure.
“We believe the AT&T towers and related assets have a tenancy level of >1.5 and could generate total cash flow in the low- to mid-$200 million range, although this depends on the specifics associated with the potential sales/leaseback terms,” Atkin wrote in March. Other analysts put the cash generated by the towers at more than $326 million in annual revenues.
Possible buyers are probably limited to Crown Castle International, SBA Communications and American Tower, which just purchased Global Tower Partners for $4.8 billion and NII Holdings’ 2,790 towers in Brazil and 1,666 towers in Mexico for $413 million and $398 million, respectively. SBA Communications expanded operations in Brazil with 2,113 towers to the tune of $302.6 million in July and 800 towers for $362.8 million in December 2012.
Because of those acquisitions, Jennifer Fritzsche, Wells Fargo senior analyst, said SBAC and American Towers are too heavily leveraged or otherwise too busy at this time to purchase the AT&T towers. That leaves Crown Castle as the logical buyer, according to Fritzsche. It has been almost a year since Crown Castle purchased T-Mobile’s portfolio of 7,180 towers for $2.4 billion.