SBA Communications has purchased the license agreements of wireless carriers to have equipment affixed on more than 700 towers owned by Pacific Gas and Electric Company (PG&E) for $973 million. PG&E will receive a portion of that future revenue.
Additionally, PG&E has entered into a strategic relationship with SBA to sublicense and market equipment at additional attachment locations on up to 28,000 transmission towers across PG&E’s network. Through this arrangement, PG&E will receive a portion of future revenues from these sublicensed equipment attachment locations.
“This transaction adds a significant portfolio of high quality, exclusive locations to our outstanding existing US macro tower portfolio and SBA expects these assets to generate approximately $39.5 million in Tower Cash Flow in their first full year in our portfolio,” said Jeff Stoops, president and CEO of SBA Communications.
Still singed by the wildfires of 2015, 2017 and 2018, PG&E emerged from bankruptcy mid-year 2020. It will use the proceeds from these agreements to strengthen its financial position and lower monthly bills in the future.
“When we emerged from Chapter 11, we made a commitment to achieve financial stability and bolster our overall financial health and we’re delivering on that objective,” said Chris Foster, PG&E Interim chief financial officer. “Strategically selling non-core assets like these is one way we’re continuing to follow through on that commitment, reduce our financing needs and strengthen our balance sheet.”
This transaction is expected to close in early 2021. PJT Partners acted as exclusive financial advisor to PG&E. Munger, Tolles & Olson acted as legal counsel to PG&E.
Wells Fargo Securities viewed the transaction as opportunistic on SBA’s part, because the 24.6x multiple paid is well below the 30x multiples seen in the market for other site portfolios, which were a mix of traditional macros and non-traditional sites, according to Eric Luebchow, senior analyst for the firm.
“Further, transmission towers historically are located in areas where zoning is more difficult for carriers, thus offering SBAC an opportunity to increase colocation by marketing in ways PG&E wasn’t able to prior,” Luebchow wrote in a Flash Comment. “Future colocation is subject to revenue splits with PG&E. While color was limited, we expect the splits would be comparable to what’s included in TCF split on the portfolio today, if not slightly better.”
It is not uncommon for electric companies to sell the rights to attach wireless antennas to their transmission towers. Although there have been some disagreements on access to the towers over the years, Florida Power & Light, Duke Energy, First Energy, Consumers Power have all sold access to their transmission towers in one way or another.
Licenses for wireless antennas are one of the secondary uses of transmission towers approved by the Federal Energy Regulatory Commission (FERC) and the California Public Utllities Commission (CPUC) and under this agreement, PG&E retains control over its safety protocols.
“It’s inconvenient for the power company to have to turn down the power to allow workers onto their transmission towers,” said. Clayton Funk, managing director, Houlihan Lokey. “It’s not their core business. Even if they have a communications division, it’s not ideal. There must be a strong monetary incentive.”
The tower industry is set for an upturn in the second half of 2020 with the resolution of the legal challenges to the Sprint/ T-Mobile merger and the birth of a new facilities-based nationwide carrier, said Jeffrey Stoops, president and CEO of SBA Communications during the fourth quarter 2019 earnings call.
“In order to meet their required 5G coverage goals, the new T-Mobile will require meaningful upgrades across their combined portfolio, deploying 2.5-GHz spectrum to legacy T-Mobile sites and 600-MHz spectrum to legacy Sprint sites. These efforts will drive amendment activity for SBA,” he said.
The Sprint/T-Mobile merger, however, still must get through the California Public Utilities Commission before the transaction closes. “I think they will go quickly [with tower deployment once the deal closes, but I think we’re going to have to wait and see as to when that happens,” Stoops said.
Another catalyst will be Dish’s heavy investment in a new 5G nationwide network. Stoops said Verizon and AT&T will respond with their own 5G initiatives, further driving additional collocation activity.
“We believe [AT&T and Verizon] will embrace the new competitive landscape and continue to invest significantly in their own [5G] networks,” Stoops said. The number towers built out by AT&T and Verizon, however, will not grow significantly year-to-year, he added.
The release of 5G-enabled handsets and new 5G apps will also spur the network investment required to support these technologies — not to mention the release of additional mid-band spectrum, which will make for a long deployment cycle.
“The initial 5G deployment cycle has really only just begun, particularly as it relates to macro sites and the deployment of mid-band spectrum and massive MIMO architecture,” Stoops said. “The anticipated auctions of CBRS [Citizens Broadband Radio Service] and C-band spectrum later this year will only serve to further support this upward investment trajectory over the next several years.”
Brendan Cavanagh, SBA executive VP and CFO, said SBA expects CBRS to be primarily a small cell indoor service but with some macrotower outdoor use, as well.
“But we don’t think, at least for SBA, the CBRS spectrum will be nearly as impactful as the C-band spectrum,” Cavanagh said.
SBA Communications reported that it had a “great start” to 2019 with strong carrier leasing and services results, and it increased expectations for the year, during its first quarter earnings call yesterday.
“Our first quarter was about as simple, straightforward and solid as we could have hoped for,” Jeffrey Stoops, president and CEO, said. “We exceeded our expectations across all financial metrics. We continued to see healthy operational leasing activity and our services business again had a strong quarter.”
Total revenues rose 7.6 percent year over year in the first quarter of 2019 to $493.3 million. Domestic cash site leasing revenue rose 6.7 percent to $361.2 million.
“Our customers rolled into the new year with the continued strong levels of activity we saw in the second half of 2018, and that level of activity continues,” Stoops said. “In the U.S., both our leasing and our services results in the first quarter were ahead of expectations, contributing to the increase in our full year Outlook.”
SBA anticipates increases in site leasing, both organic and inorganic during the rest of the year. Increases in organic growth will come from a higher concentration of amendments versus new leases. SBA has a healthy backlog in services business, but the full year services guidance anticipates a slowdown in the second half due to the Sprint/T-Mobile merger.
During the first quarter, SBA acquired 54 towers for 36.1 million and built 72 sites, mostly internationally. An additional 256 sites are planned to be purchased by the end of the third quarter for 123.9 million.
In a sign that carriers are adding coverage as well as capacity, new leases increased during 2018, almost catching up with amendments. In the fourth quarter 2018, SBA Communications’ new leases accounted for 47 percent of site revenue compared with 33 percent of revenue in the first and second quarters. Accordingly, amendment dropped to 53 percent of revenue from 66 percent of the revenue in the first half of the year.
Domestic leasing activity is being driven by new spectrum deployments, the rollout of FirstNet, and 5G preparations. The Big Four accounted for 84 percent of revenue for SBA, and Dish Network provide a “nice contribution” to revenue, according to Jeffrey Stoops, president and CEO.
“We exited the year with a solid domestic backlog, which we expect to provide us with a continued healthy level of new lease and amendment signings as we move into 2019, and earlier activity has been consistent with that,” Stoops said during the SBA’s fourth quarter earnings call.
During the quarter, SBA purchased 79 sites at a cost of $28.5 million and built 169 sites. “We met our portfolio growth goals, growing the portfolio by 6 percent in 2018,” Stoops said.
SBA’s 2019 services guidance assumes that that the Sprint/T-Mobile merge receives approval and all Sprint activity ceases in the third quarter. However, the merger will not impact the company’s 2019 leasing outlook.
Total revenue in the fourth quarter of 2018 grew 9.2 percent to $483.8 million from $443.1 million year over year. Domestic cash site leasing revenue was $356.4 million in the fourth quarter of 2018 compared to $332.9 million in the year earlier period, an increase of 7.1 percent. Site leasing operating profit grew 8.5 percent year over year to $351.3 million.
The marketplace for tower assets continues to be very competitive on a global as well as domestic basis, in part, because of the increased involvement of long-term investors, SBA Communications President and CEO Jeffrey Stoops said the recent earnings report. Investors, such as infrastructure funds pension funds, insurance companies and sovereign wealth funds, are attracted to industry’s with low competition and high barriers to entry, and they also invest for the long term.
“In the last 12 months, these funds have outbid strategic investors for a number of communications assets around the globe,” Stoops said. “Now why is that important? Because I know that the assets being purchased by these funds at much higher multiples are nearly of the same quality as ours.”
In an interview with AGL eDigest, separately, Tarpon Towers CEO Ron Bizick agreed with Stoops, saying towers are attractive to infrastructure funds, because they are stable, long-term businesses, with steady cash flows.
“It is not surprising that pension funds and infrastructure funds would gravitate toward that stability,” Bizick said. “They accept much different returns on their investments, compared with private equity. They can underwrite returns in the high single digits or low double digits, which is a far cry from the many of the traditional private equity funds in the United States.”
Infrastructure funds have enormous amounts of money, which they invest over a much longer period of time. Their deals can be written for less in annual returns.
MacQuarie Infrastructure and Real Assets, for example, has been investing in cell towers, along with bridges, roads and tunnels, among other things, for more than 20 years.
“We set out to offer investors a new kind of investment. One with long-term horizons offering sustainable, predictable returns and low correlation to traditional asset classes: infrastructure,” the firm’s web site said. “Today we have an unrivalled track record in infrastructure asset management. We take a responsible, long-term approach to building sustainable value throughout the investment cycle by investing wisely, managing with discipline and selling at the right time.”