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Another Rumor Heralds AT&T Tower Sale

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.

 

Are Towers Dead? Not According to TowerCo Bottom Lines

A strange thing happened on Wall Street after American Tower and SBA Communications posted positive second quarter results. Their stocks went down.

Jennifer Fritzsche, senior analyst, Wells Fargo, writes that Crown Castle’s less-than-anticipated 2Q growth had stirred up a lot of questions from investors.

“We have gotten a lot of ‘the tower group is dead’ comments,” Fritzsche wrote. “We do not agree. In fact, we would say that the pipeline of business for these companies is as strong as it has been in the last 14 years of following these stocks. (We remember in 1999 when AMT’s stock price was under $1!)”

Indeed, in the second quarter, SBA saw total revenues of $324.3 million, an increase of 41.6 percent; site leasing revenue of $279.5 million, up 37 percent; tower cash flow of $238 million, up 34 percent; and adjusted EBITDA of $196.4 million, up 38 percent.

Jeffrey Stoops, SBA president and CEO, expects portfolio growth to accelerate in the second half of 2013 with the previously announced tower purchases.

“We expect the combination of strong continued customer activity and material portfolio growth will allow us to finish 2013 with, and position 2014 for, material growth in site leasing revenue, adjusted EBITDA, AFFO and AFFO per share,” he said.

American Tower’s total revenue increased 15.9 percent to $808.8 million, domestic rental and management segment revenue increased 10.1 percent to $521.0 million, adjusted EBITDA increased 12.5 percent to $524.0 million, core growth in adjusted EBITDA was 14.7 percent, and adjusted EBITDA margin was 65 percent.

Jim Taiclet, American Tower’s CEO, said demand for tower space led to robust leasing activity across the company’s global portfolio.

“We expect the favorable leasing trends we have seen so far this year to continue generating solid core performance, offsetting potential headwinds from the translation of foreign currency exchange rates,” Taiclet said.

As a result of the strong second quarter results SBA increased its 2013 outlook in several metrics, according to Stoops.

“Current activity levels with the big four U.S. carriers remain high, and our backlogs remain solid. Because of our second quarter success, we are increasing our full year 2013 outlook for site leasing revenue, notwithstanding that we have begun to experience a loss of iDEN revenue,” he said.

Even with headwinds caused by a strengthening U.S. dollar, American Tower reiterated the midpoint of its 2013 outlook for total rental and management segment revenue and raised the midpoint of its outlook for adjusted EBITDA and AFFO, said Tom Bartlett, American CFO.

“This is an indication of the strength we see in our underlying organic business and our confidence in the secular demand trends we are seeing throughout our global footprint,” he said.

4G Powers 3Q at SBA Communications

The lion’s share of SBA Communications’ leasing and services growth in the third quarter came from carriers in the middle and early stages of 4G deployment, with some cell splitting activity, Jeffrey Stoops, SBA president and CEO, told a third quarter earnings call.

“We expect to benefit from this technological upgrade for the next several years, as carriers build out their initial coverage footprints to be followed by capacity spending, as consumer adoption increases,” Stoops said. “We are seeing cell splitting in certain 4G markets, although domestic leasing activity continues to center around customer overlays and upgrades to existing antenna sites.”

SBA’s site leasing revenue rose 35.2 percent to $208.8 million year over year, and site leasing operating profit was up 34.5 percent to $162.2 million, with strong demand across its entire domestic and international tower portfolio.

“Our organic leasing activity was particularly strong, with the highest revenue added per tower in many years,” Stoops said. “We expect strong levels of activity to continue through the remainder of 2012 and all through 2013.”

AT&T and Verizon represented more than half of SBA’s new business in the third quarter, which saw an increase from Sprint’s Network Vision deployment and the beginnings of T-Mobile’s 4G upgrade. Also in the quarter, SBA extended the leases for T-Mobile on 2,800 legacy SBA Towers and 520 TowerCo towers where T-Mobile was a tenant, with an increased in cash escalators.

“With the agreements now in place, T-Mobile’s working hard to bring 4G to our sites, and that now makes all four U.S. carriers extremely busy with us on technology upgrades, positively impacting both our leasing and services segments,” Stoops said.

In the third quarter, SBA acquired 37 towers and built 99 towers, ending the quarter with 13,257 owned towers, an increase of 36 percent compared with the end of 3Q 2011. Most of the towers, 11,541, are owned by SBA are in the United States, with 1,716 in international markets. SBA’s purchase of 3,256 towers from Towerco was closed in October and will be reported in the fourth quarter.

SBA spent $20.8 million on tower acquisitions and another $17.1 million on building in new towers. Of the additional $6 million spent on tower upgrades, $5 million was reimbursed by customers.

“With respect to the land underneath our towers, we spent an aggregate of $10.4 million to buy land and easements and to extend ground lease terms,” said Brendan Cavanagh, chief financial officer. “Our investments in land are both strategically beneficial and almost always immediately accretive. At the end of the quarter, we owned or controlled for more than 20 years, the land underneath 70 percent of our towers.”

Tower Companies Report Strong Leasing Growth

The mood was positive during second quarter conference calls of SBA Communications, Crown Castle International and American Tower, but not just because the last quarter was successful. Tower company executives are particularly hopeful that the good times will continue to roll well into the future.

SBA continued to experience strong leasing demand in the second quarter. The majority of amendments, which came from AT&T, Verizon Wireless and Sprint, accounted for almost 80 percent of the domestic leasing revenue added in the quarter.  With a strong leasing backlog, the tower company expects the third quarter to be good, as well.

“We had an excellent second quarter, one of the best that I can remember. All of the factors that materially contribute to our financial results came together positively in the second quarter and ahead of our expectations,” Jeffrey Stoops, president and CEO, said, according to a Seeking Alpha transcript. “Probably more exciting is our belief that these factors will continue to combine positively for the rest of 2012 and into 2013.”

SBA’s organic growth was spurred by strong wireless capital expenditures and network upgrades. Although there was little activity by T-Mobile or Clearwire, AT&T and Verizon continued their LTE rollouts driving amendment activity, and Sprint picked up its network provision activity. Stoops expects the trend to continue.

“We have a lot of runway left around amendments. Between AT&T, Verizon Wireless and Sprint we have commenced cash revenue recognition from 4G or network provision amendments on less than 25 percent of their existing sites through the end of the second quarter. There is a long way to go,” Stoops said. “Our backlogs of leases and amendments are very strong and we have clear visibility to continue strong organic growth through the rest of this year and well into 2013.”

American Tower said in its second quarter earnings call that it will experience “consistent incremental demand” for tower leasing in the United States well into the future.

“Each of the four largest U.S. wireless carriers have publicly committed to nationwide LTE network coverage between the 2013 to 2015 timeframe. Once full coverage is achieved carriers will use cell splitting and site augmentation in two phases, which will further enhance coverage. Those phases will continue many years into the future,” said James Taiclet, American Tower CEO, in a Morningstar transcript.

Even with the predictions of a rosy future, Taiclet said the tower company takes measures to guard against dips inn revenue growth.

“For example, we have established a comprehensive master lease agreement structure with two of our largest customers in the United States, which seek to eliminate our exposure to any significant potential future downside risk with those two customers. These new MLAs typically include 10-year contract extensions and they eliminate all churn or decommissioning risk,” Taiclet said.

Crown Castle International exceeded the high-end of its Outlook for site rental revenue in the second quarter, seeing an increase of 15 percent in leasing activity as carriers filed amendments to upgrade their networks. Crown also expects the good times to keep on rolling, increasing its full-year 2012 outlook for  site rental revenue by $43 million, site rental gross margin by $36 million and adjusted EBITDA by $63 million.

“We are enjoying unprecedented visibility into future revenue growth as evidenced in our increased guidance,” Ben Moreland, Crown president and CEO, said on the second quarter earnings call. “As the largest single provider of sites to the four largest wireless carriers in the United States, we expect to receive an outsized benefit from the significant 4G upgrade activity from all of the carriers, which we believe is reflected in our current results and updated outlook.”

SBA Strikes Again! Gobbles Up TowerCo Towers

In its second major transaction of 2012, SBA Communications has purchased 3,252 tower sites from TowerCo for $1.45 billion. The acquisition gives SBA 16,238 towers, including more than 14,000 in the United States. The deal is expected to close in the fourth quarter.

SBA owned 10,524 towers at the end of 2011 before it purchased Mobilitie’s assets, which included 2,300 towers. With the two purchases, which total almost 5,600 towers, the firm has increased its inventory by about 50 percent.

“The acquisition of TowerCo on the heels of the Mobilitie acquisition demonstrates SBA’s ability to get these large transactions completed while dealing with numerous smaller transactions at the same time. That says a lot about the depth and capability of their M&A folks,” Thomas Engel, Milestone Media, told AGL Bulletin. “These transactions along with the potential sale of the T-Mobile towers and a couple of other large groups shows that the tower sector is continuing to consolidate at a very rapid pace. It appears that it is a very good time for smaller tower operators to avail themselves of this opportunity and take advantage of the ‘seller’s market.’”

SBA projects that the TowerCo assets will produce $155 million to $160 million in leasing revenue. Additionally, the assets are expected to produce between $93 million to $95 million in tower cash flow for the full calendar year 2013.

“We feel strongly about our ability to integrate TowerCo’s assets. We expect smooth, quick and efficient integration of their towers into our portfolio,” said Brendan Cavanagh, chief financial officer, during a conference call.

TowerCo’s portfolio includes towers purchased from Sprint in 2008. While a substantial portion of the Sprint towers use CDMA, there is also a fair amount of iDEN revenue that SBA looked at warily while considering the purchase.

“Based on our due diligence, we were able to understand and underwrite this transaction assuming the worst case decommissioning scenario concerning iDEN,” Cavanagh said.

TowerCo had cut a deal with Sprint as part of the Network Vision where Sprint only has the option to decommission towers only at two times in 2015 and 2018. The worst case scenario would provide a $14 million hit to tower cash flow. In the interim, iDEN will bring in $100 million in iDEN revenue.

The blockbuster tower deal was the result of a long time, trusted business relationship between Jeffrey Stoops, SBA president and CEO and Richard Burns, TowerCo president.

“When Richard Burns approached us about whether we had an interest in acquiring TowerCo, the immediate answer was yes,” Stoops said. “We have been buying towers from Richard for years, most recently in 2008. Given our close working relationship, we know that these towers are in great shape, from legal, operational and physical perspectives.”

Stoops called the TowerCo assets a rare opportunity to increase the size of SBA’s U. S. holdings, a market he still believes in.

“While we have enjoyed tremendous success internationally, we believe the U.S. market is the best in the world operationally,” Stoops said. “This transaction sits firmly within that perspective.”

All of TowerCo’s assets qualify for REIT status, which is important with SBA planning on converting to real estate investment trust status, Stoops said.

Similar to the Mobilitie towers that SBA purchased earlier this year, 67.3 percent of the sites are located in the top 50 BTAs and 78.5 percent are in the top 100 markets. The sites feature an average of 1.8 tenants per tower with an average additional capacity of two tenants per tower. The average remaining years on the ground leases is 20 years, including options.

SBA’s Sprint customer concentration will increase from 23 percent to27 percent, because of the purchase. AT&T accounts for 20 percent; T-Mobile, 15 percent; and Verizon Wireless, 12 percent.

Stoops was asked by one analyst whether the possibility of a T-Mobile/Sprint merger weighed on the purchase of the towers.

“We carefully looked at the amount of T-Mobile/Sprint CDMA overlap in our combined portfolios, and the possibility of churn in the event of a merger. It would equal $42 million in revenue. Most of the shorter leases will be T-Mobile,” Stoops said. “There are some that believe it is going to happen. I personally don’t think it is going to happen, but we looked at it carefully.”

Unlike after the Mobilitie transaction, where SBA wanted to position itself for another major U.S. purchase, SBA does not expect to issue any more equity to speed deleveraging. Instead, it secured a two-year bridge facility in connection with the TowerCo purchase that will give it extra time to refinance.

With the carriers currently consumed with 4G amendment activity, SBA set conservative lease up assumptions on the TowerCo assets for next several years.

Beyond the balance sheets, Ted Abrams, an engineering consultant who provides services to TowerCo, said the mood was somber among the TowerCo employees that he shares office space with in Cary, N.C. after the announcement of the sale.

“The nature of the tower developer business is to build a tower portfolio and keep it at the highest value you can. The price got high enough and the timing was right [so they sold],” Abrams said. “At the staff level it is painful. For me it is sad because the TowerCo culture is a remnant of the SpectraSite culture, which I always enjoyed.”