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Proposed Tower Financing Given Negative Outlook

Concerned about the tower companys sizable near-term debt and warrant obligations, Moody’s Investors Service gave its second-highest speculation grade (Ba2) to the $1 billion Incremental Term Loan that was proposed by SBA Communications (SBAC).

SBAC will use the proceeds to finance the acquisition of a second tower portfolio from Oi S.A. consisting of 2,007 wireless communications sites in Brazil for $635 million. Proceeds will also replenish its revolver credit arrangement, which it used to fund the acquisition of the first tower portfolio from Oi.

The negative rating outlook reflects the new risk that SBAC will face in restoring its financial profile to a less-risky status, according to Gregory Fraser, senior analyst, Moody’s Investors Service.

“Though SBAC has made good progress to de-lever following the debt-financed purchases of TowerCo in October 2012 ($1.45 billion in cash and stock) and Mobilitie in April 2012 ($1.1 billion in cash and stock) and is currently tracking better than our projections,” Fraser wrote. “The use of debt to fund the two Oi transactions will again increase adjusted leverage metrics outside the Ba3 rating range and delay de-leveraging.”

Moody’s is also concerned that SBAC may be exposed to refinancing risk given the sizable near-term debt and warrant obligations, which total almost $2 billion over the next 12 to 15 months.

“During this period, we believe SBAC will have ample opportunity to demonstrate the ability to control its capital structure and maintain the Ba3 rating,” Fraser wrote. “Absent continued EBITDA outperformance, we believe SBAC will be forced to issue equity to settle the Convertible Warrants in order to preserve the Ba3 rating.”

Because of the Oi portfolio purchases, Moody’s expects SBAC’s leverage to increase to about 9.2x total debt-to-EBITDA from about 8.5x as of Sept. 30, 2013.

Moody’s also affirmed SBAC’s Ba3 Corporate Family Rating, Ba3-PD Probability of Default Rating, existing debt instrument ratings and its SGL-1 Speculative Grade Liquidity Rating.

“The rating outlook could be stabilized if SBAC demonstrates EBITDA expansion and leverage in a range of 7.75x to 8.5x (Moody’s adjusted) as well as free cash flow relative to debt of at least 5 percent (Moody’s adjusted),” according to Moody’s Credit Rating Service. “While unlikely over the near-term, ratings may be considered for an upgrade if SBAC delivers the following Moody’s adjusted key credit metrics on a sustained basis: debt-to-EBITDA of 7x, (EBITDA-Capex) interest coverage approaching 2x and free cash flow-to-debt greater than 5 percent.”

SBAC should be in a position to de-lever under 8.5x by year-end 2015, due to EBITDA expansion from the incorporation of the Mobilitie, TowerCo and Oi tower sites into its operations, barring the addition of incremental debt in the capital structure, according to Moody’s.

Proposed Sprint/T-Mo Merger Top Story for 2014

Wireless carrier consolidation and the accompanied jitters it inspires will be one of the top stories again in 2014.

As we headed in to the holiday break, the Wall Street Journal reported on Dec. 13 that Sprint was considering a merger with T-Mobile US, which set the industry into full speculation mode.

If such a merger would occur, Jennifer M. Fritzsche, senior analyst, Wells Fargo wrote, it would have the biggest impact on Crown Castle International, which has an overlap between T-Mobile US and Sprint totaling 8,000 sites, which accounts for 20 percent of its U.S. portfolio and 10 percent of its consolidated site rental revenues, according to Fritzsche.  SBA Communications would be the least affected with an overlap of 2,000 sites or 13 percent of its domestic portfolio. American Tower has an overlap on 5,500 sites, which 20 percent of its domestic portfolio, but it accounts for less than 5 percent of its revenue.

Average remaining term of leases on affected sites at all of the big three tower companies is seven years.

“We would be affected very little by the combo of Sprint and T-Mobile US in terms of existing overlap, however it would affect our growth model and likely pricing on exit as I think initially the entire market would trade down,” said Ronald G. Bizick, II, CEO, Tarpon Towers.

The Nikkei Asian Review reported on Dec. 25 that Sprint’s owner, SoftBank, was in the final stages of talks with Deutsche Telekom to purchase the majority of shares in T-Mobile US for $19 billion. SoftBank has approached Credit Suisse, Mizuho Bank, Goldman Sachs and Deutsche Bank, looking for funding, according to Bloomberg News.

And then there are the antitrust and competition concerns of two major carriers merging. Not forgotten is AT&T’s $39 billion merger proposal for T-Mobile US in 2011 that was nixed by the Department of Justice. Worries caused by that deal stifled growth in cell site development for the better part of that year.

A Sprint/T-Mobile US merger would create a super carrier with 100 million subs, making it competitive with the current duopoly, AT&T and Verizon. The combo would also make Softbank the second largest carrier in the world behind China Mobile. Whether the deal goes through depends in part on whether it is seen by the FCC and DoJ as improving competition or harming it.

Another issue might be timing of the merger, according to Mobile Ecosystem analyst Mark Lowenstein. “[Softbank’s] Masayoshi Son’s already uphill battle [to merge with T-Mobile US] has become progressively steeper given T-Mobile’s 2013 trifecta of successful Metro integration/expansion, rapid LTE deployment, and success with its ‘un-carrier’ strategy,” he wrote. “AT&T’s planned acquisition of Leap will put further pressure on Sprint MVNOs. Plus, the incentive auctions have been delayed into 2015, pushing commercial reality of additional sub-2.5 GHz spectrum for Sprint even further out.”

To make matters even more complicated, Charlie Ergen, the driver of much of last year’s merger melodramas, has decided he may want to poke in his nose. Reuters reported on Dec. 18 that DISH Network was considering its own bid for T-Mobile US, pitting it against Sprint, the carrier it used to want to buy.

SBA Expands in Brazil, Acquiring Additional Sites

The Olympics are not the only thing going to Brazil. SBA Communications has purchased more than 2,000 wireless sites from Oi, one of Brazil’s largest telecom carriers, for $645 million. Previously, SBA acquired use rights to 2,113 sites from Oi, a deal that closed in November.

SBA President and CEO Jeffrey Stoops said he was impressed with the quality of the sites, which are concentrated in the most populous areas of Brazil and have demonstrated attractiveness to additional tenants.

“With this acquisition, we will have established SBA as one of the largest and most capable independent tower operators in Brazil, a market which we believe is very attractive and will produce strong growth in the future,” he said.

Under the long-term agreement, Oi will make monthly lease payments for antenna space on each of the sites, which average 1.6 tenants. SBA expects to fund the purchase price from cash on hand, existing revolver capacity and future debt issuances.

During the “View From the Top” session at PCIA’s Wireless Infrastructure Show in October, Stoops said SBA gauges international investments by risk adjusting them against the North American market and analyzing the company’s capital allocations.

“Shareholders like to see top line and EBITDA growth,” he said. “To make sure we always had the largest or the right size of playing field to deploy capital, we moved international investment first in Canada, then in Central America and, most recently, in Brazil.”

Whether a capital allocation is made in the U.S. versus international is based on which has the appropriate return on investment, according to Stoops.

“The return on international investment always is higher than what we would seek in the United States,” he said.

The end game for SBA, according to Stoops, is to always stay fully invested, so if investments in foreign or domestic towers aren’t attractive, it will purchase its own stock or pay down debt.

“It’s all about managing the equation to produce the greatest value for shareholders,” he said.

American Tower Also Bets on Brazil

SBA is not the only U.S. tower company heavily invested in Brazil. American Tower entered the market in 2000 and now has 7,500 towers covering 80 percent of the country’s GDP.

American’s portfolio is mostly urban and suburban in the large metros, such as Sao Paulo, Rio de Janeiro. Towers are also strategically located along major transportation corridors, and 70 percent of them are self-supporting structures, 20 percent are rooftops and 10 percent are monopoles/guyed structures.

The reason tower companies are interested in Brazil is simple. With an IT/telecom market size of $180 billion, Brazil stand as the fourth largest market in the world and it represents more than 50 percent of Latin America.

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.