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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.

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.


SoftBank Backing Energizes Sprint’s Network Vision Buildout

Wells Fargo analysts met with Sprint senior management and investors at its Kansas headquarters at the end of August and came away feeling the overwhelming presence of SoftBank, which paid $21.6 billion for a 72 percent stake on July 10.

“A consistent message was that both SoftBank and Sprint are focused on building a world class wireless network and company,” Jennifer Fritzsche, Wells Fargo senior analyst wrote in and equity research note.  “The discussion at Sprint has clearly shifted from doing the least expensive option to a focus on aggressive network growth and expansion.”

Sprint’s spectrum holdings at 2.5 GHz and the Softbank relationship are crucial to competing in the LTE race, according to Dan Hesse, Sprint CEO, said during the carrier’s second quarter earnings call at the end of July.

“The Softbank transaction brings us capital and expertise that can accelerate our turnaround,” Hesse said. “We believe, with the combination of our existing network modernization efforts, the addition of the complementary Clearwire spectrum, and scale from the Softbank transaction, we can over time build a powerful network and a much stronger competitor.”

Sprint’s 2.5 GHz deployment has been slowed by DISH’s bid for Clearwire and will be pushed from late 2013 to 2014, Hess told the analysts.

“Sprint cited many examples of tangible network improvement it is seeing in areas where LTE/Network Vision has been launched (i.e. Chicago) but it does not expect to make a big marketing push on a national level until sometime next year,” Fritzsche wrote.

At the time the sale was closed with Sprint, Clearwire had 2,000 TD-LTE sites commissioned and a number of others under construction, which will become part of the Network Vision system in the second half of 2013.

“The hope (and plan) is that Sprint will have network parity vs. its peers in 2014 and a network advantage in 2015,” Fritzsche wrote.

Sprint launched a Novatel Wireless handset in July, which uses 2.5 GHz, as well as the 800 MHz and 1.9 GHz bands.

“As it relates to expanding LTE on 2.5 GHz, the Sprint Network plan will be to add the 2.5 gigahertz radios to our network to increase capacity and performance for our customers. And we expect to start seeing tri-band LTE smartphones later this year,” Steve Elfman, president, network operations and wholesale, said on the earnings call.

American Tower Refutes Fraud Accusation

American Tower has refuted a report by Muddy Waters Research that rated the company a “strong sell,” accusing the company of fraud in its Brazilian tower acquisition. The research firm said it has supplied evidence to the Securities and Exchange Commission that the actual sale price for the Brazilian towers was $300 million, while American claimed it paid $585.4 million, a discrepancy of $285.4 million.

“[American Towers] has engaged in a value destroying investment binge overseas, and we have identified a significant material misstatement in the company’s accounts that could amount to fraud,” stated the Muddy Waters report.

American Tower said the report contained inaccurate statements, and the company disputed the allegations of fraud concerning its acquisition of communications sites in Brazil in 2011.

The tower company said it purchased 666 communications sites for an aggregate purchase price of $585.4 million through its Brazilian subsidiary, using cash on hand from a combination of intercompany loans and equity contributions from the parent plus cash from operations. An “internationally recognized” accounting firm  assisted in the purchase price allocation of the acquisition and Deloitte & Touche audited financial statements for each of the company’s last three fiscal years, according American Tower’s 8-K filing with the SEC on July 17.

Muddy Waters also claimed that American Tower’s stock price should be $44.57, representing a downside of 40 percent from the current value of mid-$70s, saying that the company has “serious challenges domestically and internationally that have not been factored into the stock price.”

The analyst community was less than impressed with Muddy Waters’ accusations. For example, Wells Fargo maintained its outperform rating on American Tower.

“The acquisition about Brazilian accounting questions was by far the most inflammatory within the analysis, in our view. The fact that [American Tower] came out swinging hard here and given the company’s strong track record, we believe this concern/worry is overdone,” Jennifer Fritzsche, Wells Fargo senior analyst, wrote in an equity research note. “Everything we heard from the wireless side at our Fiber Forum was quite bullish for the tower sector. Just this morning, [Verizon] reported $300MM higher in Q2 wireless CapEx spend than we were forecasting — and increased its 2013 CapEx outlook (citing higher wireless data growth as reason).”