NEW YORK-Lenders anted up significant capital during the first quarter for the five publicly traded wireless tower companies, even as their share prices declined amid the stock market’s general concerns about telecommunications.
“At a time when companies like PSINet made announcements that their stock is now worthless, tower companies raised $2 billion during the first three months of 2001,” said Robert S. Kricheff, a managing director in the Credit Suisse First Boston high-yield bond department.
“This is a business that begins with cash flow, has a simple economics model and has delivered on its promises. … We have seen a lot of telco and tech companies melt down, but this industry has none of those traits. That doesn’t mean the capital markets remain open.”
The financing picture for the rest of this year remains challenging, but tower companies can wait until next year if necessary, he said March 26 at the Shorecliff Communications Inc. “Tower Industry Investment & Capital Markets Symposium.” With stock prices low, bonds, mezzanine debt and private equity may prove comparatively cheaper means to raise any capital needed, he added.
“The amount of money raised in private equity funds is huge. In the past, they may have looked at much larger investments, but now they are more willing to look at smaller companies with growth potential,” said Joseph L. Winn chief financial officer of American Tower Corp.
“Bank loan markets, which have not always been the friendliest, are a bit easier for tower companies than for wireless data or even broadcast companies.”
Disdain by the public equity markets could also turn into disdain for them, especially on the part of companies with good cash flow that went public in the heady days of the late 1990s, as is the case with wireless tower operators. “It’s not out of the question,” Winn replied when asked if American Tower would consider a leveraged buyout to return to privately held status.
“It has been done in other industries if there is a real problem in terms of valuations compared to what you think they should be. It could become an option, but we’ll cross that bridge when we come to it,” he said.
Weakness in wireless carrier and equipment vendor stocks has led the way to weakness in tower companies, affecting first their stock prices and then their debt ratings, Kricheff said. However, more than general concerns about telecommunications have colored investor perceptions of the tower sector.
“People for the first time are raising a lot of questions about the tower industry, driven by the problems at Pinnacle (Holdings) during the third and fourth quarters with decommissioning of towers and churn of analog customers,” Kricheff said.
“There has been a slowdown in core and next-generation (network) buildout and in (carrier) service revenues. No one has said they will build fewer (cell) sites, but the lack of clarity (from carriers) raises concerns.”
Although the tower industry is more immune than many to the risk that new technologies will obviate the need for its services, one such competitor is making inroads. A number of companies have entered the wireless arena specifically to fine tune networks so that operators can squeeze more capacity out of existing infrastructure, thereby avoiding the need for as many additional cell sites as they might otherwise require, Kricheff said.
“When do you get people comfortable? In my own personal view, it will take some time for companies to prove out their numbers,” he said.
“This industry has grown up so rapidly that there is no macro data source and no exact figures on numbers of towers, number of cell sites, number of planned towers. Tower companies are getting better at giving out data about their portfolios.”
According to projections by Goldman Sachs & Co., domestic wireless carriers will spend 12 percent more in capital expenses this year than last, and they spent 40 percent more in 2000 than they did in 1999, said JJ Berney, senior analyst for the investment bank.
“Verizon’s announcement of increased churn and subscriber additions under pressure and Nextel’s announcement of lower subscriber additions and reigning in of capex (capital expenditures) set off panic buttons, especially in the tower industry. If it could happen to these two operators, why not to others? Tower companies are waiting for the other shoe to drop,” he said.
“Some people think that because the macro environment is weak, demand is falling off a cliff. (Net additions in 2001) may go from 23 (million) to 24 million down to 18 (million) to 20 million, not down to 10 (million) to 12 million additions.”
While it is realistic to expect that wireless operators will defer 2.5-generation deployments and some network upgrades, it also makes sense to expect that pressure to reduce customer churn will compel carriers to continually improve coverage and capacity, Berney said.
AT&T Wireless’ decision to transition to GSM from TDMA puts pressure on Cingular to respond in kind. Likewise, Verizon Wireless’ agreement with Lucent Technologies Inc. to upgrade base stations puts pressure on other carriers to follow suit. These kinds of developments bode well for tower companies, he said.
“If some carriers pull back on cap-ex, the consolidation candidates are likely to cut back first. That could drive the bigger carriers to exploit their opportunity by accelerating buildout,” Berney said.
“There may be a bumpy road for six to nine months, but the tower business is strategically positioned to ride it out.”
To keep pace with capital expenditure demands, large telecommunications companies like AT&T Wireless and Sprint PCS may decide this year to sell more of their towers, said Jim Eisenstein, chief development officer for American Tower.
“They haven’t given us any indication, but we potentially see some carrier deals this year. But it would be more difficult for an AT&T Wireless or a Sprint to do this year because they have no more first mover advantage,” he said.
The “Big Five” tower companies-American Tower, Crown Castle International, Pinnacle Holdings, SpectraSite and SBA Communications-all rely increasingly on the “Big Six” national carriers-AT&T Wireless, Cingular Wireless, Nextel Communications, Sprint PCS, Verizon Wireless and VoiceStream Wireless-as their primary customers. The growing likelihood that the Federal Communications Commission will raise spectrum caps may well reduce the number of national carriers to five. The result will adversely impact incremental demand for towers, said Steven R. Bitner, senior vice president of Communications Equity Associates L.L.C., Berwyn, Pa.
While going after the major players is a key strategy, Jeffrey A. Stoops, president of SBA, said he has no regrets about leasing space to Metricom, a fixed wireless carrier that has run into financial problems lately.
“We have never been in a position of giving up (to Metricom) the last spot (on our tower). It’s a good idea to lease space to these folks,” he said.
“Everyone is talking as if Metricom is finished, but that is unfair to them because they have a good product and are victims of bad capital markets. Wireless data will succeed long term. The problem today is the unbelievably short-term focus investors have.”
On a parallel track to carrier consolidation, Eisenstein said he expects the five public tower companies will control about half of the towers available for lease by year-end, up from less than 5 percent at the end of 1998.
“If you charged $1,500 a month in 1998, carriers would smile at you and say they’d put up their own site,” he said. “Setting aside antitrust issues, even if you could now charge $10,000 a month, the next time that carrier has a choice of where to go, it will do all it can not to collocate with your tower company.”
Nevertheless, within the next several years, average monthly tower lease prices likely will rise by $500 to $2,000 and the averag
e number of carrier tenants per tower to three from one-and-a-half, said Kip A. Rupp, senior vice president of Wachovia Securities Inc., Atlanta.
“The tower industry is a relationship business, so you don’t want to kill your customers, but it’s also an asset-based business,” he said.
Speculation that tower companies could become the mobile virtual private network operators of the future is just that, said SBA’s Stoops.
“We would never want to be perceived as competing with our customers. It would take quite a mind shift for tower companies to own (radio-frequency) licenses, not to mention the mind shift on the part of carriers,” he said.
“We’ll have to see what new equipment will provide. To the extent that you could get sharable antennas and base stations, that also would require a mind shift by carriers and tower companies.”
While the top five tower companies consolidate their control, hundreds of smaller, privately held firms still serve the remainder, Bitner said. Within that group, there is a top 10 list that includes companies like Mesa, TrinTel, SignalOne, Mountain Union and Midwest Tower Partners.
“In 2000, public companies built 4,500 towers and private companies, 500. Every incremental build goes to the private companies. This is not a temporary phenomenon but one that will increase much more,” he said.
“The 10 biggest private companies are hoping for the re-emergence of the capital markets so they can do a public debt deal or an IPO.”
