Crown Castle International Corp. last week confirmed it is selling its U.K. business, including 3,600 tower sites, to British utility company National Grid Transco plc for $2.035 billion cash.
“The price fully values the U.K. business plan,” said Ben Moreland, Crown’s chief financial officer. “We are now going to be at our targeted capital structure,” an impressive stance for a company in the traditionally highly leveraged wireless tower industry.
Indeed, the transaction makes Crown a “substantially different company from a risk profile perspective,” added Kelly, saying that Crown will use $1.3 billion of the proceeds to fulfill its operating company’s credit facility.
Bond indentures require Crown to move the remaining $740 million in proceeds within 12 months. Moreland emphasized the company will remain prudent about where it invests those proceeds, indicating they likely would be used to repay debt, fund a share repurchase, pay down dividends or to possibly invest in new U.S. business opportunities.
The news came as a surprise to industry watchers who noted Crown had never hinted at slowing trends in its U.K. business or any intention to sell it.
Crown said it was approached about a sale in late 2003, but the idea was canceled when an agreeable price could not be met. The company did not enter 2004 contemplating such a move, according to Kelly, but when the two parties returned this year and competitively bid for the assets, the value of the end result in terms of de-leveraging the company could not be overlooked.
Indeed, despite their initial surprise at the sale and some hesitation regarding the purchase price, analysts reacted relatively favorably to the news.
The sale will be a “valuation neutral transaction” in the short-term, said Jonathan Atkin, a tower industry analyst at RBC Capital Markets. In the longer term, Crown will have the cash to repurchase shares, returning value to shareholders. In addition, Crown’s enthusiasm regarding U.S. market trends seems good for the entire U.S. tower industry.
RBC increased its site-leasing revenue estimates to align with Crown’s expectations and maintained its $18 price target on Crown. “We view yesterday’s pullback in CCI and the overall tower sector as excellent buying opportunity,” the firm said, commenting on the slight drop in stock prices across the sector that immediately followed the news.
Meanwhile, Bear Stearns & Co. Inc. lowered its price target to $16 from $21 per share and lowered its rating to “peer perform” from “outperform,” noting slightly reduced free cash flow estimates and slower growth in free cash flow per share. Smith Barney, which recently began covering the tower sector, dropped Crown from “buy” to “hold” and assigned it a $16 price target, based on the sale.
Raymond James & Associates Inc. reduced its price target to $17.50 vs. $21 to reflect the removal of the U.K. business. The firm however maintained its “strong buy” rating, noting that “while much of the discussion regarding this transaction has centered on its valuation, we are focusing our energy on how the remaining business and residual balance sheet can be used to create value for equity holders going forward.”
Crown also pointed out that exiting the slowing U.K. market will allow it to focus its energy on the larger and faster growing U.S. market.
The company said it sees potential in the fact that the United States, with a population of 283 million, is at only about 54-percent penetration, and the country has yet to deploy 3G networks, although carriers including Sprint Corp. and Verizon Wireless have made billion-dollar commitments to deploy 3G technologies.
Meanwhile in the States, 2G buildouts are continuing, 2004 leasing has shown strong improvements compared with past years, and network quality and customer satisfaction still lag behind Western Europe, indicating carriers will be required to continue spending capital on upgrades.
Meanwhile, the United Kingdom, with a population of 60 million, is already nearing 90-percent penetration and has begun 3G rollouts, including that of 3, Hutchison’s 3G network that was built from the ground up. Crown said it has recently lowered its U.K. guidance to assume steady 4 percent to 5 percent yearly revenue growth, knowing that build volumes experienced during the past year, which were bolstered by the Hutchison network, would not occur again.
In addition, according to RBC’s Atkin, Crown had already realized the potential of the United Kingdom’s practice of “open market review,” under which companies can assess tower rents and drive through rent increases.
As a result of the sale, expected to close by Sept. 30, Crown revised its previous 2004 and 2005 outlooks. The company now expects site-rental revenue for 2004 to fall between $524 million to $528 million, with site-rental revenue for 2005 reaching $565 million to $575 million. Crown predicts EBITDA will equate to $270 million to $280 million for 2004 and between $305 million and $320 million for 2005.
The company expects net cash from operating activities to reach $225 million to $245 million for 2005, and to achieve free cash flow of $195 million to $215 million for the full year of 2005, representing 90 percent to 100 percent of previously expected 2005 free cash flow per share. The company did not issue guidance on net cash or free cash flow for 2004 because those numbers will depend on the timing of the closing of the sale and its impact on 2004 interest expenses. Going forward, Crown expects to achieve a compound annual growth rate of 20-percent for its free cash flow.
Crown also expects to realize savings in reduced capital expenditures, which have been significantly higher in the United Kingdom than in the United States, having represented 77 percent of the company’s total cap ex in 2003. Moreland cited the larger broadcast segment in the United Kingdom, which requires higher levels of cap ex. Also, a historically favorable U.S. dollar-to-U.K. pound exchange rate prompted the sale to occur now.
The sale shrinks Crown to the second-largest U.S.-based tower company and catapults American Tower Corp. to the top. Following the transaction, Crown will own, operate and manage more than 10,600 wireless communications sites in the United States and 1,300 in Australia. American Tower owns more than 13,200 towers in the United States, Mexico and Brazil.
Shares of Crown were trading at $14.35 toward the end of last week, down about $2 from before the sale was announced. Meanwhile, at RCR Wireless News press time shares of American Tower were trading at $15.10, SBA Communications Corp. was at $4.34, SpectraSite Inc. was at $44.24, and Global Signal Inc. was at $22.26.
