With carriers focusing on network efficiency, tower companies are not expected to yield any immediate benefits from the anticipated merger between Sprint PCS and Nextel Communications Inc., according to analysts.
In a few years, however, SpectraSite Inc. may reap some financial gains if and when Nextel installs CDMA overlays on its present iDEN infrastructure networks.
The tower sector in general could also benefit since this most recently proposed merger and the already-accomplished Cingular Wireless L.L.C. and AT&T Wireless Services Inc. tie-up places pressure on No. 2 carrier Verizon Wireless. Verizon, which already markets its network based on its top-quality coverage, may have to improve its coverage and capacity even more by acquiring more cell-site space, thus triggering activity in the tower space.
“Tower sites are driven by minutes of use,” commented Seth Potter, equity analyst with Punk, Ziegel and Co. “I don’t expect the minutes of use to decline soon.”
The more the minutes of use, the greater the need for towers. Likewise, the number of antennas carriers possess and their locations also matter in improving services to their end users.
The Sprint-Nextel merger throws up several new scenarios for tower companies. In a conference call last week, Sprint indicated the combined company would have more than 50,000-more than they will need. That likely will put more pressure on Sprint to sell some towers assets. The carrier already is trying to sell 6,500 towers in a process that has attracted bids from major tower operators like Crown Castle International Corp., Global Signal Inc. and Liberty Media.
The sale is expected to cut down Sprint’s $15.6 billion debt load by up to $1.2 billion.
Sprint has not indicated when it plans to sell the assets. Raymond James analyst Ric Prentiss said he believes the merger will compel the carrier to put off the sale for now until the two carriers conclude the intricacies of the merger. Industry watchers had expected Sprint to sell the towers this month or early next year. But that was before the merger agreement was reached.
Liberty Media is expected to be a strong bidder for Sprint’s tower assets. The John Malone-led company already owns nearly $2 billion of Sprint stock. If Liberty wins the bid, it will free Liberty from its tax burden and enable it to fulfill what industry watchers see as one of Malone’s all-important quests: buying into companies with good cash flow.
“The main beneficiary of the merger will be SpectraSite,” said Jonathan Atkin, senior analyst at RBC Capital market, explaining that the tower operator gets 22 percent of its revenue from Nextel, more than double the exposure of players American Tower, Crown Castle, SBA Communication and Global Signal Inc. SpectraSite owns 7,700 towers across the country.
However, SpectraSite may not really capitalize on the merger until the new company decides to overlay CDMA technology on iDEN networks. In the early going, both Nextel and Sprint are going to run separate radios, core networks, antennas as well as engineering.
Although SpectraSite is expected to benefit from the Nextel side of the merger, analysts do not expect it to be a foregone conclusion. Shares of SpectraSite actually fell as speculation over the anticipated Sprint-Nextel merger increased. The thought-process in some carrier mergers is that fewer cell sites would be needed.
In its recent quarterly filing with the Securities and Exchange Commission, SpectraSite said “any industry consolidation could decrease the demand for our sites, which could lead to reductions in our revenue.”
And the pressure on Verizon may not be much, commented Atkin, saying that the CDMA carrier has 21,000 towers around the country. In the immediate future, Atkin said he doesn’t expect Verizon to spend more capital on towers.
“Indirectly, if Cingular improves its quality, it puts pressure on Verizon,” he said.
Verizon has launched its CDMA 2000 1x EV-DO networks in major markets in the U.S.
If Verizon decides to buy more towers, some analysts think the beneficiary may be Crown Castle, which lapped up the remaining stake of $295 million in its joint venture with Verizon. The venture owns 2,019 towers.
Potter thinks that may put Crown Castle at an advantage, although Atkin thinks differently.
Atkin said it throws the bids wide open to all tower players because Verizon would have to seek new sites.
