At long last, the tower deal causing months of speculation is etched on the record books.
Global Signal Inc. has won the exclusive rights to lease or operate more than 6,600 towers from Sprint PCS for 32 years, sending Global’s share price up 7.2 percent to $30.95 and Sprint’s shares up 7 cents to $23.38. Global will pay $1.202 billion for the deal.
This brings Global to an enviable third place in the hierarchy of tower operators in the United States, behind Crown Castle International and American Tower Corp. Both had been named as possible contenders for the Sprint towers. The chances of Global Signal finalizing the deal brightened about a week prior to the announcement, especially with Liberty Media pulling out.
At the end of the lease period, Global has the option to buy the towers for about $2.3 billion.
According to the contract, Global will also take over existing collocation arrangements with tenants that lease space on the towers. It can also sublease the towers to additional third-party tenants.
Sprint also committed to sublease space on the towers from Global for a minimum of 10 years at an initial rate of $1,400 per month, per tower.
The transaction with Global Signal will contribute to Sprint’s increased financial strength and strong cash position, said the carrier. “It is currently expected that the net effect of this transaction will have an immaterial impact to Sprint’s 2005 annual operating income, adjusted earnings before interest, taxes, depreciation and amortization, and earnings per share,” Sprint said.
A number of tower operators had been in the running for the Sprint properties through a process that gained momentum after the carrier announced its proposed merger with Nextel Communications Inc.
“After reviewing possible scenarios, Sprint concluded that accepting the offer from Global Signal was the best course of action for creating economic value while maintaining network integrity,” said Sprint on the arrangement, which is expected to close in the second quarter of 2005.
Sprint expects the money to help cut its debt and help fund its network buildout in light of its marriage with Nextel as well as it 2.5 GHz MMDS spectrum holdings.
“It gives Sprint the best of both worlds,” said Stephen Humes, an attorney who represents tower development companies and carriers, adding that Sprint is subleasing space on the towers and making a significant amount of money on the sale of the towers.
Sprint, however, also will pay Global a below-market monthly rent of $1,400, noted Jonathan Atkins analyst with RBC Capital Markets in his commentary on the deal. He said that Global will receive 100 percent of the economic interest from leasing space on the towers to the third-party tenants.
RBC estimates that Global paid about 15 times tower cash flow for the assets, which compares with a range of 14 times to about 16.5 times the tower cash flow for the public tower companies.
“We view the towers of the public tower operators to be more attractive assets, due to higher operating margins and greater tower capacity,” noted RBC. “We believe Sprint towers may require at least one full turn of TCF to augment capacity in line with that of the public tower operators.”
In the research note, Atkins observed that the values of the Sprint towers are about $180,000 to $195,000, which amounts to less than $445,000 to $475,000 per-tower valuations for the public operators like Crown Castle, ATC and Global. He adds RBC estimates that the Sprint tower portfolio will generate low 40-percent tower cash flow margins while the public tower operators will generate high 60-percent margins.
“We attribute the difference to higher ground lease expenses, fewer tenants and less capacity for incremental lease-up due to initial build specifications and ground-space limitations,” he wrote in the note, adding these factors make the per-tower valuations meaningless.
Humes said the deal validates the principle that wireless carriers are in the coverage business. “Towers are a means to an end for carriers,” he said.
