As the FCC’s Auction 97 apparently enters its final stages, many in the tower industry are no doubt breathing a sigh of relief. Carrier spectrum spending coupled with relentless mobile data price wars could mean higher costs and lower revenues, leaving less capital available for adding new antennas to cell towers.
“Technical and financial questions have arisen and we believe these have partially pressured the tower stocks,” said Canaccord Genuity analyst Greg Miller in a recent note. “Chief among these concerns are a limited or nonexistent equipment refresh cycle and the incremental carrying costs of capital that will have been raised to finance spectrum bids, which have far exceeded initial expectations, limiting the carriers’ ability to spend capex to build out the spectrum. The fear is that these factors will mean amendment activity – and, therefore, incremental revenue – will be limited and overall growth will be slower than expected. We believe such concerns are overblown.”
Carrier capital expenditures
Analyst Mark Walker of Ovum estimates that wireless carrier capital expenditures will total $204 billion this year, and will be roughly flat next year. The firm expects wireless capex to decline after 2015, and then rebound in 2018.
Ovum says that wireless and wireline carriers spend roughly 18% of revenue on capex, and that this amount will deteriorate by less than one basis point over the next five years. AT&T has said that next year it will spend 14-16% of service revenue on capex, a level consistent with historic spending targets. AT&T surpassed that level during recent years at it invested to build out its LTE network and its fiber optic network through its Project Velocity IP. Now as Project Velocity IP nears completion, spending priorities may change.
“For AT&T it certainly appears to be that they’re putting less into sites and more into spectrum this year,” said tower industry veteran Alex Gellman, now CEO of Vertical Bridge Holdings. “Really it started in 2014, so for 2015 I think that’s a reasonable expectation.”
Vertical Bridge stands to benefit from co-location projects and amendment activity from all four of the major U.S. carriers. The company has roughly 2,000 active cell sites now, including 595 towers purchased from U.S. Cellular for $159 million. Those towers serve Midwestern markets that U.S. Cellular sold to Sprint in 2012. At that time Sprint did not want to buy the towers, so U.S. Cellular had been operating them for other carriers. Gellman said a number of those sites are multi-tenant towers, and so far he sees no change in investment activity from the other major carriers.
“Verizon has always been the steady eddy,” said Gellman. “It’s always maintained a pretty consistent level of investment in wireless sites and I haven’t seen anything that says that’s changing.”
Gellman said that so far he has not seen anything to indicate a change in spending levels from T-Mobile US or Sprint. Analyst Jennifer Fritzsche of Wells Fargo has projected that these carriers will focus on specific geographies in the months ahead.
“In terms of Sprint and TMUS, we continue to expect both of the companies’ spending to be more targeted to improving capacity in key areas of the US,” Fritzsche wrote in a research note.
Tower company valuations
Wall Street analysts see investors turning cautious on the tower sector, but say that the fundamentals remain strong. However, the outlook may not be quite as bright as it has been in recent years.
“We’ve been spoiled,” said Gellman. “We’ve been in a very, very favorable market and a very, very favorable position in the market, as an industry, for the last four or five years. It wasn’t always like this, and I don’t think it will always be like this.”
Gellman noted that at the present time, buyers are able to borrow 11 or 12 times tower cash flow to finance tower transactions. He said that these multiples have been on the rise, evidence that borrowers remain confident in the tower sector. But Gellman added that he is less certain about the outlook for tower company equity in the near term.
