NEW YORK-A 6-percent average summer dip in the price of shares in American Tower Corp., Crown Castle International, Pinnacle Towers Inc., SBA Communications and SpectraSite Communications also reflected “a shift of investors out of telecom into what are perceived to be faster growth areas,” said J.J. Berney, senior analyst at Goldman Sachs & Co.
“That said, we believe that ultimate share price performance will reflect the ability to aggregate assets, attract customers to them and gain attractive returns,” Berney said at Kagan Seminars’ recent tower summit.
The stocks of the five publicly traded tower companies may have treaded water in late summer as the broader markets digested the large capital demands across industry sectors, said Sharon Armbrust, senior analyst and vice president of investment research at Paul Kagan Associates Inc., Carmel, Calif.
“But all the growth in front of them will allow them to tread water and then go forward,” she said .
SBC Communications Inc.’s decision in August to lease to SpectraSite about 3,900 existing towers and 800 others yet to be built also had an adverse short-term impact on other tower companies, thereby dragging down the sector, said Kip Rupp, vice president of technology and communications research for Wachovia Securities.
American Tower and other companies that lost out to SpectraSite in this competition were perceived for a time to be at a disadvantage. The SBC-SpectraSite transaction also occurred at the time when investors started giving a cooler reception to the telecommunications sector generally.
“Everyone recognizes clustering is important because of the great pricing power it provides. But everyone also recognizes that overall demand for towers is so great you will get good prices if you’ve got a good site,” he said.
However, investors who used to believe that third-generation wireless “is right around the corner” have had to adjust their expectations for a slower American rollout, which ultimately will boost tower demand, said Edward I. Zughaft, a managing director at Lehman Brothers Inc.
“You won’t see 3G in Western Europe till 2002, and the United States will probably follow in 2004,” Goldman’s Berney said.
Investors have become convinced of the tower companies’ thesis that telecommunications operators are willing to outsource tower construction and related services to third parties, Wachovia’s Rupp said. Consequently, the prospects for 3G wireless buildout may not matter so much because tower companies are gaining increasing leverage over carriers, which are their captive customers.
Regardless of whether the varied perceptions that affected share price are true or false, the time was right for these stock prices to cool down a bit, he added.
“In the summer and fall of ’99, they were trading at screaming buy multiples. To see some companies pull back is healthy. I like where a lot of their stocks are now,” he said.
Notwithstanding these factors, tower companies have had no problem accessing capital, having raised $6 billion in debt and equity through mid-September, Armbrust said. However, this recent success raises the question of whether additional funding will be available and to what kinds of companies, she added.
“You can’t assume the high-yield (debt) and the equity markets always will be there, but we have seen a large uptick in opportunities in the last six months,” she said.
“The sell-off in the wireless (carrier) market because of the large amount of capital expenditures required translates into a positive for tower companies.”
Tower bond prices so far have tracked tower stock prices, but their paths likely will diverge during the next year or two, said James S. Ballan, director of high yield tower and wireless bond research for CIBC World Markets.
“The quality of the footprint will drive top line growth, not so much market share overall but a strong presence in a particular market. This is pretty much a local business,” he said.
Bondholders benefit from good equity performance and therefore are willing to extend more credit to companies whose stocks fare well, said Drew Hanson, senior vice president of the high yield research group at Donaldson, Lufkin & Jenrette Securities Corp. Bond buyers also favor the tower sector as “a defensive play because the market’s perception is it’s not high risk,” he added.
The bank loan market, which provided nearly $4 billion in financing through mid-September, has also played an increasing role in meeting the capital needs of the tower sector this year, Armbrust said.
The performance of the top five companies, which own or control about half the communications towers in the United States, has attracted bank loan dollars to big and small players alike, said Mary Meduski, managing director in the media, telecom and technology finance group of Toronto Dominion Securities.
“It’s also a good environment (in which) to refinance outstanding debt to bring down the cost of capital,” she said.
Bank of America Capital Investors’ two investments, in Signal One and Titan Towers, have performed ahead of expectations, said J. Travis Hain, a founding partner and managing director.
“Both have $20 million bank credit facilities, and we expect to up that to $100 million (total) for both of them by year-end,” he said.
“We had a three-year horizon, and each time we look into our crystal ball, another opportunity always seems to come along.”
For smaller companies like these, Hain said he sees three options going forward: combinations with “a handful” of other private firms to form a company that would be attractive to take public; mergers with larger, public companies that have complementary business strategies; and growth through organic, internal expansion into a larger company.
Nations Media Partners has seen “quite a few” new joint ventures between larger and smaller tower companies in the last several months, said R. Clayton Funk, managing director of the tower division. Among buyers, there also is a good bit of idle capital on hand that needs to be deployed. The result is a “healthy appetite” for acquisitions, he said.
“We deal with a lot of smaller tower companies. They’re doing quite well buying or building and selling to the big guys, then doing it all over again,” Wachovia’s Rupp said.
Kit Spring, tower equity analyst for Morgan Stanley Dean Witter, noted that Pinnacle and SBA have benefited in the past by buying cheaper towers “from mom-and-pops below the radar screens of the other companies.” However, that game is over now since these small tower owners now have four or five bidders for their sites.
“Some are trying to build up into bigger companies. I think there is a good opportunity to become smaller public companies because small-cap investors are limited as to market-cap size and are now cut out of a lucrative sector,” Funk said.
A small, regional player with $10 million in annual earnings before interest, depreciation, taxes and amortization likely could go public with a micro cap initial stock offering geared to retail investors, in Rupp’s view.
“The question is do these smaller companies get there before being gobbled up by the big guys,” he said.
Overhanging all discussions about supply and demand supply is the question of whether and when carriers like Sprint Corp. and AT&T Corp. will sell their towers. Telecommunications operators could opt to sell these properties sooner rather than later if other sources of financing dry up, Kagan’s Armbrust said.
“Sprint has a national division marketing its towers. If they spin it off, there will be no real effect on supply. AT&T is a behemoth that would crimp up others available if it sold its towers,” Wachovia’s Rupp said.
“But I think that prospect already has been factored into expectations. C
arriers also may have already missed their windows of opportunity.”
Carrier-owned towers have the advantage of being “well-clustered, overbuilt
and underutilized,” said CIBC’s Ballan. However, gaining the valuable few in unique and important locations requires taking on others already fully leased. By contrast, towers that are built to suit tend to “be considerably cheaper to acquire and have good lease-up potential,” he said.
Divestiture of towers by carriers like AT&T and US Cellular Corp. probably will not happen in the next few years, said Goldman’s Berney.
“Over time, content will be king and carriers will devote their resources to branding and content. What business does a carrier have in minding the infrastructure when other companies out there can do it better and cheaper? In the near term, though, there is some value is seeing how 3G develops and what its requirements are,” he said.
“On the horizon, tower companies are telling us they will generate more revenues on the service side of 3G, which they will be in a better position to maintain and, at some point, run and own. The learning curve is quite steep, though.”
A tower company’s goal to become a content distributor throughout its footprint “probably is positive, as long as the new content provider can’t churn off,” said DLJ’s Hanson.
The investment community is “not yet comfortable” with this kind of diversification in a tower company’s business model, he said. To get financing, tower companies probably would have to establish a non-recourse model, meaning a stand-alone entity that cannot fall back on its parent.
Although the investment community sees the big five tower companies in aggregate as extensions of opportunities in wireless communications, it has made significant distinctions among them.
“Pinnacle is given more credit for acquisitions, but in the future, the market will favor organic growth. American Tower is perceived to have the best management team. Crown Castle has a spotty record meeting analysts’ expectations,” said Morgan Stanley’s Spring.
But Pinnacle, along with SpectraSite and SBA, have proven best at meeting or beating analysts’ expectations. SpectraSite and Crown Castle have facilities best suited to handle the wireless Internet and capacity demands in urban areas, he added.
