The tower industry is sitting pretty these days. And, all things considered, the future couldn’t look brighter for The Big Three: Crown Castle International Corp., American Tower Corp. and of SBA Communications Corp.
Gone are days of flimsy business models and living on the edge. Bankruptcy is no longer in the lexicon of the tower industry. The bulls are running, with stock prices and revenues on the steady incline. Free cash flow is-frankly-fantastic for tower companies. In addition to management getting smarter and more rational, one only has to look at the key trends in the wireless industry to understand why Wall Street is so high on the tower industry.
Spectrum fueling growth
More spectrum-the lifeblood of the wireless industry-is gushing into the market. The Federal Communications Commission late last summer concluded the $13.7 billion auction of 1,087 licenses to a mix of national mobile-phone and rural telephone companies. It could be a year or so before the benefits of the AWS auction become tangible for tower companies, but they’re on the way. And right around the corner is the 700 MHz auction. If satellite TV giants Direct TV Inc. and EchoStar Satellite L.L.C. can convince the FCC to create a nationwide license and then bid successfully for it, the tower industry will be able to add significantly to the 80,000 towers already in place.
T-Mobile USA Inc., the top AWS bidder, plans to use the spectrum infusion to deploy 3G services. In some cases, that will require amendments to existing leases. And in other cases, it means new leases with tower companies. Both outcomes bode well for the tower industry.
“It’s all about location. It’s all about terms of leases,” said Mark DeRussy, a analyst who tracks the tower industry at Raymond James & Associates. DeRussy and other equity analysts said they see many positives going for the tower industry and few, in any, negatives on the horizon. “I think it’s healthy and visibility remains solid,” DeRussy said.
Leases remain challenge
However, the leasing process can be contentious for owners of land and tower companies.
“The biggest one [issue] is the extension of leases,” said Ken Schmidt, president of Steel in the Air Inc. Schmidt, who assists land owners in tower lease negotiations, said there’s a significant increase in efforts to renegotiate tower leases downward. Yet Schmidt concedes what most everyone else has concluded: “I think most of them [major tower companies] are sitting in a good place.”
Indeed, ambitious AWS spectrum acquisition and buildout plans by emerging, unconventional regional powers Leap Wireless International Inc. and MetroPCS Communications Inc. mean more business for tower companies.
WiMAX wild card
While the AWS auction helped Sprint Nextel Corp. and Verizon Wireless fatten up their wireless pipes in existing markets to support data- and content-rich multimedia applications, the former wants to leverage its hefty supply of 2.5 GHz around the country for a big WiMAX technology play that is expected to generate fresh tower business. The same goes for Craig McCaw’s Clearwire Corp., which last week strengthened its wireless broadband position by acquiring 2.5 GHz spectrum from AT&T Inc. for $300 million. The tower industry will be watching AT&T closely to discern whether the telecom giant will come calling for help in getting facilities in place to deploy WiMAX in the 2.3 GHz band.
Verizon Wireless’ “Can-You-Hear- Me-Now?” pitchman is nerdy enough, but his service quality-coverage selling point has become ground zero for competition among the major mobile-phone operators.
“There’s a lot of spending going on,” said Jonathan Atkin, an analyst at RBC Capital Markets.
As for wireless technology wars, the tower industry could care less. Analyst Chris Watts of Atlantic Equities points out tower companies are technology agnostic. Wireless carriers need towers in good locations. That’s it. “I think it’s going to be a strong year,” said Watts.
Clayton Moran, a industry analyst at Stanford Financial, said what helps make tower stocks-besides strong free cash flow-is the high predictability and low volatility of the sector. “The stocks have been good performers. . The two-to-three year outlook is very positive,” he said.
Seth Potter, an analyst with Punk, Ziegel & Co., agrees. “The demand for location remains steady. . Clearly the managements have done a great job,” Potter said.
Tower analysts said the last chapter in industry consolidation likely has not been written, with SBA remaining a prime acquisition target.
In the policy arena, tower companies remained trapped in the vortex of Groundhog Day, with antenna-siting feuds with local officials always in perpetual play. PCIA, the wireless infrastructure trade group, has crafted a model siting ordinance and a template for siting legislation in hopes of streamlining the sometimes fractious process of erecting wireless transmitters.
The tower industry continues to wrestle with the American Bird Conservancy over the impact of towers on migratory birds, particularly in the Gulf Coast area. PCIA has engaged the Federal Aviation Administration on the bird front-joining other trade groups in asking the agency to conduct a study on avian tower safety-and in the equally controversial matter of radio-frequency interference. The FAA has proposed new rules to curb disruption from wireless facilities to government spectrum, a move that sparked sharp criticism by the wireless and tower sectors.
“It will create a lot more paperwork and unnecessary burdens on membership,” said Anne Perkins, manager of industry affairs at PCIA.