Tower firms at little revenue risk from Sprint/T-Mobile merger, Cowen says

A possible merger between Sprint Nextel Corp. (S) and T-Mobile USA Inc. (DTEGY) would not impact the tower industry much because the combined company would likely continue to operate its 2G and 3G networks separately, according to a new report from Cowen and Co.
American Tower Corp. (AMT), Crown Castle International Corp. (CCI) and SBA Communications Corp. (SBAC) stocks were all down last week, possibly on rumors that Sprint Nextel would buy T-Mobile. Because Sprint Nextel uses CDMA technology and T-Mobile’s network uses GSM-based technology, a consolidated operator would not spend the capital to integrate those networks, Cowen said. “The most likely scenario would be for them to continue operating separate networks for several years (ex. Sprint/Nextel) while building a unified 4G network using either Clearwire (Corp.) spectrum, LightSquared spectrum, and/or their own combined spectrum. Once their 4G network gained enough scale then it is possible that they could start decommissioning a portion of the legacy 2G/3G networks, but we believe this would take 5+ years to do so.”
The firm also said that tower overlap between Sprint and T-Mobile is minimal.
Further, Cowen said that even after a unified 4G network is built, the combined company would probably keep its existing towers because of the continued need for capacity. Operators today are struggling with capacity issues due to increased data demands.
AT&T Mobility and Verizon Wireless accounted for the majority of capital expense spending in 2010, and Cowen thinks that trend will continue this year. A combined Sprint/T-Mobile could have a stronger balance sheet, and thus afford to spend more capex. “Both Sprint and T-Mo are still figuring out their long-term 4G strategy and neither company have a strong enough balance sheet or spectrum portfolio to aggressively build out a 4G network alone, in our view. To that point, Sprint and T-Mo have not made significant tower equipment upgrades for several years and as a combined company they could more efficiently build-out and scale a 4G network. Such a scenario could actually provide incremental revenue for the tower companies.”
As it stands today, Cowen estimates SBA is at the greatest risk for having less revenue if Sprint and T-Mobile merged, with about 5% of revenue at risk. Cowen estimates Crown Castle and American Tower’s revenue risk both at around 2.3%.