The wireless industry relies on towers like a lifeline. All those wireless calls, messaging exchanges and data downloads and uploads rely on a steadily budding array of transmission towers. Without them, nothing happens.
Bearing that in mind, it’s no surprise towers are considered one of the safest financial investment plays in the entire industry.
More, more, more
With a not-so-rebel yell, everyone is crying for more, more, more. More capacity, more in-building penetration, more services, more coverage.
“There continues to be a supply-demand gap,” said Clayton Funk, managing director at Media Venture Partners L.L.C. There has consistently been a healthier appetite for towers than what’s physically available, he said.
Jackie McCarthy, director of government affairs at PCIA, said growth will continue to be driven by three factors: improving in-building coverage, meeting the proliferation of uses and buildout plans for recently acquired (and soon to be acquired in 700 MHz auction) spectrum.
“The demand for more wireless infrastructure and more wireless coverage are going to be increasing as the 700 MHz ramps up and the deployment of that spectrum becomes first and foremost on peoples’ minds,” McCarthy said. “Now more than ever there’s a customer demand for ubiquitous coverage in their home, in their business.”
Funk agrees. “For video to be penetrating buildings and homes . you’re going to need more cell sites,” he said.
“We see the future evolution of the wireless networks demanding more cell sites for seamless coverage of what consumers are demanding and expecting,” Funk said.
Media Venture Partners, an investment banking firm that specializes in telecommunications and media, typically works on 10 tower deals a year, whether they involve mergers, acquisitions or raising capital for private companies.
“A lot of the carrier and tower buildout is tied to the health of the capital markets,” Funk said. As long as investors are willing to lend, growth will continue. Despite the economic downturn, Funk sees a healthy financial year ahead for the tower industry.
“2008 looks really good for the tower industry. Certainly there have been times in the past where budgets get cut last minute . but we’re optimistic that the next calendar year will result in analyst estimates of 17,000 to 20,000 cell sites being deployed this year,” he said.
New and existing tenants
That number includes existing towers that got a new tenant and new towers. One of Funk’s former clients said as long as carriers demand tower space there’s no such thing as a full tower. Last year, which saw a buildout of 13,000 to 16,000, the big spenders were Leap Wireless International Inc., MetroPCS Communications Inc. and Clearwire Corp., Funk said. T-Mobile USA Inc. is expected to be high among the leading spenders this year.
Concrete numbers are difficult to pin down (if not entirely impossible), he said, but Funk’s heard there’s upwards to 200,000 towers in operation nationwide.
“From all indicators, what the carriers are telling Wall Street is that they’re going to be deploying more towers than in the past,” Funk said. “The (credit crunch) definitely has the potential to affect the carrier budgets. It certainly is likely to affect multiple tower merger and acquisition situations.”
In 2001 as the economy was going into recession, Wall Street hammered the carriers after spending billions of dollars on spectrum and urged them to build up customer numbers. Carriers moved quickly to increase subscriber counts and the number of new tower sites deployed went down significantly.
“We see a little bit of that happening again,” Funk said, adding that carriers are shelling out top dollar for spectrum while the credit market is on the rocks.
“Many investors look at the tower industry as the safest play in all of wireless,” he said. “If you believe in wireless and you believe in the growth of video and data and everything over the handsets . it’s going to lead to more tower growth.”
These are all positive signs for the tower industry. But with that come some burdens.
Consolidation opportunities
“There are sort of two opposing or contrasting trends that we’re seeing on the business side,” PCIA’s McCarthy said. Plenty of forces are driving growth and a need for more towers, but “on the other side there’s increasing regulation from all sides,” she said.
“We’re seeing that at the same time there’s an increase in demand . we’re seeing an increase in regulatory burden that makes that quick deployment and speed to market more challenging than ever,” she added. “Speed to market has really become the determining factor in their success.”
While there might be good policies behind federal and local regulations, they’re slowing down deployment and increasing costs, McCarthy said.
All of that is helping fuel a market ripe for further consolidation. McCarthy and Funk both expect to see more consolidation in the industry as all parties look to expand.
The most valuable towers are those pre-existing in restricted zoning environments with no nearby competitors with the ability to hold at least five separate carriers, Funk said. Of course remaining capacity to hold more carriers is all the better.
“I do see some room, especially as the bigger companies acquire the assets of smaller tower companies,” McCarthy said. “I don’t think that consolidation is over.”
The large tower companies will have their eye on the most valuable assets of their smaller counterparts, Funk said.
“Anything in a very densely populated suburban area that’s had to go through a rigorous hearing process to get it permitted is of value,” he said. “A tower in New England is valued more favorably than a tower in Texas.”
Beyond that, Funk is dubious about the hype surrounding alternative coverage enhancements.
“A terrestrial based delivery system model has been the proven model for years and it will continue to be,” he said. His firm views products such as femtocells as an additive rather than a threat to tower growth.
