OT Story on wireless tower companies.
=DJ Wireless Tower Companies Shine Amid Telecom Malaise
(This article was originally published Wednesday)
By Dena Aubin
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--That sound you hear is the buzz in the
high-yield bond market swirling around the wireless tower sector.
While much of the once-favored telecom universe has been losing its
firepower, bonds of companies that build towers for cellular, paging
and mobile radio services have been on a tear over the past year.
"It's a play on innovation and all the wireless technologies we've
been seeing, but not necessarily hitching to one in particular," said
Stephen Weiss, a high-yield analyst who covers the sector for Bear
Stearns & Co.
Among the best high-yield performers: Pinnacle Holdings Inc. (BIGT)
and SBA Communications Corp. (SBAC), whose bond prices have surged
from the mid-50s a year ago to the 70s currently.
Pinnacle's 10% discount notes, for example, were trading at 54 1/2
in August a year ago and have advanced to 72 now. Yield spreads
meanwhile tightened from 7.75 percentage points over Treasurys a year
ago to 5.30 percentage points this week.
SBA's 12% senior discount notes have soared from a price of 54 to 75
since last August, while yield margins tightened from about 9.0
percentage points over Treasurys to about 5.9 percentage points now.
High-Octane Real Estate
Towers are the backbone of the wireless universe, transmitting cell
phone calls, wireless Internet and paging messages across the
airwaves.
By investing in the tower business instead of the wireless companies
themselves, bondholders in essence have a form of high-octane real
estate - a wireless telecom play with hard assets, notes Jim
Kourkoulakos, senior analyst for OppenheimerFunds Inc.
"Anything that's wireless is going to require equipment and antenna
space to put that equipment on," said Kourkoulakos.
With the growth of wireless voice communication and a so-called 3G
or third-generation broadband wireless network coming on line in the
next few years, "tower companies are one of the winners," said
Kourkoulakos.
Companies that operate towers didn't look like a slam dunk two years
ago, when they began showering the junk bond market with debt after
buying towers at steep prices.
But several quarters of positive performance have shored up investor
confidence that demand for tower space will generate ample cash-flow
and boost overall margins, analysts say.
"This is a backdoor way to play the growth of wireless and get into
a business model that's very high-margin," said Brian Hessel, a
high-yield portfolio manager for J. & W. Seligman & Co., New York.
Unlike wireless companies themselves, tower companies have minimal
maintenance and operating expenses. Just one tenant can pay for the
cost of a tower, meaning rent from each additional tenant drops
straight to the bottom line.
And adding tenants should be no problem.
Demand has been exploding for technologies that use towers -
cellular phones, PCS services, paging and SMR (specialized mobile
radio). And community opposition has made it difficult to build new
towers, ensuring plenty of business for existing companies.
Though towers have been around for years, in the past most were
owned by wireless companies themselves. But wireless carriers have
been getting out of the tower business, a time-consuming chore that
distracts from their core pursuits.
Easy Money May Be Over
SBC Communications Inc. (SBC), for example, last week announced that
it's selling the leasing rights to 3,900 of its towers to SpectraSite
Holdings Inc. (SITE) for $1.3 billion, a deal that will make
SpectraSite the largest tower operator in the country.
And because SpectraSite can sublease the towers to other wireless
companies, it stands to earn a healthy return on its investment.
"There are a lot of deals like that still out there," said Hessel of
J. & W. Seligman. "Economically, everyone wins. The tower operator
earns a nice return on invested capital and the wireless company gets
to outsource this noncore business."
One drawback to the sector is that the easy money may be a thing of
the past.
"My overall sense is that the market's grown more efficient and the
returns going forward are not going to be what they were over the last
year," said Bear Stearns' Weiss.
Tower companies also are still a long way from de-leveraging and
seeing improved credit ratings, Weiss said. Indeed, both Moody's
Investors Service and Standard & Poor's Corp. placed SpectraSite on
watch for a possible downgrade, pending details on how the company
will finance its purchase of SBC leasing rights.
But Hessel believes if SpectraSite uses an appropriate mix of debt
and equity, its ratings shouldn't be harmed.
"It's still a pretty good sector to have involvement in, and you can
probably do well buying new issues," said Bear Stearns' Weiss. That's
because new issues tend to come to market at a discount and trade up
in the secondary market.
No new deals have been announced, but analysts expect more issuance
from the sector later this year.
"There's still going to be a pretty strong appetite for capital and
the high-yield market will probably have a pretty solid role, as it
has in the past, in helping these companies finance themselves," said
Weiss.
-By Dena Aubin, Dow Jones Newswires; 201-938-2189
dena.aubin@dowjones.com
(END) DOW JONES NEWS 08-31-00
08:15 AM
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