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>The divestiture of towers by telcos, meanwhile, has helped to create a rapidly expanding industry of independent tower owners. Today, the nation’s five major players own 45% of towers in the United States: Crown Castle (TWRS), American Tower Systems (AMT), SBA Communications (SBAC), Pinnacle Systems (BIGT) and now, SpectraSite.
Admittedly, what these companies actually do can sound less-than-dynamic. For the most part, they simply own and maintain hunks of steel and metal of various sizes, shapes and locations. But investors, take note: Analysts say the business is a lucrative one that’s only getting bigger.
Nothing but growth
“You might ask, why would I want to own something the carriers don’t want to own?” said Johnson Rice analyst William Burns. “Well, think about it. A tower operator buys a tower with a carrier already on it, and generally that carrier is a great tenant with a long-term lease that provides steady cash-flow with almost no turnover. Then, ground leases, taxes, insurance don’t change. These are nearly all fixed costs," Burns explained. "Once the operator starts adding second, third and fourth tenants, it’s all profit.”
According to Burns, who has buy ratings on Pinnacle and Crown Castle, tower revenue growth should accelerate as carriers continue offering new services and technologies that need to be online as quickly as possible. The zoning environment continues to create some barriers to entry, co-location rates are increasing, and with the growing demand, there appears to be no downward pressure on leasing rates.
“With the current emphasis on increasing tenants not prices, future pricing opportunities exist,” Burns said. “The new wireless applications and technologies expected to enter the market will create opportunities as old lease space can be released under improved terms. The need for the tower space will remain regardless of the competition among technologies or companies. As acquisition decreases in importance, operational efficiency will become the focus in the future.”
Crown Castle owns 11,400 towers in the United States, the UK and Australia. American Tower owns about 10,700 towers in the United States, Canada and Mexico. Pinnacle Tower has about half as many; however, the company, which purchased many of its towers from Motorola (MOT), has found a niche in wireless radio access, and has a high-margin business in leasing space to carriers. SBA Communications is the smallest of the bunch, with just over 1,700 towers, but in very carefully chosen, key metropolitan locations. The company also builds many towers on its own.
SpectraSite’s purchase puts it head-to-head with American Tower and Crown Castle, said Burns. In addition to premium metro locations, each of the towers it purchased has an average capacity of 3.75 tenants, which could represent the potential for extremely attractive recurring revenue. “The most important factors are tower location and capacity,” Burns said.
Wachovia Securites analyst Kip Rupp agreed, though he would also encourage investors to take a look at the services that tower operators offer. “These are real-estate plays to some extent,” Rupp said. “Good towers in good market areas are critical. But that’s not the only factor to look at. This is very much an outsourcing game. Some of these companies offer tower services that make them more competitive, such as project management and tower building. These services are designed to fit the needs of the carriers these tower companies are competing to do business with.”
Rupp told America-iNvest.com that he has strong buy ratings on Pinnacle and Crown Castle, long-term buys on SBA Communications and SpectraSite, and a neutral on American Tower.
More to come
Though thousands of towers have been sold off by the telcos, there are still many possible assets to enter the market: AT&T (T), for instance, owns some 5,000 towers, but analysts say the company isn't likely to sell them anytime soon. Sprint (FON) meanwhile, is keeping its towers, though they're managed separately and, some say, may be spun off in the future.
The majority, however, have decided they would rather earmark the cash spent on maintaining these towers for other important growth activities, such as marketing or expanding overseas operations. Over the last year and a half, Bell Atlantic, GTE (now Verizon (VZ)), Powertel (PTEL) and Airtouch have also sold off their towers.
On news of its tower sale to SpectraSite, SBC Communications saw its shares climb 3% to 42 7/16 Monday. Many analysts believe the decision to sell its towers will free up cash it can use to beef up any of several major projects the company has in the works.
SBC is working on the three-year roll-out of “Project Pronto,” for instance, in which the company plans to provide technologically advanced DSL services on a broad basis by 2003. The company hopes to hit its target of 1 million DSL subscribers by year-end. SBC could also use the cash for a wireless venture it has planned with BellSouth (BLS).
Legg Mason analyst Timm Bechter is among 15 analysts who maintain strong buy ratings on the stock. “We consider SBC a core holding,” he told America-iNvest.com. His firm has a $64 price target on the shares.
Meanwhile, the companies that own and operate communications towers continue to grow as more and more towers are put up for sale and new ones are installed. While there are 60,000 towers in the United States right now, there are nearly as many in the western part of Germany.
How fast could the tower industry grow? “As fast as the communications industry grows,” said Johnson Rice’s Burns. “We are still a year-and-a-half away from Europe in terms of wireless phone adoption. There is clearly a very long way to go.” |
