Battle of the Towers
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SBA Communications (NASDAQ: SBAC) has been steadily climbing the pricing ladder since the market low in 2009, which in itself was a blip of a larger bullish trend that kicked off in 2003. The company owns and operates wireless communications towers in the U.S., Canada and Central America. It competes with larger competitors American Tower Corporation (NYSE: AMT) and Crown Castle International (NYSE: CCI). Its smaller size leaves it disadvantaged when it comes to its debt burden, carrying a negative outlook on its debt rating from Moody's following its announcement to acquire over 3,000 cell tower sites from TowerCo for $1.45 billion. The deal brings the company's total tower count to over 15,000, following an earlier deal for 2,300 towers from Mobilitie LLC in February.
The 'land grab' for towers has been driven by the increased demand for mobile data from the ever data-hungry tablets and smartphones. Both American Tower and Crown Castle are sniffing at the 7,000 U.S. towers T-Mobile are looking to sell. Both of these companies recently secured small deals; American Tower adding to its 45,000 (21,000 in U.S.) towers with a $500 million deal with Telefonica's Mexican unit for an additional 2,500 towers and Crown Castle's acquisition of NextG Networks helped expand its tower coverage to 24,700 (22,000 in U.S.). However, given the debt status of SBA Communications it's unlikely to join the biding process for the T-Mobile towers.
The TowerCo deal is expected to add $155-160 million in leasing revenue and $93-95 million in cash flow. This should provide a substantial boost to the $698 million revenue earned in 2011 and the $723 million projected for 2012; a 20% increase. While the gain is unlikely to see the stock profitable for the next few quarters (at the very least), increased revenue will contribute to the improved earnings trend, raising EPS from a loss of -$0.34 in Q2 2010 to the current -$0.20 loss in Q1 2012. Estimates don't anticipate profitability until the latter part of 2013, which means the company will have to be deft in its handling of its debt to keep itself afloat.
The debt concern is more immediate. SBA Communication's total debt of $3.6 billion has to be serviced from an operating cash flow of $262 million (13.7 ratio). This is compared to American Tower's $7.3 billion debt and $1.3 billion cash flow (5.6 ratio) and Crown Castle's $8.4 billion debt serviced from $678 million operating cash flow (12.4 ratio). Crown Castle's current debt burden may be enough to rule it out of the running for the T-Mobile deal. As the 'middle child' of the three companies with a business model tied heavily to the U.S. it will stand most to lose if the T-Mobile deal goes to American Tower.
While the short-term picture suggests SBA Communications is the one under the most pressure, it could be Crown Castle that ultimately feels the heat. Crown Castle has managed to maintain relatively stable (and positive) earnings since Q4 2010, but it has also failed to generate any discernible growth in its earnings per share. If it misses out on the T-Mobile deal it may find itself increasingly squeezed by the larger American Tower, offering SBA Communications an opportunity to fill the gap at its expense. American Tower is the logical beneficiary in the near term, but it has a checkered (although positive) earnings history. Assuming it wins the T-Mobile deal it will see its debt burden substantially increase. The increased debt burden will pressure earnings and maintain its erratic earnings performance. SBA Communications' smaller footprint may allow it to blossom while its competitors go stale.
While each of these companies is vulnerable to loss of a client, given the business and infrastructure costs to change providers is high, it's unlikely any of these telecommunication providers will be hit by a loss of a major client . Therefore, the winner going forward will be the company that can best handle its debt. American Tower may hold the advantage now, but SBA Communications could be the one to (indirectly) benefit most once the T-Mobile deal is concluded.
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