Crown Castle’s Gain is T-Mobile’s Gain

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Houston based Crown Castle International Corp. (NYSE: CCI) has successfully acquired the rights to operate T-Mobile USA’s 7,200 towers for $2.4 billion. According to the agreement, Crown Castle will have exclusive operational and leasing rights over T-Mobile’s towers for 28 years with the option of a complete buyout at the end of the lease for another $2.4 billion which can be paid over a period of 36 years. This also confirms that Deutsche Telekom,, the parent of T-Mobile, is going to stick it out in the American market for the long haul and sees an opportunity to compete meaningfully with the leaders Verizon and AT&TTo do that DT/T-Mobile needed the cash to upgrade its network and this deal will help them get there.

The deal looks like a win-win for both T-Mobile and Crown Castle, as the former will get the cash it needs for expansion and the latter will expand its network by one-third in high value metro areas using just 12.8% of its market value to do so.

Crown Castle is looking to compete with its bigger rival American Tower Corp (NYSE: AMT).  In its second quarter, the company’s revenues increased 5.8% sequentially and 17% YoY to $585.5 million, while net income jumped 131% sequentially and 276% YoY to $116 million, although the surge in profits was largely due to a tax benefit. Operational income remained flat sequentially but increased by 17% YoY to $195.5 million. The company has also raised its year-end earnings estimate from $0.63 - $0.89 to $0.71 - $0.96. The increase in revenues was due to the company’s expansion strategy, which included a $1 billion acquisition of NextG Networks in April and the increased use of smartphones, tablets and 4G/LTE networks.

AMT, on the other hand, posted an EPS of $0.12 against the expected $0.40 as its profits fell by 78% sequentially and 58% YoY to $48 million. However, revenues increased 17% YoY to $697.8 million, thereby maintaining it double-digit revenue growth record for more than two years. The decline was largely because of the one-off foreign currency losses of $118.6 million realized in this period.

<table> <tbody> <tr> <td> </td> <td> <p><strong>CCI</strong></p> </td> <td> <p><strong>AMT</strong></p> </td> <td> <p><strong>PCS</strong></p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>4.3%</p> </td> <td> <p>5.7%</p> </td> <td> <p>5.4%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>9.6%</p> </td> <td> <p>11.9%</p> </td> <td> <p>11.3%</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>73.0</p> </td> <td> <p>62.6</p> </td> <td> <p>13.8</p> </td> </tr> <tr> <td> <p><strong>Div</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>0.92</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>1.30%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Beta</strong></p> </td> <td> <p>0.59</p> </td> <td> <p>0.23</p> </td> <td> <p>1.42</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>0.88</p> </td> <td> <p>1.15</p> </td> <td> <p>0.90</p> </td> </tr> </tbody> </table>

2012 has been particularly good for Crown Castle, as its shares have been up 43.75% since January while it was also added to the S&P 500 earlier this year, outperforming the SPDR S&P 500 ETF, which is up 14.7% YTD. The company’s revenue streams are also considered fairly reliable. Most of its earnings (70%) are generated from four leading US mobile phone service providers: AT&T, Verizon, Sprint Nextel and T-Mobile. Crown Castle also has operations in Australia.

AMT, on the other hand, is much more diversified with revenues coming from the US, Latin America, India and South Africa. Therefore AMT is better positioned in emerging market growth, but it will have to deal with the volatility. Crown Castle relies on fewer but bigger clients, mainly located in the U.S., and being valued as a growth stock at a P/E 73 in a market that is rapidly becoming mature in terms of smartphone penetration should give one pause.

However, the current T-Mobile deal will go a long way in improving Crown Castle’s network quality and coverage, the key area of competition and will further reaffirm its foothold in the US market. AMT has so far not announced any acquisition plans, but it is expanding at the rate of 2,000 towers a year and has planned to touch 15,000 towers from the current 10,000 until 2015. The current strategy is to go deeper in the Southern Asian markets, particularly India. 


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