The business of owning telecommunications towers has so many good points that Ric Prentiss said he has never found a business as good. The head of telecom services research and an analyst at Raymond James & Associates, Prentiss spoke at the Connectivity Expo conducted by the Wireless Infrastructure Association on May 22 in a session about the investment outlook for towers and infrastructure. Prentiss said the common occurrence of owners selling all of their towers and then reentering the business is one indicator among many of how good the tower business is.
“We see guys and gals in this industry that hit a nice payday and get right back in it,” he said. “Why? Usually, you see people make money and then they go after their boats and other stuff. But tower people get right back into the tower business because it’s a good business with a growth rate that says towers are great assets. The question I always ask is: But what will you pay for it?”
Prentiss said he downgraded his recommendations for some of the tower stocks a year ago because he anticipated some possibilities that could be disruptive for tower companies, such as an attempt by Sprint and T-Mobile US to merge.
It also is important for investors to ask what exactly are they buying when they buy shares in the tower companies, Prentiss said. He said some companies are not all-tower companies anymore. Some have foreign assets with multiples that differ from their U.S. assets. Some own fiber-optic cable, small cells and distributed antenna systems. Foreign investments include assets in Latin America, India and Africa.
People on the finance side of the business look at discounted cash flows, Prentiss said. For the terminal value growth rate, it is important to look at cash, he said.
“You have to look at consolidated versus proportion of ownership,” Prentiss said. “You have to look at what is prepaid rent amortization. Is it real cash that is ever going to be paid again? You have to look at final purchase options and ask: What is really the discounted cash flow out here? As I have said, it is a good business, the best I have ever seen. But you want to be selective about when you buy it and what you pay for it.”
The Effect of 5G
In future years, Prentiss said, he expects 5G wireless communications networks to offer a cornucopia of services. He gave as examples augmented reality (AR), virtual reality (VR), the autonomous vehicle (AV), the smart city (SC) and tele-health (TH).
“1G was voice; 2G was texting; 3G was data; 4G was video; and 5G is going to be all the above, along with other technologies,” Prentiss said. “It is going to be difficult to pigeonhole into any one item, which is why people have a difficult time figuring out what the use cases are.” Use cases are descriptions of how a business is used by customers and partners.
Although 5G will offer higher data speeds, Prentiss raised the question of whether the internet of things (IoT) needs a network with higher speed. He said it does not; it merely has the potential of connecting billions of devices.
For Prentiss, the shape of some of the 5G activity depends on the shape of net neutrality, the principle that internet service providers should enable access to all content and applications regardless of the source, and without favoring or blocking particular products or websites. He gave net neutrality credit for increasing how much money Facebook, Apple, Amazon, Netflix and Google (FAANG) made with the use of 4G network services.
“The wireless carriers spent the money on the network, and FAANG got all the revenue,” Prentiss said. “That’s why net neutrality coming apart under Obama was changing things to say, ‘Let us get some of the revenue.’ We’ll see what happens in mid-term elections. It’s going to be a huge item. We’ve seen the U.S. Senate vote on it. It’s going to be an issue in the presidential elections, when that comes up again. And that will lead into who is building networks and who will get the return on it. Right now, we cannot answer who will get the return because we don’t know what the law of the land is going to be.”
Turning to what 5G will mean for radio-frequency (RF) spectrum use, Prentiss said he doesn’t believe any one frequency band will be used for 5G. “T-Mobile clearly has said they’re going to use 600 MHz,” he said. “That’s as low as you can get, almost, unless you want to listen to radio. It’s pretty darn low. Why? Because it’s available, it’s clean, it covers a lot of the country, and they have it available. I think they’ll reuse 3G spectrum as we turn off 3G and deploy 5G. So 3G spectrum will get repurposed.”
Towers are good places for 600-MHz equipment and for frequencies as high as 4 GHz, Prentice said. He said towers are not as good for millimeter-wave frequencies that have short range. Instead, he suggested millimeter-wave frequencies might be used indoors with distributed antenna systems.
With TV broadcasting in decline, in Prentiss’ view, he suggested a portion RF spectrum from 37 GHz to 42 GHz that now serves the satellite broadcasting service might be reallocated for wireless communications, perhaps 100 to 200 megahertz of it. He said the wireless communications business needs to secure as much spectrum in as many frequency bands as it can.
About the proposed merger of Sprint and T-Mobile, Prentiss said he put the probability of government approval at 65 percent. He said the companies have done a good job of articulating why the merger should be approved. The companies played the China card, as Prentiss put it, and he said that was brilliant.
“They came out and said, ‘We need the United States to lead the world in 5G. We cannot give that up to China and South Korea.”
Prentiss recalled that in January, a government presentation advanced the idea that the government should nationalize 5G, taking it way from the carriers and instead having the government build and maintain the 5G network. “In any administration, that’s crazy,” he said. “In a Republican administration, it’s absolutely crazy, and it was debunked pretty quickly by both political parties. But the kernel of truth within the idea was the fear of China and what can you do if you make the infrastructure — the handset, the devices, and the network — 5G-enabled for IoT and everything else? How many IP trade secrets are you going to be able to grab? So China was a surprise to me, that they played that card. That was a change from six months ago.”
A second reason the companies articulated to approve the merger was the increase in synergy the deal represented, thanks to the Tax Cuts and Jobs Act, Prentiss said. He reported that the companies indicated the synergy increased from $37 billion to $43 billion. The companies said the difference can be rolled into making their combined network better, Prentiss added.
“Those are the two things — China and the synergies — that convinced me to put the probability higher than 50-50, and that was a change from six months ago,” Prentiss said.
The merger partners also will try to define the competitive universe as something besides mobile wireless communications service, and instead include all forms of broadband service, Prentiss said. Along with mobile wireless, that means fixed and satellite service. He said AT&T Mobility and Verizon Wireless are rolling out 5G, and it will take the form of fixed wireless first. Thus, he said Sprint and T-Mobile can say to the U.S. Department of Justice (DOJ) that the merger is not about wireless going from four to three. Prentiss said they would tell the DOJ that cable companies are in it, too, and other companies are getting into providing broadband service.
A Political Battle
Next, Prentiss addressed the politics involved with the merger, with the Trump administration possibly guiding the staff in its view of the relevant universe. He said some long-serving regulatory specialists said they were shocked to see how politicized the FCC and the DOJ had become during President Barack Obama’s second term.
“Usually there was a little band that you would operate in, swinging left to right,” Prentiss said. “But under Obama, in his second term, the swing was so hard. At the time, they (the regulatory specialists) said that it could swing as far back the other way if we get a Republican in. And that’s how it may be shaping up. This is going to be much more of a political battle than just a staff battle.”
Some aspects of the merge could be negotiated to obtain government approval, Prentiss said, including pricing agreements, divesting RF spectrum and divesting prepaid brands, such as Boost.
“Those are some of the reasons why we believe the companies are being smart about the merger,” Prentiss said. “I don’t believe Sprint and T-Mobile believe merger approval is a given. I believe they’re saying, ‘Let’s take a shot. If we have a shot, let’s take a shot at it. If it doesn’t work, we’re on our own. But let’s take a shot.’”
Prentiss said that meanwhile, Sprint and T-Mobile will continue spending to improve their networks up to an amount previously announced as $10 billion to $11 billion. He said that is good news for tower companies leading up to a potential merger closing, and still good for tower companies whether or not the merger closes 12 to 18 months from now.
“What if you assume the deal closes in 2019?” Prentiss asked. “In the following three years, 2020 to 2022, the combined company will raise its spending with tower companies because they will not turn off anything at antenna sites until they put all the Sprint and Clearwire frequencies on T-Mobile sites and all the T-Mobile frequencies on the Sprint sites that they are going to keep.”
Similar to what Prentiss said he saw in the Sprint-Nextel Network Vision construction days, tower companies could expect to see a bubble of spending during the first two to three years after the merger closes, if it is approved. He said the worry could come in years 4, 5 and 6 after the merger, when the company begins partial or full decommissioning at sites.
“It will be an interesting dynamic for tower guys who run through the finish line, work like heck to get the network ready to be decommissioned, and then decommission it,” Prentiss said. “We could see a bubble-up and then a pull-down or the tower companies could negotiate through it. Net-net, I believe the merged company will spend some more money in the post-integration or post-approval process to fix the networks and get ready.”
Executive Editor and Associate Publisher
Don Bishop joined AGL Media Group in 2004. He helped to launch and was the founding editor of AGL Magazine, the AGL Bulletinemail newsletter (now AGL eDigest) and DAS and Small Cells magazine (now AGL Small Cell Magazine). He served as host for AGL Conferences from 2010 to 2012, appearing at 12 conferences. Bishop writes and otherwise obtains editorial content published in AGL Magazine, AGL eDigest and the AGL Media Group website. Bishop also photographs and films conferences and conventions. Many of his photographs have appeared on the cover, in articles and in the “AGL Tower of the Month” center spread photo feature in AGL Magazine. During his time with Wiesner Publishing, Primedia Business Information and AGL Media Group, he helped to launch several magazines and edited or managed editorial departments for a dozen magazines and their associated websites, newsletters and live event coverage. He is a former property manager, radio station owner and CEO of a broadcast engineering consulting firm. He was elected a Fellow of the Radio Club of America in 1988, received its Presidents Award in 1993, and served on its board of directors for nine years. Don Bishop may be contacted at: firstname.lastname@example.org.
The next Connectivity Expo is set for May 20–23 in Orlando, Florida.