December 2, 2014 — Zayo Group, whose 81,000 route miles of dense metro and intercity fiber assets provide the backbone for cell tower backhaul, DAS and small cells, raised $400 million in an initial public offering last month. The stock, which debuted at $19 a share, is trading at more than $26 at this writing.
“It’s not just towers that people are excited about. Investor appetite is really strong for other facets of communications infrastructure,” said Marc Ganzi, CEO, Digital Bridge Holdings. “The Zayo IPO, which was extremely successful, was a strong signal that there is depth beyond towers in the comm infrastructure, permeating other asset classes, whether it is fiber or data center developers.”
Wells Fargo initiated coverage of Zayo Group Holdings with an outperform rating and $30 to $32 valuation range.
“Our positive thesis very much centers around the theme of the need for bandwidth infrastructure. We believe we are in the early stages of this demand — on both the wireline and wireless side,” wrote Jennifer Fritzsche, Wells Fargo senior analyst. “The fiber industry is one of dynamic change and growth. For Zayo specifically, we see many catalysts that will continue to drive revenue growth, including increasing demand for dark fiber, the early stage of small cell development and continued growth in wireless and wireline data traffic.”
Zayo’s dark fiber segment generates high-margin, recurring-revenue streams secured by longer-term contracts, and it has enough scale to create high barriers to entry for competition.
“Investors really crave the safety and the yield that comes from long-term contracted cash flows from investment-grade carriers,” Ganzi said. “It is a story that transcends towers and is now permeating other asset classes, whether it is fiber, data centers or small cells.”
Zayo has placed a greater emphasis on selling dark fiber compared with its competitors, which Fritzsche believes differentiates Zayo’s position as fiber-to-the-tower contracts come up for expiration.
“Dark fiber to the tower (FTTT) has a long runway for growth. While the initial FTTT rollout by carriers appears to be in later stages, Zayo sees growth opportunities in dark FTTT, with carriers signing dark fiber contracts for its scale and control benefits,” Fritzsche wrote
Fritzsche also thinks fiber backhaul will play a key role in providing small cell backhaul and that Zayo is more focused on opportunity than its rival, Level 3 Communications.
J. Sharpe Smith is the editor of AGL Link and AGL Small Cell Link newsletters.
October 16, 2014 – The timing, really, could not be worse. Unless you are a stockholder, of course. In the middle of performing due diligence and possibly raising debt and equity for a bid on Verizon’s towers, Crown Castle is facing tension among its investors.
Activist investor Corvex Management, which owns a $1 billion stake in the tower company, has told the tower company it must “correct its capital allocation plan” and reduce its cost of capital before it bids on the 12,000 tower portfolio.
In a letter to shareholders, the investment advisor said Crown Castle would be the best positioned bidder from a strategic standpoint but not from financial point of view, because its stock price is depressed.
“We believe Crown Castle’s current capital structure and capital allocation plans taken together are sub-optimal, and that the combination of de-levering the balance sheet while maintaining an artificially low payout ratio has pressured the company’s valuation and led to Crown Castle trading at a discount to its peers,” Corvex wrote.
To improve its valuation, the tower owner should either begin paying more than $4 a share in quarterly dividends or pay $1.60 per share in dividends combined with ongoing buybacks, according to Corvex. These capital allocation changes would drive a 27 percent re-rating of equity in the short term and possibly a 60 percent improve in the long term, the investor asserts.
“Once the company’s equity currency has strengthened, Crown Castle can aggressively pursue a Verizon towers transaction, creating even greater long-term value for shareholders. However, if the company does not have the right cost of capital, it should not be pursuing acquisitions or issuing equity, whether for Verizon’s towers or any other transaction,” Corvex wrote.
Corvex believes “excessive equity funding” was used by Crown Castle last year in its purchase of AT&T’s Towers for the “relatively high price” of $4.85 billion for 9,700 sites.
“It is critical that the company avoid a similar stumble in any potential Verizon transaction,” Corvex wrote.
Corvex noted that a higher payout ratio would increase Crown Castle’s appeal to REIT investors, while also attracting yield-oriented investors.
Jennifer Fritzsche, senior analyst, Wells Fargo Securities, expects Corvex’s letter and the two options to be well received by shareholders.
“We believe the shift toward increasing its payout ratio, coupled with the recurring nature of its dividend secured by the Big 4 wireless carriers, would be viewed positively by yield investors,” she wrote.
Crown Castle acknowledged that it had received the Corvex letter and said the tower company plans to address capital allocation policy, including dividends, on its 2014 third quarter earnings call scheduled for October 31, 2014.
“We receive input from many of our shareholders on a regular basis, and we welcome the dialogue and perspective,” Ben Moreland, Crown Castle president and CEO, said in a prepared statement. “Over the last decade, we have returned more than $3 billion in capital to shareholders through share purchases and dividends. We continually review our capital allocation strategy and consider all input from our shareholders as we aim to create long-term shareholder value.”
September 19, 2014 — Recent estimates of 1 percent cell site growth in a CTIA survey may seem underwhelming, but to understand the health of the tower industry you should look at the revenue per cell site, which is going up at a muscular pace with both amendments and collocations increasing, according to Jennifer Fritzsche, managing director in the Equity Research department at Wells Fargo Securities.
Fritzsche gave the track chair address at the Tower and Small Cell Summit last week in Las Vegas, where she drilled down and shared her analysis of wireless infrastructure deployment activity at all four major carriers.
“While small cells will show a higher growth rate, we believe macrocells will continue to increase in absolute numbers,” Fritzsche said. “AT&T, when it announced Project Velocity IP in 2012, said it would add 10,000 macrocells. While Verizon has not confirmed it, it will have as much growth or more. It is the consistent spender in the industry.”
Verizon Wireless is well into its 4G network deployment with 308 million LTE POPs in the 700 MHz band, more than 500 markets with LTE coverage, and 76 percent of total data traffic on its 4G LTE network. But it’s not done yet.
“The Verizon Wireless CFO says don’t expect wireless capex to come down anytime soon, even though they are — quote-unquote — done with the LTE build out,” Fritzsche said.
“Verizon is known for the quality of its network,” Fritzsche said. “It has been very aggressive with its backhaul. Sources say they are aggressively deploying dark fiber to the cell sites, which gives them more control and they can light them up as they see the demand.”
Their future network plans are definitely focused on network densification, investing in small cells, DAS and in-building coverage. They plan to deploy LTE on 1700-MHz and 2100-MHz AWS spectrum, and their stated goal is to deploy VoLTE by the end of the year.
“Even Verizon’s LTE network covers more than 308 million LTE POPs [U.S. population equals 310 million], the Verizon CFO says the wireless capex will not come down any time soon, even though the LTE build out is completed. It speaks loudly to the densification that has yet to occur,” Fritzsche said.
AT&T has LTE coverage of 300 million in population on 700-MHz spectrum and more than 600 markets with 4G LTE coverage. Two-thirds of its postpaid smartphones are LTE-capable devices, and 84 percent of postpaid subs use a 4G-capable device.
In the future, the carrier plans to deploy LTE on Advanced Wireless Services and Wireless Communications Service (2.3 GHz) spectrum. It has already begun refarming the 1900-MHz Personal Communications Service spectrum. Additionally, it will begin rolling out LTE Advanced carrier aggregation technology later in 2014.
“There have been a lot of questions about the stops and starts of capital spending at AT&T,” Fritzsche said. “I think we have to look at the fact that they spent more than what was expected in the first half of this year. The guidance is for $21 billion in capex in 2014. To state the obvious, that is a huge number. I don’t see AT&T backing away from its investment in wireless or their commitment to their network.”
Sprint is catching up with the other carriers, with coverage of 255 million LTE POPs in 500 markets. A key part of its strategy is the deployment of Spark in major markets, using the old Clearwire spectrum at 2.5 GHz. The company has set its guidance for 100,000 POPs of 2.5-GHz Spark coverage by the end of 2014. It should complete to rollout LTE on 800-MHz spectrum by year-end 2015 and on 2.5 GHz over next 3 years.
“Sprint is my wild card company,” Fritzsche said. “The Network Vision deployment has been a hard slog for Sprint, but hopefully we are seeing the light at the end of the tunnel.”
The iPhone 6, which was announced during Super Mobility Week, is the first Apple handset to operate on 2.5 GHz and holds the key to unleashing the power of Network Vision, according to Fritzsche.
“With 2.5 GHz being the cornerstone of Sprint’s strategy, this phone is a really big deal. Essentially, Sprint can now move iPhone users from a 5×5 channel for LTE to multiple 20×20 channels. This is a game changer for Sprint,” she said.
Sprint also launched an unlimited data plan with no throttling for $50 a month and a leasing arrangement for $20 a month. The question is when there will be a network to back up that subscriber plan. Fritzsche called the plan “transformational.”
T-Mobile has 233 million LTE POPs on AWS spectrum, 325 markets with 4G LTE coverage and nationwide VoLTE coverage over 200 million POPs.
“You have to give T-Mobile credit, a lot of credit. I have learned that it is a mistake to bet against Neville Ray [T-Mobile CTO],” Fritzsche said. “Since the breakup of the AT&T merger and with rumors of a merger with Sprint flying back and forth, T-Mobile has quietly built a very good network. The MetroPCS merger has proven to be a very logical move.”
Future network plans for T-Mobile include covering 250 million LTE POPs by year-end 2014 and more than 280 million POPs by mid-2015. It has begun the 700-MHz A block rollout, and 60 percent of its MetroPCS spectrum needs to be re-farmed and integrated. Additionally, wideband LTE is being deployed on 15×15 and 20×20 channels.
“I don’t expect most of this deployment to be done until the end of next year, so maybe the iPhone 7 will be able to operate on T-Mobile’s spectrum in the 700-MHz A block,” Fritzsche said. “T-Mobile has the easiest spectrum position footprint, because it is not bringing in a really high band spectrum.”
Never mind the World Cup dominating the stage in Brazil, American Tower has claimed more turf in the largest country in South America, purchasing BR Towers, a Brazilian company with 2,530 towers and the rights to 2,110 additional towers for $978 million.
American Tower anticipates that the towers will generate $131 million in annual run rate revenues and $81 million in annual gross margin. The deal is expected to close in the fourth quarter of 2014.
Wells Fargo values the deal 12x tower cash flow and $210,000 per tower, and it increases American’s Brazil exposure by 69 percent. The buy adds to the 6,753 towers American already owns in the country. While some question the stability of the Brazilian economy and American’s expansion there, Wells Fargo takes a favorable view of the country.
What is most interesting to Wells Fargo analysts is that a large percentage, 60 percent, of the wireless infrastructure in Brazil is still 2G. There is also the promise of telecom expansion to handle the coming Olympics.
“With the coming of the Olympics in 2016 (and the not so smooth experience with the World Cup) we believe there will be a great sense of urgency by players to update the wireless infrastructure before this event,” Jennifer Fritsche, senior analyst wrote. “Clearly, towers would play a major role in this process. In our view, those tower companies that have a large foothold in the area are best positioned to capture much of this future spending.”
More Brazilian Action Coming?
The American Tower deal may not be all that is cooking. Bloomberg reported a rumor last week that as many as $4 billion in wireless assets are being sold in three different auction processes. In addition to BR Towers SA, Grupo TorreSur, owned by Providence Equity Partners LLC, and Tim Participacoes, the mobile-phone provider owned by Telecom Italia, may also be selling their towers.
By J. Sharpe Smith —
Even as a Sprint/T-Mobile merger appears more likely, the Spectrum Screen Order released by the FCC this week may cast some more doubt on the regulatory approval fortunes of the transaction.
The proceeding expounds on how competition between service providers is important to the pricing of service, technology innovation and infrastructure investment. Specifically, the FCC updated the spectrum screen that it uses in its competitive review of secondary market spectrum acquisitions to reflect the suitability and availability of spectrum.
“As expected the FCC changed the denominator calculation of the spectrum screen (and what bands are included in it) as well as offered some subtle (but seemingly very purposeful) language about the future M&A activity in the industry and how it would be evaluated in terms of spectrum ownership,” Jennifer Fritzsche, senior analyst, Wells Fargo, wrote in a published Equity Research note.
This new denominator is 446.5 megahertz of spectrum, which includes 90 megahertz of AWS-1, 40 megahertz of AWS-4, 10 megahertz of H Block; and 156.5 (of the 194) megahertz of spectrum in the 2.5 GHz band. The higher amount of 2.5 GHz spectrum is significant because it represents a 3X increase over the previous denominator, which was 55 megahertz. Why is 2.5 GHz spectrum so important? Sprint would have to divest its vast holdings of 2.5 GHz spectrum in order to couple with T-Mobile, and Verizon Wireless is the obvious buyer.
“We note this was something Verizon Wireless was especially passionate about getting included in this screen calculation — as it represents a real asset for Sprint,” Fritsche wrote.
The FCC created a spectrum reserve provision for the 600 MHz band and then stated it would revisit that decision if there are “significant changes in the marketplace structure affecting the top four nationwide providers and their spectrum holdings.”
“We believe this language is very purposeful and could signal the FCC’s displeasure with the possibility of a Sprint/T-Mobile merger,” Fritzsche wrote. “According to our regulatory legal experts, this language could indicate that if this transaction is filed, the FCC will disallow Sprint, T-Mobile, or both from bidding on the 600 MHz band spectrum reserved for all bidders except AT&T and Verizon Wireless.”
J. Sharpe Smith is senior editor, AGL Link.