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Sprint Merger with Leap Wireless or MetroPCS Makes Sense–RBC

RBC Capital Markets has released a report that a merger between Sprint and either Leap Wireless or MetroPCS is not only possible but makes sense. This is not the first time this has come up. In late February of this year, it was widely reported that Sprint’s board rejected a proposal to acquire MetroPCS for $8 billion in an all-stock transaction, because of the dilution to Sprint equity.

The key component that has changed since February is the outperformance of Sprint’s equity versus that of Leap or MetroPCS, which translates into less equity dilution in a stock-based transaction and more attractive EBITDA multiples, according to RBC.

“In light of Sprint shares’ significant outperformance versus Leap and PCS, we believe a bid for Leap or MetroPCS is a distinct possibility,” Jonathan Atkin, RBC analyst, wrote. Additionally, refinancing either the debt of Leap or MetroPCS has decreased by between $50 million and $60 million since February, RBC statistics show.

Either Leap Wireless or MetroPCS would be a good fit, because like Sprint, they are facilities-based wireless operators that use CDMA technology at 1.9 GHz.

“As such, an integration by Sprint of either company would entail minimal technical risk, require no handset migrations, and quite possibly drive top-line ARPU synergies, because of the elimination of a prepaid competitor, and churn improvement due to the elimination of a competitor as well as the likelihood that the acquired customers would find themselves with superior network quality and coverage,” Atkin wrote.

Atkin does not believe a merger would provide any conflicts with Sprint’s ongoing Network Vision project deployment. Additionally, a merger would most likely not receive pushback from federal antitrust regulators. In fact, Atkin noted, no other pairing between carriers makes any sense.

“[A merger of] Sprint/T-Mobile or a different national carrier (AT&T or T-Mobile) purchasing Leap or MetroPCS would be unrealistic given recent statements by company managements, technology incompatibilities and regulatory uncertainties,” Atkin wrote.

SBA Strikes Again! Gobbles Up TowerCo Towers

In its second major transaction of 2012, SBA Communications has purchased 3,252 tower sites from TowerCo for $1.45 billion. The acquisition gives SBA 16,238 towers, including more than 14,000 in the United States. The deal is expected to close in the fourth quarter.

SBA owned 10,524 towers at the end of 2011 before it purchased Mobilitie’s assets, which included 2,300 towers. With the two purchases, which total almost 5,600 towers, the firm has increased its inventory by about 50 percent.

“The acquisition of TowerCo on the heels of the Mobilitie acquisition demonstrates SBA’s ability to get these large transactions completed while dealing with numerous smaller transactions at the same time. That says a lot about the depth and capability of their M&A folks,” Thomas Engel, Milestone Media, told AGL Bulletin. “These transactions along with the potential sale of the T-Mobile towers and a couple of other large groups shows that the tower sector is continuing to consolidate at a very rapid pace. It appears that it is a very good time for smaller tower operators to avail themselves of this opportunity and take advantage of the ‘seller’s market.’”

SBA projects that the TowerCo assets will produce $155 million to $160 million in leasing revenue. Additionally, the assets are expected to produce between $93 million to $95 million in tower cash flow for the full calendar year 2013.

“We feel strongly about our ability to integrate TowerCo’s assets. We expect smooth, quick and efficient integration of their towers into our portfolio,” said Brendan Cavanagh, chief financial officer, during a conference call.

TowerCo’s portfolio includes towers purchased from Sprint in 2008. While a substantial portion of the Sprint towers use CDMA, there is also a fair amount of iDEN revenue that SBA looked at warily while considering the purchase.

“Based on our due diligence, we were able to understand and underwrite this transaction assuming the worst case decommissioning scenario concerning iDEN,” Cavanagh said.

TowerCo had cut a deal with Sprint as part of the Network Vision where Sprint only has the option to decommission towers only at two times in 2015 and 2018. The worst case scenario would provide a $14 million hit to tower cash flow. In the interim, iDEN will bring in $100 million in iDEN revenue.

The blockbuster tower deal was the result of a long time, trusted business relationship between Jeffrey Stoops, SBA president and CEO and Richard Burns, TowerCo president.

“When Richard Burns approached us about whether we had an interest in acquiring TowerCo, the immediate answer was yes,” Stoops said. “We have been buying towers from Richard for years, most recently in 2008. Given our close working relationship, we know that these towers are in great shape, from legal, operational and physical perspectives.”

Stoops called the TowerCo assets a rare opportunity to increase the size of SBA’s U. S. holdings, a market he still believes in.

“While we have enjoyed tremendous success internationally, we believe the U.S. market is the best in the world operationally,” Stoops said. “This transaction sits firmly within that perspective.”

All of TowerCo’s assets qualify for REIT status, which is important with SBA planning on converting to real estate investment trust status, Stoops said.

Similar to the Mobilitie towers that SBA purchased earlier this year, 67.3 percent of the sites are located in the top 50 BTAs and 78.5 percent are in the top 100 markets. The sites feature an average of 1.8 tenants per tower with an average additional capacity of two tenants per tower. The average remaining years on the ground leases is 20 years, including options.

SBA’s Sprint customer concentration will increase from 23 percent to27 percent, because of the purchase. AT&T accounts for 20 percent; T-Mobile, 15 percent; and Verizon Wireless, 12 percent.

Stoops was asked by one analyst whether the possibility of a T-Mobile/Sprint merger weighed on the purchase of the towers.

“We carefully looked at the amount of T-Mobile/Sprint CDMA overlap in our combined portfolios, and the possibility of churn in the event of a merger. It would equal $42 million in revenue. Most of the shorter leases will be T-Mobile,” Stoops said. “There are some that believe it is going to happen. I personally don’t think it is going to happen, but we looked at it carefully.”

Unlike after the Mobilitie transaction, where SBA wanted to position itself for another major U.S. purchase, SBA does not expect to issue any more equity to speed deleveraging. Instead, it secured a two-year bridge facility in connection with the TowerCo purchase that will give it extra time to refinance.

With the carriers currently consumed with 4G amendment activity, SBA set conservative lease up assumptions on the TowerCo assets for next several years.

Beyond the balance sheets, Ted Abrams, an engineering consultant who provides services to TowerCo, said the mood was somber among the TowerCo employees that he shares office space with in Cary, N.C. after the announcement of the sale.

“The nature of the tower developer business is to build a tower portfolio and keep it at the highest value you can. The price got high enough and the timing was right [so they sold],” Abrams said. “At the staff level it is painful. For me it is sad because the TowerCo culture is a remnant of the SpectraSite culture, which I always enjoyed.”