Wireless-Tower Outfits: Rising High


By Olga Kharif For years, the prospects of American Tower (AMT) looked about as exciting as the fake palm trees that camouflage the cell-phone towers it rents out and develops for wireless carriers. The Boston-based company, which primarily leases sites to service providers for the routing of cellular calls, has had its share of red ink and accumulated plenty of debt.

But the company should turn a corner on Aug. 3. That's when shareholders of American Tower and rival SpectraSite (SSI) will vote on the companies' proposed merger, designed to create the wireless-tower industry's largest player, managing some 22,600 sites across the U.S. If the deal is approved, as is expected, the new company, to be called American Tower, should enjoy substantial economies of scale. And thanks to SpectraSite's higher credit rating, the merged entity will also have access to lower-cost capital, says Jonathan Atkin, an analyst with RBC Capital Markets.

The deal will have broader significance. When it closes, the $5 billion tower industry will have consolidated around four large players -- American Tower, Crown Castle International (CCI), SBA Communications (SBAC), and Global Signal (GSL), which control 40% of the approximately 120,000 cell-phone towers across the U.S. Facing less competition than they have in years, these players could reap vastly increasing revenues by helping their service-provider clients offer new services ranging from high-speed cellular to mobile TV.

OUT OF THE RED. The tower companies could prove to be lucrative for investors, too, as long as shareholders are willing to look beyond the short term. Most wireless companies are reporting losses today because of huge amortization and depreciation charges they incur on their tower assets.

Take American Tower. On July 28, it reported a second-quarter loss of $31.8 million, or 14 cents a share, while analysts expected a loss of 8 cents a share. The reason: a greater-than-expected payment on debt, says Seth Potter, an analyst with Punk, Ziegel & Co. Much on the basis of that news, the share price rose 4.5%, to $23, by the day's close.

American Tower has continued to generate plenty of cash from operations: $165 million in the six months ended June 30 of this year. That's 56% more than it generated in the same period of 2004. American Tower is expected to become profitable on an annual basis by 2006, according to analysts polled by Thomson One.

HIGH STABILITY. Investors are beginning to take notice. Shares of the four wireless-tower leaders are up as much as 65% since the beginning of the year. "The fundamentals in the tower industry are favorable to those companies," says Michael Mahoney, portfolio manager with hedge fund EGM Capital in San Francisco. American Tower's shares could rise another 40%, to $30, by the end of 2006, while Crown Castle's stock could hit $27, up from $21.76 at the close on July 29, estimates Jim Ballan, an analyst with Bear Stearns.

Meanwhile, venture capitalists are starting to give the industry a second look, too. "Private-equity firms are starting to express a lot more interest in towers," says Mitch Mitchell, a vice-president at consultancy A.T. Kearney.

What's attractive about investing in tower companies? For starters, they own valuable real estate at railroad stations, on the tops of skyscrapers, and in malls in major metro areas. But they're more stable than investments in real estate because these companies lease their sites to established carriers, which sign 5- to 10-year contracts. "There are very few businesses out there as good as towers in predictability of revenues and in margins," says Jeff Stoops, CEO of Boca Raton, (Fla.)-based SBA Communications, which operates more than 3,000 towers in the Eastern U.S., Puerto Rico, and the Virgin Islands.

MORE GIZMOS, MORE TOWERS? And demand for towers is expected to skyrocket. As carriers migrate to speedier, next-generation wireless technologies such as EV-DO networks deployed by Verizon Wireless (VZ), they'll need the towers to transmit their new services, in addition to their older offerings, says Mitchell. Plus, for emerging wireless-broadband applications, such as over-the-air music and video downloads, carriers will need additional towers because the signal can't be transmitted as far. "Now, they need a new tower every two to three miles, vs. every five miles," says Stoops. "We are fortunate because we see a very high degree of organic growth."

Tower companies also are attracting customers from other industries. On July 13, satellite-radio provider XM Satellite Radio Holdings (XMSR) purchased WCS Wireless, which owns valuable wireless spectrum used for sending calls, for $196 million in stock. That has fueled speculation that XM will start offering limited wireless services. Potentially, XM could broadcast, say, video to cars via its satellite (a one-way, broadcast connection), then allow users to pick content on demand by sending requests to XM via a wireless connection. XM would need to lease wireless towers to provide the service.

And as wireless-service providers roll out a new technology called WiMax, allowing for broadband access from within a 30-mile radius of its antenna, they will likely attach the new antennas required for that technology to existing wireless towers, which they will lease. After all, building wireless towers can be costly, to the tune of $200,000 per site, and gaining municipal permits for construction can turn into a multiyear headache. As a result, it's much easier to rent tower space from existing companies.

CO-STAR. Opportunities also abound in providing new services, such as mobile TV. Wireless-communications pioneer Qualcomm (QCOM) is building out a special network, called MediaFLO, which will use towers for transmission of movies and TV news to cell phones. The network should become available in major metro areas in the fourth quarter of 2006. "We are currently in discussions with a number of [tower] companies," confirms Rob Chandhok, vice-president of engineering for Qualcomm's MediaFLO USA subsidiary, in an e-mail.

Some tower outfits might even play a more active role in the mobile-TV service. Crown Castle, for instance, is testing a technology that is a rival to Qualcomm's and designed by partner and cell-phone maker Nokia (NOK). The service will not only use Crown Castle's towers but also its wireless spectrum -- an asset most other tower companies don't have. As this mobile-TV network is introduced next year, Crown Castle is expected to be a major decisionmaker and stakeholder in the new service.

Moreover, Crown Castle is currently looking for investors who would cough up the $1 billion needed for this project. It has recently hired investment bank Allen & Co. to round up prospects. Analysts believe that some cable company, wanting to get into wireless entertainment, might become part of this deal.

LOWER COSTS. As tower companies explore such possibilities, they should at least double their average number of attachments per tower in the next three to five years, believes A.T. Kearney's Mitchell. Since renters have to pay wireless-tower companies between $300 and $3,000 a month per attachment, depending on location and length of the lease, that should translate into brisk revenue growth, he notes.

At the same time, the industry's costs of operating towers will continue to decline, as its various players consolidate further. A combined American Tower and SpectraSite, if the companies' merger gets the go-ahead, is expected to have revenues of more than $1 billion and shave off as much as $35 million in administrative costs.

Clearly, wireless-tower companies are in a good spot. "[Carriers] will have to pay tower companies, no matter what," says Ken Leon, an analyst with Standard & Poor's Equity Research (S&P, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP)). And that's not a bad position to be in. Kharif is a reporter for BusinessWeek Online in Portland, Ore.


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