The Tower Industry - Pre-NATE Early 2009 Outlook
By Clayton Funk
February 23, 2009 - Many of you who check in regularly to Wireless.Estimator.com are in the business of building towers -- for the end users to utilize on their own or for third party tower owners (including yourself) who are in the tower rental business --and so what better than a pre-NATE Show summary of where the tower business appears to be heading in early 2009 and what the rest of the year may hold.
The tower industry's health continues to be most heavily influenced by two intertwined factors: wireless carrier activity and the availability of capital.
Carriers spend money to upgrade and expand their networks assuming they can have access to capital .Tower companies can build towers to meet the needs of the carriers as long as they have access to capital as well. However, carriers must show their investors that their return on invested capital justifies spending even more and more money.
How is a carrier judged to be worthy of being able to access more capital, either debt or equity or both? By growing their subscriber count, increasing revenues per user (RPU) and increasing minutes of use (MOUs).
It's the more and more mantra
The business plans of the carriers are based on their ability to add more and more customers, ideally have them spend more and more money for the services and to utilize their devices more and more so the consumer makes wireless a household budget item that doesn't get slashed in these difficult economic times.
The good news is, with the exception of Sprint Nextel's recent announcement of losing over one million net subscribers, wireless providers continue to add customers, albeit at an even decreasing growth curve as wireless penetration rates starts approaching 85%.
RPU remains flat or increasing, especially for iPhone users on the AT&T network who spend nearly twice as much as non-iPhone users on all other wireless networks. Voice and data MOUs continue to increase as wireless customers view their wireless service as a necessity instead of a luxury. This is all positive news as it relates to the tower industry.
My firm's deep involvement and experience in the wireless and tower industries has shown that over time the health of the tower industry is directly tied to the health of the wireless industry. And in early 2009? So far, so good.
Carriers continue to deploy sites (analyst estimates suggest as many as 14,000 new search rings for 2009) and tower companies continue to lease these sites on existing facilities or build towers in all areas of the United States.
Tower companies, due to the activity of the carriers, are still able to attract investors and confidently deploy their capital into new infrastructure. In many ways, despite the issues with the economy overall, the tower industry is seen by many as a "flight to quality" investment given some other alternatives.
What would you rather invest in these days? Financial institutions? Auto manufacturers? There continues to be a direct need for more towers and sites (rooftops, DAS, etc…) as the wireless industry grows.
But there are some dark clouds on the horizon (and aren't they everywhere these days?). Why? Well, this will be a very simple summary but many investors like to make high returns.
Returns can be increased through borrowing as much debt and investing as little equity as possible (think about how many people buy their homes). But what if money isn't available to borrow? What if the anticipated leverage someone wanted to get to attain their returns can't be secured?
A couple things happen. One, the prices people are willing to pay to acquire towers will decrease because they can't borrow the money to finance acquisitions. Two, fewer investors will deploy their own money if they can't borrow as much as they wanted, especially if there are higher returns to be found elsewhere, i.e. buying distressed residential or commercial real estate or even high yielding secure corporate debt.
Finally, companies who borrowed money within the last few years and are growing so quickly that they need to raise more money will find themselves stuck.
Many of these scenarios have already happened. Prices for tower deals are down roughly 25% since last year at this time. Many potential new investors into the tower sector are finding greater returns in other industries or buying corporate debt so their interest in financing new tower builds or acquisitions has waned.
Too successful can be costly
Some companies will also find themselves as "too successful" - they grew so quickly that they need to borrow more money. But the rates being charged, due to lenders being concerned about making any new loans, are priced at rates two to three times higher than they were over the last couple years and equity investors are asking for higher returns given other options. Neither scenario is attractive to an existing company and wasn't anticipated in the company's business plan.
The silver lining and the good news? Again, where else would you rather be? The tower industry continues to have underlying fundamentals that make it an incredibly attractive business for investors, owners and operators, and even lenders once more liquidity returns to the banking sector.
The sector has barriers to entry in terms of zoning and permitting and investment grade customers in a growing space committed to long-term leases with minimal bad debt or churn rate. How many industries can claim these traits?
Additionallhy, with the passing of the government's stimulus bill it remains to be seen how the federal dollars will trickle down into the tower industry, but there is a commitment by the new administration to focus on rural broadband and wireless providers will continue to need towers.
Despite the overall economic environment the wireless and tower industries are off to a positive start. The underlying fundamentals look good and yet there are still many things to watch to make sure we'll continue to remain relatively immune to many macroeconomic factors. Best wishes on a successful and healthy 2009.
Clayton Funk is a Managing Director with Media Venture Partners, a boutique investment banking firm specializing in various areas of telecommunications and media. They assist companies with the sale of assets or their entire businesses and raise capital for companies across the following telecom sectors: tower and DAS companies, wireless providers and data center owners. Since their founding over 20 years ago they have closed on nearly $15 billion in transactions and have had a long history in the tower and wireless industries.