The pending merger of T-Mobile US Inc. and Sprint Corp. will result in fewer cell towers, but the major U.S. tower companies expect increased network infrastructure investment in the ramp up to next-generation 5G technology to make up for any difference in revenue.
In the weeks since Sprint and T-Mobile shared their merger plans, the stock prices of the three largest U.S. tower companies — American Tower Corp., Crown Castle International Corp. and SBA Communications Corp. — have all remained relatively stable. While the companies are not equally exposed to the T-Mobile-Sprint deal, tower company executives at all three estimated that any negative revenue impact would be relatively small and short-term, and analysts said that Sprint and T-Mobile's merger plans call for fewer towers to be decommissioned than feared.
As of the close of May 16, shares in American Tower were up nearly 1% since April 27, the last day of trading prior to the deal announcement, while shares in Crown Castle were up almost 2% and shares in SBA were down less than 1%. After years of on-again, off-again negotiations between Sprint and T-Mobile, analysts said investors had already braced themselves for the carriers' pending combination, muting the transaction's impact on tower stocks.
New Street analyst Jonathan Chaplin said in a research report that the three tower stocks, all of which are organized as real estate investment trusts for federal income tax purposes, had been underperforming the MSCI US REIT Index by several hundred basis points since April 10, when deal chatter first resurfaced in the press. "Most of the downside has been largely priced in already … especially accounting for the uncertainty around the deal gaining regulatory approval," he said.
Following the merger, T-Mobile President and CEO John Legere said the combined entity would initially have 110,000 macro tower sites. As the networks are integrated, 35,000 of those existing sites will be decommissioned, while 10,000 new sites will be created.
"Then you ultimately have about 85,000 macro sites and 50,000 small. So it's a massive network," Legere said.
MoffettNathanson analyst Craig Moffett said he had expected Sprint and T-Mobile to decommission more macro sites, ending with a total of 80,000 rather than 85,000.
"From a tower perspective, the math appears to be a bit less punitive than it did before we could hear from T-Mobile and Sprint about their network and investment plans," Moffett said in a research note.
Moffett said he believes American Tower is the "best positioned" ahead of the deal. He estimates the company derives 16% of its total site leasing revenue from Sprint and T-Mobile, while Crown Castle and SBA each derive more than 30% of their leasing revenue from the two carriers.
American Tower's business is also much larger than the other two tower companies, ending the first quarter with 159,077 wireless towers, as compared to the 40,053 operated by Crown Castle and 28,309 from SBA.
During American Tower's first-quarter earnings conference call, Chairman, President and CEO James Taiclet said the Sprint/T-Mobile combination would be "neutral to positive" for American Tower's U.S. business.
"The disclosed plans for the combined entity to spend $40 billion in network and other capital investments over the next 3 years would represent a substantial increase in spending relative to the recent average annual combined spending of the two companies," Taiclet said.
In regards to the tower sites the companies plan to decommission, Taiclet said there will be a "significant" opportunity for American Tower to amend its existing rental agreements with the combined company to add new equipment on the remaining towers to support the new entity's spectrum portfolio.
"So while there may ultimately be less total transmission sites in the merged network, each site is likely to have more spectrum bands, more data traffic and more equipment installed," the CEO said.
Crown Castle CFO Daniel Schlanger also sought to assuage concerns around the impact of the deal, saying during an earnings conference call that while Crown Castle derives 19% of its revenues from T-Mobile and 14% from Sprint, only 5% of total revenues come from towers where the two carriers have overlapping equipment.
Similarly, SBA CFO Brendan Cavanagh said during a May 15 investor conference that a "worst-case scenario in terms of potential risk" is that SBA Communications could lose "north of 5%, close to 6%" of its revenue due to overlapping sites between Sprint and T-Mobile. He also said any revenue losses would be spread out "over an extended period of time," adding, "Really, the net impact should be much, much less than that."
Cavanagh said he would rather see three well-capitalized nationwide networks than four that are spending more conservatively.
"Our four carriers haven't really been actively spending for years. So if you have three strong carriers that are … committed to investing competitively in their networks, I think we'll be just fine in terms of the outcomes of this," he said.