(By Mani) The $1.45 billion acquisition of TowerCo helps SBA Communications Corp.
) take advantage of the expected cell-splitting activity of AT&T, Inc.
) and Verizon Communications, Inc.
) during their 4G network build outs.
The expansion of smaller carriers such as Leap Wireless International Inc, and MetroPCS Communications Inc. (NYSE:PCS) in to new markets and exponential growth in wireless subscribers have led to strong demand for additional space on wireless towers.
TowerCo has about 3,300 towers, versus SBA's nearly 13,000 towers. Including TowerCo, SBA will own in excess of 16,000 towers, primarily in the U.S., with about 1,600 in various international markets, including Canada, Cost Rica, Guatemala, Nicaragua, Panama, and El Salvador.
SBA, which has expanded its revenue base both through organic growth in tower leases, expects these towers will be in great demand for the future cell-splitting needs of US wireless carriers.
Meanwhile, shifting carrier exposure has been a key byproduct of SBA's two most recent acquisitions – Mobilitie and TowerCo. Both these companies generate a relatively high percentage of revenue from sites of T-Mobile and Sprint Nextel Corp. (NYSE:S), and SBA's revenue exposure to these carriers is expected to increase as these acquisitions close.
Total revenue generated from Sprint and T-Mobile is expected to increase to 42 percent following the TowerCo deal, up from 33 percent prior to the Mobilitie Deal.
"We believe investors are under appreciating SBA's strategic shift to take advantage of the anticipated upcoming cell splitting opportunity at AT&T and Verizon," Deutsche Bank analyst Brett Feldman wrote in a note to clients.
Both the Mobilitie and TowerCo portfolios are relatively under exposed to AT&T and Verizon, making them prime candidates for both carriers when they enter the cell splitting phase of their LTE deployments.
Currently, most of the leasing activity at AT&T and Verizon has come from amendments to existing sites. However, the scenario is expected to change as these carriers reach nationwide LTE coverage and instead choose to add capacity by loading LTE equipment on new sites in existing markets.
"With 1.3 tenants per tower on the Mobilitie assets and 1.8 tenants per tower on the TowerCo assets, SBA has more than enough capacity to add AT&T and Verizon to its recently acquired towers in future phases of their LTE deployments," Feldman added.
As a result, this strategic shift in customer exposure has positioned SBA to benefit most from the upcoming cell splitting opportunity at AT&T and Verizon.
SBA expects the deal to close in the fourth quarter, and the deal is accretive to adjusted funds flow from operations a share immediately, driven by an attractive purchase price that compensates SBA for increased exposure to potential iDEN churn and the strong lease up potential on assets. For the full calendar year 2013, SBA expects the TowerCo assets to generate around $93 million to $95 million in cash flow.