Can Towers Stand Tall Through Carrier M&A?

Wireless carrier consolidation is a tower investor’s worst fear.  Entire networks can be eliminated, driving a sharp loss in tenants that cuts straight to the bottom line.  Often overlooked, however, are the benefits to tower companies from the combination of networks and a healthier market structure.  In this Global Weekly Review, we highlight our views on the impact of carrier consolidation to tower companies globally.  In most cases, carrier consolidation results in a net negative outcome for towers; however, in some cases, it can lead to a stronger growth.  We believe carrier M&A offers opportunities for investors own towers in US and Europe, and avoid towers in India and China.

T-Mobile / Sprint: A Net Negative For Towers, But Mostly Priced In

We recently took a deep dive into the impact of the potential T-Mobile / Sprint merger on the US tower companies (LINK).  The merger could provide eye watering synergies for New T-Mobile of $43BN (LINK), most of which come from shutting down the majority of Sprint’s network.  Our analysis for the towers shows that the loss of value from decommissioning is largely offset by the impact from amendments as New T-Mobile implements their network plan; however, there would still be 12% value loss for the group from foregone site growth that would have happened had the networks remained independent.

The Deal (Still) Faces Uphill Odds.  When T-Mobile and Sprint announced the deal, we believed there was slightly lower than 50% odds that regulators would approve the deal (LINK).  Since then, it seems the market has come to place materially higher odds of deal approval (at a recent investor conference, 85% of the audience expected the merger to be approved), but we believe this is a mistake (LINK). While the deal's 5G message appears to have gained some support among Administration officials, nothing, in our view, has reduced the risks of state attorneys general litigation, potential White House concerns about job cuts and price increases, or DOJ staff using a traditional analysis that focuses on the implications of the deal for the 4G market.  Further, the appointment of William Barr, given his conflict with current antitrust head Makan Delrahim, the government's poor performance at the Court of Appeal on the AT&T / TWX merger earlier this week (LINK), and a mysterious challenge to the deal based on national security grounds add new, and potentially negative dynamics for the deal.

SBAC Is The Only Tower Company We Would Own Into The Merger.  SBAC could see 13% downside if the merger were approved.  This is worse than the 7% that AMT could see; however, SBAC has underperformed REITs by 10% since the deal was announced, whereas AMT has outperformed.  Additionally, SBAC is the only tower company where we would still see upside to consensus estimates should the deal get approved.  With the deal mostly priced in, and the stock trading at a discount to AMT and CCI, SBAC remains our top pick in US towers.

Indian Consolidation: A Disaster That Remains Underappreciated

Never has a wireless market, in any region globally, consolidated so dramatically, so quickly, as has happened in India following the launch of Reliance Jio in 2016.  The impact of the wireless industry collapsing from 13 to 3 private players has wreaked havoc on the towers; importantly, we do not think this has been fully factored into consensus (LINK).  We see the greatest downside to Bharti Infratel (LINK), though we still remain cautious on AMT because of the remaining churn issues ahead (LINK).  This is before considering the scenario where Vod / Idea exit the Indian market altogether and India becomes a two-player wireless market (LINK).

China 5G Spectrum Auction Increases Potential For Single 5G Network Deployment

We visited Hong Kong last week, and met all three telcos as well as China Tower. A timely visit given it coincided with the issuance of 5G spectrum. We believe the biggest risk to China Tower would be a merger of China Unicom and China Telecom (LINK). However, following our conversations, and given that the latter have each been issued with 100 MHz of contiguous spectrum at 3.5GHz, we think an increasingly likely outcome might be an agreement to build a joint 5G network rather than full merger, which avoids the complexity and potential disruption inherent in a full merger. While a joint 5G roll would reduce the long term co-location rate for China Tower, we think it would also be coupled with a commitment to a wider scale deployment of 5G to create a network more comparable to China Mobile’s. This would largely offset the negative implications by increasing co-location in rural areas.

Indonesia: No Consolidation Occurring (Yet)

Despite persistent rumors of deals between the smaller operators, there is no consolidation occurring in Indonesia at the moment.  With the capex cycle turning, we think tower companies are poised to see accelerating growth (LINK). Protelindo is our preferred way to play this growth theme. Were carrier consolidation to occur, we would see this as a good example of a market where the benefits of an improved market structure would drive stronger overall demand from the smaller telcos, more than offsetting any negative impacts from consolidation.

How Can Carrier Consolidation Benefit Towers?  See Italy

Generally speaking, tower companies can be better off if a merger results higher levels of tenant-equivalents than previously existed, or this leads to increased Governmental involvement in ensuring increased network buildout.  In developed markets, with 3-4 national carriers, this can happen through regulator-mandated merger conditions, such as a wholesale MVNO deal that enables a new competitor to access the network at a low rate, or a spectrum divestiture.  In Italy, the merger of Wind and Hutchison gave birth to the rise of Iliad via a wholesale MVNO deal.  This has just started to drive increased tenancy growth for Cellnex and Inwit in Italy in recent quarters. So while Inwit might lose ~200 tenancies as a result of the merger, we think they stand to gain ~1,900 from the entry of Iliad, a net 8% increase to their total tenancy ratio (LINK). We are also seeing evidence that where networks do genuinely consolidate to 3 players, ie in Germany, Governments are now more willing to use future licence auctions to ensure increasing coverage obligations, which we also think should be a net positive for tower companies.

Hence, mergers shouldn’t necessarily be a source for concern for tower investors, and our top global picks would be SBAC and Inwit.

For the full weekly review and updated comp sheets, see HERE.