SBC Deal Spotlights Wireless Tower Business

While few investors may be aware of it, the wireless tower management business has excellent potential. Companies like SpectraSite Holdings are expanding their wireless tower networks and renting capacity on them for high-margin revenue. Nevertheless, costs are high for now, as tower management companies spend heavily to buy and build additional facilities.

By Chris Rugaber (TMF RFK)
September 1, 2000

Every now and then a relatively unknown company pops up in the news and provides investors a rare opportunity to learn more about an obscure but critical piece of a fast-growing industry. An example of this occurred earlier this week, when wireless tower management company SpectraSite Holdings (Nasdaq: SITE) purchased leasing rights to 3,900 wireless towers from telecom carrier SBC Communications (NYSE: SBC). Sure, wireless tower management may not sound like the most exciting business in the world, but the economics of the sector are intriguing.

The deal
The agreement more than doubled the number of towers under SpectraSite's management, to almost 9,000, and vaulted the company into the top ranks of the sector, currently dominated by companies such as Crown Castle (Nasdaq: TWRS) and American Tower (NYSE: AMT). SpectraSite paid SBC $983 million in cash and $325 million in stock in exchange.

For an asset-heavy business like SBC, it's a great opportunity to unload facilities that they no longer have to maintain. And as wireless communications evolves towards third-generation (3G) technologies, SBC won't have to do all the upgrading and buildout themselves.

Meanwhile, SpectraSite can rent capacity on the towers to other wireless carriers, which SBC did not do since other carriers are its competitors. In addition, SBC's tower portfolio includes many facilities in major metropolitan markets, and current zoning laws make it difficult to impossible for that network to be replicated by another company. This should help SpectaSite attract tenants to these towers, and it also acts as a barrier to entry for future competitors.

Nevertheless, SpectraSite's current competitors, Crown Castle and American Tower, aren't exactly slouches. Both have more towers under management than SpectraSite, and both have benefited from deals similar to the one SpectraSite signed this week with SBC. For example, Crown Castle purchased 1,850 towers from Bell South (NYSE: BLS) in March of this year and 2,300 towers from GTE -- now part of Verizon (NYSE: VZ) -- last November. American Tower has snagged facilities from AirTouch -- now part of Vodafone (NYSE: VOD) -- and AT&T (NYSE: T).

The wireless tower business
What makes this business attractive are the potential marginal returns once the towers are built (at an average cost of $200,000) and rented. As SpectraSite's CEO, Stephen Clark, sketched it out on Bloomberg TV, the average tenant pays about $18,000 to $20,000 per year in rent, and SBC's towers can fit up to four tenants, resulting in approximately $80,000 total revenue per tower. Meanwhile, maintenance and other recurring costs are perhaps $12,000 a year, resulting in gross profit margins per tower in the 85% range. SpectraSite and other wireless tower management companies also provide maintenance and consulting services for additional revenue.

Sales are up, but no profits yet
Despite these gross margins, profits won't materialize for some time as the tower management companies spend large sums to build and purchase additional facilities. As a result, while Crown Castle almost doubled revenues to $148.4 million in the most recent quarter, and SpectraSite's sales jumped by a factor of five to $77.8 million, they laid out $127.6 million and $177.6 million, respectively, in capital expenditures. Thanks to depreciation, amortization and interest expenses, the companies reported losses of $0.22 and $0.31 per share, respectively.

Nevertheless, the path to profitability is not hard to see. On an EBITDA basis (earnings before interest, taxes, depreciation and amortization), which factors out many of the costs of the companies' capital spending, Crown Castle reported earnings of $58.2 million for the second quarter, and an EBITDA margin of 39.2%. SpectraSite was a little less impressive, at $11.7 million of EBITDA, and a margin of 15%. Ideally, this gives an indication of the companies' potential profitability, though investors should know that EBITDA is an imperfect measure.

Demand for more sophisticated wireless services is expected to boom over the next several years, and more carriers in the U.S. and abroad are likely to turn to these companies for help in 3G network buildout. Investors should keep their eye on this sector, for the company or companies that can best manage their debt and capital spending may do very well indeed.

Your Turn:
How do you think these companies will fare down the road? Let us know on our Wireless World discussion board.

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