By Alexia Sparling, an insider at Lease Advisors
The Federal Communications Commission (FCC) is seeking to generate enormous profit from Auction 97, an auction for cellular spectrum licenses. A spectrum auction is a government-mandated process where wireless providers bid on the right to transmit signals over specific bands of the electromagnetic spectrum necessary for cellular transmissions. Last July, it was reported that the FCC was looking to generate more than $10 billion from the 70 qualified auction participants. As of mid-December, total auction proceeds exceeded $43 billion; the highest revenues the auction has ever generated. Auction 97 has called for excessive carrier spectrum spending, which could result in higher costs and lower revenues. This could be detrimental to the cell tower industry, leaving less capital available to add new antennas to cell towers.
Despite the reassurance of industry analysts, investors are growing cautious with regard to the tower sector. Wireless carrier capital expenditures will total $204 billion this year, and will be roughly flat next year, estimates Analyst Mark Walker of Ovum. Ovum expects wireless capex to decline after 2015 before rebounding in 2018. According to Canaccord Genuity analyst Greg Miller, technical and financial questions have partially pressured cellular tower stocks. “Chief among these concerns [is] a limited or nonexistent equipment refresh cycle and the incremental carrying costs of capital that will have been raised to finance spectrum bids, which have far exceeded initial expectations, limiting the carriers’ ability to spend capex to build out the spectrum.” Despite these changes, Canaccord Genuity believes that the implications of spectrum spending on the tower sector will be minimal. Miller explains, “The fear is that these factors will mean amendment activity – and, therefore, incremental revenue – will be limited and overall growth will be slower than expected. We believe such concerns are overblown.”
Alex Gellman, CEO of Vertical Bridge Holdings, believes borrowers remain confident in the tower sector, but is unsure about the outlook of tower company equity in coming months. Gellman comments, “We’ve been in a very, very favorable market and a very, very favorable position in the market, as an industry, for the last four or five years. It wasn’t always like this, and I don’t think it will always be like this.” While capex spending for the next year remains unknown, debate over spending expectations are being vetted by industry professionals and analysts. At this point, only one conclusion can be drawn; as Auction 97 draws to a close, spectrum spending has dramatically exceeded initial expectations. The implications remain unknown.
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