UPDATE Crown Castle (NYSE:CCI) announced yesterday it entered into an agreement to acquire FPL FiberNet Holdings, LLC and certain other subsidiaries of NextEra Energy, Inc. (NYSE:NEE) (collectively, “FiberNet”) for approximately $1.5 billion in cash (subject to certain limited adjustments). FiberNet is a fiber services provider that owns or has rights to approximately 11,500 route miles of fiber installed and under construction in Florida and Texas, inclusive of approximately 6,000 route miles of fiber in top metro markets. Pro forma for the proposed acquisition, Crown Castle will own or have rights to approximately 28,500 route miles of fiber.
New Street Research analyst Spencer Kurn said he was ‘wary of CCI’s outdoor small cell endeavors.’
“This is the third fiber system that CCI has acquired since they entered the small cell market in 2012, and we estimate that small cells will now comprise ~15 percent of CCI’s revenue. The small cell investments have been optically positive for the company: organic growth accelerates (because CCI doesn’t delineate organic from inorganic growth on small cells) and the deals have been accretive to AFFO,” Kurn said. “Despite these benefits, we have been skeptical of tower companies investing in outdoor small cells because we believe they generate returns that are lower than towers. If we use the original NextG investment as a guide, we estimate that CCI’s yields on the portfolio have only increased by ~1 percent since the fiber system was acquired despite tripling the number of tenancies on the fiber. This isn’t a bad investment, but we estimate that tower yields would roughly triple with that type of increase in tenants. Further, we are wary that returns may face pressure from players with existing fiber in CCI’s territories entering the market,” he said. CCI is currently benefitting from engineering expertise and a time to-market advantage, but we don’t view these as strong barriers to entry over the long-run,” Kurn said.
“The addition of FiberNet’s complementary footprint in top metro markets in South Florida and Texas bolsters our fiber available for small cells in markets where we see significant demand from our wireless carrier customers,” said Crown Castle CEO Jay Brown. “As demand for wireless connectivity continues to grow, small cells are playing an increasingly important role in adding the network capacity and density needed to provide ubiquitous high-speed, high-capacity wireless services. With a long runway of expected growth ahead for small cells, we believe our investment in FiberNet further strengthens our leading position in small cells and will enhance our long-term dividend growth.”
Crown Castle expects the acquisition to close in the first half of 2017, and to be immediately accretive to Adjusted Funds from Operations (“AFFO”) per share upon closing. In the first year of Crown Castle’s ownership, the transaction is expected to contribute approximately $105 to $110 million to gross margin and approximately $15 to $20 million of general and administrative expenses. Additionally, the transaction includes approximately $5 million in annual cash flows associated with a customer lease that will be accounted for as a financing lease and therefore not contribute to the expected gross margin. Supplemental materials related to the transaction are on the Crown Castle website at: http://investor.crowncastle.com.
November 2, 2016
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