Donald Trump’s election has raised the prospect of revenue churn from a combination of T-Mobile and Sprint just when it looked like a Clinton administration would likely maintain the “no deal” posture of the Obama administration regarding wireless, according to analyst Nick Del Deo of MoffetNathanson.
“The tower leasing industry experiences churn that is the envy of other sectors in the broader telecommunications space. Low churn – typically in the one to two percent range annually – in tandem with contractual rent escalators and underlying demand for new cell sites/amendments to support wireless traffic growth underpin the tower growth model,” Del Dio said. “But investors are very sensitive to growth expectations given the multiples at which the stocks trade, and periods of elevated churn can materially weigh on net growth. In particular, consolidation-related churn stemming from large carriers getting together has always been something that tower investors worry about because of its potential to disproportionately affect the bottom line,” he said.
According to Del Dio, the market now appears to be pricing into tower valuations a fairly high probability of a T-Mobile/Sprint combination. “We think it is appropriate to explicitly incorporate this risk into our target prices, and lower them accordingly,” he said.
“Our analyses strongly suggest that the same-tower overlap framework used by the industry to dimension M&A exposure meaningfully understates expected revenue losses,” Del Dio said. “However, there are important offsets to consider, like potential spectrum divestitures and what consolidation would mean for the odds of a cable entry, which mitigate some of these concerns. M&A or not, towers continue to look very attractively priced for long-term holders. SBA remains our [MoffettNathanson’s] top pick,” he said.
November 15, 2016
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