Sale of ExteNet, Where Does this Leave SBA?

By Jody McCoy

Kevin Smithen of Macquarie Securities took a closer look at the sale of ExteNet Systems to Marc Ganzi’s Digital Bridge and Stonepeak Infrastructure Partners. ExteNet is the second largest small cells and DAS operator with about 10,000 nodes deploywed or under construction including WiFi access points, and could add 2,000 nodes per year. “We continue to believe that Verizon and Sprint will add the vast bulk of their incremental capacity on small cells over the next several years as public WiFi, unlicensed LTE spectrum and the 2.5GHz band deployments require denser networks,” Smithen wrote. “ExteNet expects 25% long-term growth in the small cells market. We are forecasting 30% over the next several years. We continue to believe that U.S. macro cell industry growth will slow to the bottom end of the 6-8% long-term range within 2-3 years, and that small cells will be needed to bolster growth rates to the high-end of that range.” So why did SBA, who held a 19% stake in ExteNet systems, decide not to secure control of the last remaining small cell platform of scale available? Smithen notes that the company will record a $150 million profit on its initial investment of $43 million in 2010, but exiting this company leaves them as the only major tower operatory without a significant presence in DAS and small cells. The Digital Bridge press release explained, “All of ExteNet’s current investors are exiting. In addition to SBAC, these include Columbia Capital, Centennial Ventures, Sevin Rosen Funds, CenterPoint Ventures, Palomar Ventures and Quantum Strategic Partners, a private investment vehicle managed by Soros Fund Management.” So this was a great chance to liquidate and receive a more than decent payout, but it does raise some questions. Crown Castle has been extremely active in the small call market, and recently reported that 8% of the company’s site rental revenue in the second quarter. Smithen commented, “We have long felt that SBAC’s CEO Jeff Stoops was the best steward of capital in the industry. We also felt that way about Verizon’s management team prior to the Verizon Wireless minorities buy-in. However, as with Verizon, we strongly disagree with SBAC’s strategic decision on an important deal, in this case ExteNet, and believe that recent share repurchase programs were a short-term move while important long-term thematic industry changes could have been addressed with those proceeds. In the near term, SBAC holders might be happy that no equity issuance was required for ExteNet. Nevertheless, we think there is now a gaping hole in the SBAC product suite for Verizon and Sprint, and this makes us less constructive on the name over the long-term and we maintain our Neutral rating and $128 target price.”

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