A skittish market has put extra pressure on tower companies the past two weeks with bug-eyed investors nervously waiting for the six largest wireless companies to release their quarterly earnings and their future capital expenditure plans. "[Wireless] capex is revenue for the towers," one dealer explained. With a crimp expected in the revenues for tower companies, bids on paper for Crown Castle International, American Tower and SpectraSite Holdings have dropped three to six points. One dealer said he expects the paper to drop another three to five points before investors start stepping in for bargains.
An official from American Tower maintained that investors cannot draw direct conclusions on the impact of decreased wireless capital expenditure budgets on tower revenues. But the market seems to be making that leap. Crown Castle, referred to as the golden egg of tower companies because of its large cash balance and relatively less levered capital structure, has seen its bank debt levels fall from the 96-98 range down to the 90-94 range in the past two weeks. American Tower and SpectraSite have seen their bank debt levels depressed two to three points, currently quoted in the 85-88 and 85-87 range, respectively. Calls to David Tomick, SpectraSite cfo, and Benjamin Moreland, Crown Castle cfo and treasurer, were not returned by press time.
Market players are taking a second look at companies with highly levered capital structures that have yet to produce substantial revenue. "They want to see cash generation now," one buysider said of the market opinion. Revenue is an issue with tower companies because wireless players are cutting back. AT&T Wireless Services has reduced its capital expenditure guidance from $5.3 million to $5.1 billion for the next year, and capital expenditure from Sprint PCS Group is down from $3.8 billion to $3.3 billion from 2001 to 2002.
David Wells, high-yield wireless services analyst atLehman Brothers, said it is important to take into account where the wireless companies are spending. Wireless companies know that they have to spend money to take care of the holes in their networks and keep their networks capable of handling the capacity of their subscribers, he said, explaining that towers will still be in demand. Still others anticipate tower demand to slump. "The amount of capex that results in more tower demand is probably flat to down from last year to this year," said Sean Butson, principal and wireless stock analyst at Legg Mason, noting that last year was the peak of demand.
