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TowerCo again cleans house; may target T-Mobile assets

by David Carey and Chris Nolter | Published June 27, 2012 at 9:20 AM

Though TowerCo LLC is selling its portfolio of wireless communications infrastructure assets to SBA Communications Corp. for $1.45 billion in cash and stock, the company aims to remain a player in the sector.

The Cary, N.C., tower operator is one of several parties that has lodged a bid for T-Mobile USA Inc.'s wireless tower assets, a source familiar with the matter said. PE firms have approached CEO Richard Byrne about backing a purchase, the person added.

Such a move would recall TowerCo's maneuvering in 2008, when it followed a sale of its portfolio with a large purchase.

TowerCo was started in late 2004 as an acquisition platform by Byrne and New York PE shop Tailwind Capital Group LLC. Soros Strategic Partners LP became an investor in 2005. In early 2008, TowerCo unloaded its entire 430-site portfolio to SBA for $194 million.

That September -- the same month Lehman Brothers Holdings Inc. failed -- TowerCo shifted back to buying mode, snapping up 3,200 towers from Sprint Nextel Corp. for $740 million. This time, Tailwind and Soros brought in Vulcan Capital and Stonetower Capital (now Altpoint Capital Partners) as equal co-investors, the source said. With credit impossible to come by, the four funded the whole deal with equity.

The investor group will garner about $1.05 billion in cash and SBA stock in TowerCo's latest asset sale to SBA, this person said. That will be on top of about $400 million the four already had raked off in two debt-financed dividends.

The target's four private equity backers will ring up just over a 100% partly realized gain on their 4-year-old equity investment, the source noted.

TowerCo's sale price includes $1.2 billion in cash and 4.6 million shares of SBA stock. The valuation comes to more than 15 times 2013 tower cash flow.

The deal would continue consolidation of the tower industry in the hands of SBA and large peers Crown Castle International Corp. and American Tower Corp.

The timing is significant, with Deutsche Telekom AG's T-Mobile USA putting about 7,000 towers on the market. Industry sources have said that T-Mobile USA could sell the assets in parcels, rather than one bundle, to facilitate bidding.

Representatives of TowerCo could not immediately be reached Tuesday.

"The big three have grown over time largely by acquisition," a person close to TowerCo said, regarding the potential for Byrne to launch a new acquisition.

"So if you do the hard work of putting together the collection of towers, it is a business with significant consolidation economics," he continued. "And the big guys have been active acquirers, so it is certainly possible that [TowerCo's] management will conclude they can do it a third time."

After buying TowerCo, it appears unlikely that SBA would play a major role in the T-Mobile auction. The company is also buying towers and other assets from Mobilitie LLC for $1.1 billion.

SBA management said on a Tuesday investor call that it would not pursue any other large deals this year.

However, removing TowerCo's portfolio from the marketplace could make the other large tower companies more committed to the T-Mobile USA auction.

"It would be a challenge for a nonstrategic to outbid American or Crown Castle," said Moody's Investors Service analyst Gerald Granovsky. "Especially when you look at what just happened."

With the purchases of TowerCo and Mobilitie, SBA has significantly increased its domestic scale.

"Now that TowerCo is gone, that leaves very little opportunity for M&A growth in the U.S.," Granovsky continued. "It's the T-Mobile USA towers and whenever Global Tower Partners decides it is ready to sell," he added, referring to the Boca Raton, Fla., tower company backed by Macquarie Group Ltd.

Since TowerCo purchased most of its assets from Sprint, it is little surprise that the Overland Park, Kan., telecom is its largest customer. Sprint is shutting down the "iDen" wireless network that it acquired during its merger with Nextel.

Macquarie Capital (USA) Inc. analyst Kevin Smithen suggested in a Tuesday report that the changes at Sprint may have influenced TowerCo's strategy.

"We believe that TowerCo's financial sponsors, including Soros, opted for a strategic sale instead of an IPO given the long-term overhang of the iDen decommissioning and were able to achieve a robust [Tower Cash Flow] exit multiple," Smithen wrote.

The analyst suggested that the TowerCo acquisition could hasten SBA's transition to a real estate investment trust. Profits from TowerCo would cause SBA to use up net operating losses from prior years that it can apply to future tax bills. A REIT structure would help it shield its income from taxes.

Incidentally, SBA and Soros are co-investors in ExteNet Systems Inc., a Lisle, Ill., wireless infrastructure company. As part of an investment agreement, SBA was in talks to sell some of Mobilitie's assets to ExteNet.

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