OSU SIM Equity Research
November 11, 2013
Current Price: $91.25
Total Return: -45.2%
Wireless Telecommunications Services
When Valuation Is Disconnected from Reality
Risks to Recommendation
The primary risks to my SELL recommendation are:
 The amount of capital wireless carriers invest in their networks
could be higher than what I am modeling.
 The government may release significantly more spectrum in
spectrum auctions, giving the carriers further impetus to invest
in their network capacity.
 Multiple expansion could occur if the company converts into a
REIT, which one of its competitors recently completed in
2012.
Sep-13
Oct-13
Aug-13
$95
$90
$85
$80
$75
$70
$65
$60
Jun-13
Jul-13
The thesis for selling SBAC hinges on the combination of three
factors: leverage, valuation, and its competitive position. In short, I
believe that the firm’s leverage will cause it to be unable to live up to
its valuation and keep pace with its key rivals.
 SBAC has significant leverage, with a debt/EBITDA of 9.0
and debt/equity of 12.6, which are high on both absolute terms
and relative to its primary competitors.
 The current valuation assumes SBAC’s revenue is going to
continue to grow at an 18% revenue CAGR over the next
decade. The firm is valued at an EV/EBITDA of 21.5, and
while the firm does have steady cash flows and growth
opportunities, there is simply too much optimism priced into
the stock for its actual growth opportunities going forward.
SBAC TTM Stock Price
Apr-13
May-13
Investment Thesis
Ticker: SBAC
Market Cap: $11.7b
Enterprise Value: $17.2b
Dividend Yield: 0.0%
Dil. Shares Outstanding: 136.9m
52-week Price Range: $63.85-$92.21
Jan-13
SBA Communications (SBAC) is one of the world’s largest
wireless tower operators, operating in the United States, Canada,
Costa Rica,Investment
El Salvador,
Guatemala, Nicaragua, Panama and Brazil.
Thesis
They lease space on their wireless towers to wireless service
providers, such as AT&T and Verizon. SBAC also has a site
development business that helps its wireless service customers locate
new tower sites, obtain zoning permits, and other tasks necessary to
build wireless
tower
sites. As of September 30, 2013, the firm owned
Risks
to Recommendation
the rights to 17,889 wireless towers worldwide.
Company Data
Nov-12
Dec-12
Company Description
Feb-13
Mar-13
SBA Communications
Recommendation: SELL
Target Price: $50.00
5-Yr Stock Price vs. S&P 500
(Using 100 as base in November 2008)
700
600
500
400
S&P
SBAC
300
200
100
0
SIM Telecommunications Analyst
Micah Martin
614-578-2150
martin_2457@fisher.osu.edu
SBA Communications
November 11, 2013
Table of Contents
Company Overview………………………………………………………….........3
Company Operating Segments……………………………………………………………....3
How the Wireless Tower Business Works…………………………………………………..4
Industry Trends………………………………………………………………………………6
The Investment Thesis…………………………………………………………….8
Macro Trends………………………………………………………………………………...8
Fundamental Factors………………………………………………………………………..10
Risks to my Recommendation…………………………………………………...17
Conclusion and Recommendation…………….…………………………….......18
Appendices………………………………………………………………………...19
A: Income Statement Projection………….……………,…………………………………..19
B: DCF Analysis…………..…………………………….………………………………….19
C: Sensitivity Analysis……………………………….....…………………………………..20
Sources…………………………............................................................................20
OSU SIM Equity Research
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SBA Communications
November 11, 2013
Company Overview
SBA Communications Corporation is a wireless tower operator with operations primarily
in the United States. The company was founded in 1989 in Boca Raton, Florida, and currently
operates 17,889 towers worldwide, roughly 85% of which are located in the United States. The
firm acts as essentially a property management firm, leasing out space on its wireless towers to
wireless carriers such as Verizon and AT&T.
The firm went public in 1998 and was a participant in the tech bubble of the late 1990’s.
In June of 2000 the stock was priced at a high of $57.00, and then after the bubble popped fell to
an all-time low of $0.19 at in October of 2002, just a little over two years later. Since October
2002, the stock price has increased by 47,795% to $91.25. Four days ago (Nov 7), the stock
reached an all-time high of $92.21.
$60
Exhibit 1. The Tech Bubble and SBAC's Share Price
$40
$20
$0
6/16/1999
6/16/2000
6/16/2001
6/16/2002
SBA Communications is the smallest of the “big three” wireless tower operators, the
others being American Tower Corporation and Crown Castle International Corporation. These
three firms operate a substantial majority of all wireless towers in the United States, and all three
are expanding globally as well. The other major operators of wireless towers worldwide are the
wireless carriers themselves (AT&T, Verizon, etc), but these firms have gradually been selling
their towers to the “big three” wireless towers over the last few years in transactions very similar
to “sale and leaseback” transactions seen in other industries.
Company Operating Segments
SBA Communications operates in two segments: site leasing and site development.
Site Leasing
Site leasing accounts for the bulk of the firm’s revenues and operating profit, and
involves wireless carriers such as AT&T and Verizon leasing space on SBAC’s towers. This is
the core of SBAC’s business, and is characterized by stable cash flows, as carriers set up very
long-term leases with SBAC. According to their 2012 10-K, a typical new lease in the US or
Canada is generally for “an initial term of five to ten years with five 5-year renewal periods at
the option of the tenant.”
This segment seeks to grow via both acquisitions and constructing new towers itself,
though the vast majority of the company’s growth has been through acquisitions in recent years.
This will be discussed more later, but the reason for this is primarily because it is difficult to find
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SBA Communications
November 11, 2013
places that want to have a wireless tower built in their backyard. At the end of 2012, the firm had
14,929 towers here in the US, and 2,562 total towers in Brazil, Canada, Costa Rica, El Salvador,
Guatemala, Nicaragua, and Panama. International expansion is a primary focus for this segment
going forward.
Site Development
The site development segment offers assistance to wireless operators in developing their
networks via zoning, site construction, and site acquisition. It is significantly smaller than the site
Exhibit 2. Segment as % of Sales
Exhibit 3. Segment as % of Op. Income
100%
100%
90%
17%
14%
15%
12%
11%
80%
70%
70%
60%
60%
40%
83%
86%
85%
88%
89%
3%
2%
5%
98%
97%
98%
95%
90%
80%
50%
2%
50%
101%
40%
30%
Site Development
30%
Site Development
20%
Site Leasing
20%
Site Leasing
10%
10%
0%
2008
2009
2010
2011
2012
0%
2008
2009
2010
2011
2012
leasing segment, and is more of an add-on service that complements site leasing than a business
unto itself. In this segment, SBAC does equipment installation for carriers, site audits,
buying/leasing support, tower construction, and aids clients in obtaining zoning approvals.
Roughly 5% of company operating profit comes from the site development business. This
business is much more cyclical and it is difficult to project, as it is largely influenced by cyclical
capital spending by the major carriers.
How the Wireless Tower Business Works
Before diving any deeper into my thesis, I believe that as part of the firm overview it is
first critical to discuss briefly how the wireless tower business works, as it is not an industry with
which many have familiarity.
Customers of Wireless Tower Operators
The customers of the wireless tower companies are major wireless telecommunications
companies, and thus the four nationwide wireless carriers in the United States are the wireless
tower companies’ major customers. For SBA Communications, for example, at the end of FY
2012, the four nationwide carriers (Sprint, Verizon, AT&T, and T-Mobile) accounted for 67% of
total firm revenues. As of the most recent quarter end (September 30, 2013), those same four
nationwide carriers accounted for 80% of total firm revenues. (A significant part of that 13%
OSU SIM Equity Research
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SBA Communications
November 11, 2013
increase is due to recent consolidation in the wireless telecom industry: Sprint acquiring
Clearwire, T-Mobile acquiring MetroPCS, and AT&T acquiring LEAP Wireless.)
Exhibit 4. The 4 Major Carriers as % of Total Revenues in FY 2012
Company
American Tower
Crown Castle SBA Communications
AT&T
18%
20%
20%
Verizon
11%
17%
13%
Sprint
14%
24%
21%
T-Mobile
8%
11%
13%
Total
51%
72%
67%
Benefits for Carriers of Using Wireless Tower Operators
These customers care deeply about two benefits wireless tower companies can provide:
coverage and capacity. Growth in consumer data usage has provided great impetus for wireless
carriers to upgrade both their coverage and capacity, and to do that they need to lease more space
on wireless towers or build their own towers. By relying on wireless tower operators, the major
carriers do not have to worry about day-to-day tower maintenance and can invest their time
elsewhere. In addition, it is much more strategically flexible to rent space as opposed to
constructing and maintaining the space themselves. If they need to add more coverage in one
location, they can do it quickly and painlessly without having to worry about zoning, regulation,
and all the difficulties that go into building a wireless tower themselves.
The majority of wireless towers have at least 2 tenants (wireless carriers) per tower.
These wireless carriers sign up for very long leases, many of which are initially for 5-10 years,
with 5-year renewal options for up to 30 years. Because these contracts are so long, annual rent
escalators that the carriers have to pay are built into these contracts and often are roughly 3-4%
per year, depending on the carrier, tower company, and tower location.
The Often Over-looked Landowner
The wireless carriers (Verizon, AT&T, etc.) are “downstream”, if you will- the ones
renting space on the towers. It is significant to note, however, that the major tower companies
rarely own the land on which they operate the towers. They lease the land long-term from
landowners, and, like the carriers, have similar rent escalators in place which they must pay to
the landowners each year.
It is thus important to look briefly at the role of the landowner in this process. The
landowner has her land, and wants a low-maintenance, steady stream of income. A wireless
tower definitely fits the bill, but it is extremely difficult to obtain regulatory approval to build a
wireless tower on one’s land. Statistic Brain states that the odds of having a tower approved to be
on your land is 0.8%1. If the landowner’s land is approved as a site on which to build a wireless
tower, a wireless tower operator will sign a lease with the landowner, agreeing to pay a longterm lease with rent escalators and possibly continent rent dependent on tower cash flow.
1
http://www.statisticbrain.com/cell-phone-tower-statistics/
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SBA Communications
November 11, 2013
In short, a wireless tower operator is essentially a property rental company that rents out
space on towers it operates on others’ land. It is important to note that the entities who have the
bulk of the strategic power are the landowners and the wireless carriers. The landowners own the
most difficult-to-obtain asset in the wireless tower business- land that has received approval to
have a wireless tower built upon it. The carriers are buyers of great importance to the wireless
tower operators, and were any tower operator to lose one of the big four carriers, the tower
operator would be at a significant strategic and financial disadvantage. The carriers, though, can
painlessly and gradually go to another tower operator who will welcome them with open arms.
Key Growth and Profitability Drivers for the Wireless Tower Industry
The best way for a wireless tower firm to improve its profitability is simply to increase
the number of tenants on its tower. The operating leverage in the industry is significant because
the majority of tower “COGS” are land rent and property taxes. There is also very low
maintenance capex (roughly $1,000/tower) and other corporate costs to maintain the tower are
minimal, so each additional tenant on a tower adds significantly to the bottom line of a wireless
tower operator.
Thus, the key drivers for companies in the
Exhibit 5. Average Tenants/Tower
3.25
industry are a) towers, b) tenants, and c) how much
rent tenants pay. This really is key. A wireless tower
3.00
company must constantly be improving its average
tenants per tower, average rent paid per tenant, or
2.75
total towers in order to grow. As discussed further
2.50
below, with the recent wave of consolidation in the
telecom industry, both the average tenants/tower and 2.25
average rent/tenant have not been increasing, so the
Crown Castle
2.00
only way for tower companies to grow is via total
American Tower
SBA Communications
towers. When combined with record low interest
1.75
rates, this has resulted in significant tower
2008
2009
2010
2011
2012
acquisitions by all tower operators over the past 2-3
years.
Industry Trends
Consolidation
The competitive landscape in the wireless tower industry is one of increasing
consolidation, similar to that of the telecommunications industry in the United States. After years
of deals, there are three primary independent tower operators left on the global stage: American
Tower Corporation, Crown Castle International, and SBA Communications. All three have the
same business model of leasing tower space to wireless carriers. For all three, site leasing
comprises the vast majority of their revenues and profits and all three of them have the four
nationwide carriers as their largest four customers.
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SBA Communications
November 11, 2013
Addressable Market/Market Share
Exhibit 6. America's Top Tower Companies*
The US addressable market is getting
Rank Tower Owner
Total Towers Market Share Cum. Market Share
1 Crown Castle
39,739
39.1%
39.1%
crowded for the three wireless tower operators,
2 American Tower
28,463
28.0%
67.0%
and major acquisition opportunities that can
3 SBA Communications
14,873
14.6%
81.6%
4 United States Cellular
4,802
4.7%
86.4%
move the needle are increasingly few. It is
5 Verizon Wireless
1,400
1.4%
87.7%
difficult to obtain a grasp of the total
6 T-Mobile Towers
1,003
1.0%
88.7%
7 Time Warner
950
0.9%
89.7%
addressable US wireless tower market, but the
8 Mediacom Communications 750
0.7%
90.4%
source that seemed most reliable gave the
9 Charter Communications
650
0.6%
91.0%
10 Diamond Communications
637
0.6%
91.7%
figures in the chart to the right.
11 Trillion Partners
635
0.6%
92.3%
It is clear to see that future
12 South Carolina Educational TV 600
0.6%
92.9%
13 Insite Towers
583
0.6%
93.4%
opportunities for major acquisitions, such as
14 Union Pacific Railroad Company
513
0.5%
94.0%
Crown Castle’s October purchase of 9,700 of
15 Clear Channel
497
0.5%
94.4%
16 BNSF Railroad
387
0.4%
94.8%
AT&T’s towers, are very limited. It is also
17 Pegasus Wireless
347
0.3%
95.2%
clear that the big three incumbents have the
18 Subcarrier Communications 307
0.3%
95.5%
19 SkyWay Towers
250
0.2%
95.7%
majority of the market share, and that is not
20 Sprint Sites USA
242
0.2%
95.9%
likely to ever change as long as wireless towers
All Others
4,126
4.1%
100.0%
Total
101,754
100.0%
are the best way for carriers to build out
*Last updated on 10/31/13
Source: WirelessEstimator.com
coverage and capacity.
With the US market now crowded, all three firms have been pursuing growth
opportunities internationally via tower “sale and leaseback” transactions with international
wireless carriers. This is because it is common in many international markets for wireless
carriers to own and manage their own towers. American Tower, of the three, has been by far the
most aggressive acquirer of international towers, and has towers in several countries around the
world. American Tower is the largest independent tower operator in the world, with 62,968
towers worldwide and 34,000+ outside the US. Crown Castle is only in two countries (the US
and Australia), but it is the largest independent tower operator in both. SBAC is the smallest of
the three, and has been acquiring towers in Brazil and other Latin American countries in order to
catch up with American Tower. The vast majority of SBAC’s revenue and profits still come from
the US, though. (It obtains such a small amount of revenue from its international towers that it
does not even break out the split between domestic and international revenue in its filings.)
Recent News
SBAC has not been in the news recently, but both of its competitors have made sizeable
acquisitions in the last few months. In September, American Tower acquired Global Tower
Partners’ tower portfolio of 5,500 towers and 9,000 other sites for $4.8 billion and in October
Crown Castle acquired the land rights to 9,700 of AT&T’s towers for $4.85 billion. (Before
American Tower’s acquisition, Global Tower Partners was the fourth largest independent tower
operator in the world.) Acquisitions have thus been the news story in the tower operator industry
over the last few months.
OSU SIM Equity Research
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SBA Communications
November 11, 2013
SBAC’s Competitive Advantages
There are honestly not many sustainable competitive advantages for SBAC. They are
caught between the landowners and the wireless carriers, both of whom have more power than
SBAC (i.e. both buyer power and supplier power are high.) It is also difficult to for SBAC to
differentiate itself. Their key asset is land rights for a certain period of years, and thus the land is
the differentiator, not the company.
Exhibit 7. Future Lease Income To Be Received Under NonThus, probably the most
Cancellable Leases (in thousands)
significant competitive advantage
Year
Lease Income
% of 2012 Revenue
SBAC has is its portfolio of long2013
934,199
97.9%
term leases. To quantify that
2014
867,696
90.9%
advantage, their portfolio of long2015
769,680
80.7%
term leases leads to very “sticky”
2016
657,011
68.9%
cash flows compared to firms in
2017
544,214
57.0%
other industries. SBAC has a good
Thereafter
2,833,582
297.0%
portion of its revenue locked for the
Total
6,606,382
692.4%
next 5 years, as can seen in Exhibit 7. *Note: SBAC includes rent escalators in these projections
The Consensus View
The market currently is expressing significant optimism in regards to the three wireless
tower operators, and all three are trading at strong premiums to their historical valuation. A few
of the items that wireless tower “bulls” cite as reasons for these valuations include:
a) significant growth in wireless telecom capital spending to accommodate the increased
demand for faster network performance due to growth in mobile data usage,
b) the rent escalators built into the contracts between the tower operators and the wireless
carriers,
c) the low maintenance capex necessary to keep a tower going,
d) the steady cash flows that the long-term contracts provide, and
e) the extremely high barriers to entry in the industry.
However, for reasons that I discuss below, I believe that while these are all positives for
the industry, there is too much optimism surrounding the industry in general. Of the three,
though, I believe that SBAC is in the inferior position, even though the market values SBAC at a
premium to the other two.
The Investment Thesis
Macro Trends
SBAC’s core revenues are largely in place for the next 3-5 years, so their revenue
stability is not directly correlated to any particular economic data point. However, SBAC’s longterm expected growth is most definitely connected to the health of the telecommunications
sector, which in turn depends on consumer spending and consumer confidence. As the US
economy continues to sputter towards growth and the unemployment rate continues to decline, I
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SBA Communications
November 11, 2013
believe that both metrics will slowly and gradually improve, which should help encourage
telecommunications capital expenditures and thus SBAC’s revenue. As the below exhibits show,
SBAC’s industry returns are at least somewhat correlated with real GDP and Consumer
Spending.
Exhibit 8. 5-Year Correlation Between Real GDP and
Wireless Telecommunications Services
Exhibit 9. 5-Year Correlation Between Consumer
Spending and Wireless Telecommunications Services
Interest Rates
That said, in my opinion the economic factors that will have the most tangible effect on
SBAC are interest rates and inflation. First, out of the $5.6 billion of outstanding long-term debt
that SBAC owes, roughly $500 million of it has variable interest rates. This is only a rough
estimation, but a 1% increase in interest rates could add $5 million in annual interest expense to
SBAC. If interest rates dramatically increase, the effect would obviously be higher.
The risks just mentioned, while tangible, are not extremely large for SBAC. However,
SBAC has benefited from low interest rates in the last few years and has been able to refinance
their debt cheaply, but it is highly likely that interest rates will increase over the next 5-7 years,
and when SBAC has to refinance a few of their key debt issues, their interest burden will likely
be higher. (SBAC does not have enough annual free cash flow to pay off all of the debt principal
that will be coming due in the next ten years, so will have to refinance or issue a significant
amount of equity in order to deal with the maturing debt, possibly diluting shareholders.
Inflation
Were inflation to increase, SBAC would feel it acutely. Their long-term contracts have
built-in rent escalators of roughly 3.5% for the next 5-10 years, and while that is a positive in an
environment of high inflation, they leave the firm with nearly zero pricing power over the next
five years. It is difficult to estimate precise figures, but while gross margins would stay fairly
constant with probably a small decline (rent expense would remain at 3-4% annual increases
while property taxes would probably increase at a higher rate), the operating margin would
definitely decrease.
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SBA Communications
November 11, 2013
Fundamental Factors
The key to my SBAC sell recommendation is the combination of the firm’s financial
leverage, the expectation for growth implicit in the company’s valuation, and the competitive
dynamics in the industry. Before diving into those three areas in depth, though, I briefly want to
touch on a few other elements of my thesis that support my recommendation. These are: a)
regulation, b) misaligned managerial incentives, c) rising rent expense, and d) technological
vulnerability.
Regulation
One factor that is significant to all wireless tower operators is the amount of regulation
inherent in the industry. As mentioned earlier, it is extremely difficult to obtain regulatory
approval for a wireless tower site. This can be both good and bad. On the positive side, it creates
high barriers to entry. On the negative side, it affects SBAC in that it is extremely difficult for
the firm to grow enough organically in the United States to “move the needle.” Because of
regulation and other NIMBY (“Not In My Back Yard”) factors, SBAC has no choice but to grow
internationally via acquisitions. In the past two years, SBAC has been constructing 350+ towers
a year, but that has been a very minor part of their growth, as can be seen in Exhibit 10. (Going
forward, constructing 350+ annual towers would only be 2% of their stated 5-10% annual tower
growth.) Acquisitions are thus a core part of the strategy, and with their leverage it is going to be
increasingly difficult to compete for major acquisitions against American Tower and Crown
Castle.
Exhibit 10. Breakdown of Constructed vs. Acquired Towers (2003-2012)
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Towes Owned- Beginning of Period
3,877
3,093
3,066
3,304
5,551
6,220
7,854
8,324
9,111
10,524
Towers Acquired
0
5
208
2,189
612
1,560
376
712
1,085
6,630
Towers Constructed
13
10
36
60
61
85
101
124
388
356
Towers Reclassified/Disposed of
(797)
(42)
(6)
(2)
(4)
(11)
(7)
(49)
(60)
(19)
Towers Owned- End of Period
3,093
3,066
3,304
5,551
6,220
7,854
8,324
9,111
10,524
17,491
New Towers, Net
(784)
(27)
238
2,247
669
1,634
470
787
1,413
6,967
Constr, Towers as % of Net New Towers
-1.7%
-37.0%
15.1%
2.7%
9.1%
5.2%
21.5%
15.8%
27.5%
5.1%
Management Incentives
A further element of the fundamental thesis is that management is incented to grow via
acquisition without regards to interest payments, debt repayment, or acquisition-related
expenses. The 2013 proxy statement describes the guidelines for determining bonus pay, and the
only quantitative metric that the board uses is Adjusted EBITDA dollars. In calculating this
Adjusted EBITDA number, it is worth pointing out that acquisition costs are not included. Thus,
management is incented to grow EBITDA via any method possible, and right now their method
of choice is by acquisition. This leads to an inflated balance sheet for shareholders but higher
bonuses for management. I did check out the proxy statements of both Crown Castle and
American Tower, and while they both use a similar Adjusted EBITDA measure, they use a few
other metrics, as well.
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SBA Communications
November 11, 2013
Rising Rent Expense
Another area worth pointing out is the rising rent expense as % of sales this past year.
This is potentially illustrative of the fact that a) SBAC’s average tenants/tower is decreasing
and/or b) landowners are
Exhibit 11. Rent Expense as % of Sales
wielding their power and
Year
2008
2009
2010
2011
2012
maintaining their rent levels. As
Rent Expense
63,300
72,600
75,400
82,800
133,100
towers become increasingly
Contingent Rent Expense
8,100
9,900
12,500
13,700
16,100
difficult to come by here in the
Total Rent Expense
71,400
82,500
87,900
96,500
149,200
United States, it is likely that
these landowners will continue
Rent Expense % of Sales
15.0%
14.9%
14.0%
13.8%
15.6%
attempting to increase their slice
of the pie and negotiate for higher rents. Currently this is not a major part of the thesis, but it is
worth keeping an eye on. (Please note that rent expense is disclosed only at the back of their 10K’s, not their 10-Q’s.)
Technological Vulnerability
A further reason I am cautious in regards to SBAC is due to the pace of technological
change. There are several technologies being researched that could severely disrupt the
traditional wireless tower business model. These include DAS (Distributed Antenna System)
networks, rooftop systems, low-orbiting satellites, and Alcatel-Lucent’s lightRadio cube. Both
American Tower and Crown Castle have DAS networks technologies in use, and they are
currently used to provide wireless service in malls, underground subway systems, and other
locations where wireless towers have a difficult time reaching. Unlike American Tower and
Crown Castle, SBAC does not currently have any DAS network technologies in use. In fact,
SBAC sold their DAS networks this past year to a firm in which they are one of several
investors, reinforcing their dependence upon the traditional wireless tower network.
Perhaps the greatest technological risk comes from the lightRadio cube by AlcatelLucent. In 2011, the CEO of Alcatel-Lucent stated that “LightRadio will signal the end of the
base station and the cell tower as we know it today.”2 The cube uses a small-cell network and is
scalable and flexible. 3 It is beginning to be deployed by Verizon in 2H 2013 as a “hole-filling”
device in dead zones that are “still too small or under trafficked for a DAS”. 4 It is still in the
very early stages in adoption, and might not ever reach full adoption, but it is worth noting as a
risk to SBAC and the wireless tower industry in general.
This technological risk is made a little more relevant because of the fact that people don’t
really like looking out their window to see wireless towers. Were there to be a way to achieve
high wireless speeds at a low price via low-orbiting satellites or Alcalel Lucent’s cube, these
methods would no doubt be popular among consumers.
2
http://www.slashgear.com/alcatel-lucent-lightradio-promises-tiny-2g3g4g-cell-base-stations-07131262/
http://www.alcatel-lucent.com/solutions/lightradio
4
http://www.anandtech.com/show/6632/verizon-shows-off-alcatel-lucent-lightradiobased-small-cells-deploying-in2h-2013
3
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November 11, 2013
Competitive Dynamics in the Wireless Industry
The first of the three primary reasons I recommend selling SBAC is due to the changing
competitive dynamics in the wireless industry. One of the disruptive forces this past year has
been T-Mobile and their new phone plans. They have been messing with the current wireless
near-duopoly held by AT&T and Verizon by changing the way wireless consumer contracts are
structured. Since being acquired by Softbank, Sprint has also been shaking things up by heavily
investing in their network and beginning to lower prices, as well. The industry is beginning to
compete more on price than it has up to this point, and this is likely to continue. One of the
reasons many believe that the price war is just beginning is that Softbank (the Japanese
telecommunications company that acquired Spring in 2012) reached a strong position in its home
market of Japan by competing and growing market share based on price.
These dynamics could be good or bad for wireless tower operators. They are good in that
there seems to be a steady amount of capital expenditures by major wireless tower operators on
their networks, which gives SBAC more incremental income on their currently held towers.
These changes are bad in that a price war would lead to carriers being more demanding on costs
all the way through the supply chain. Currently, carriers have been offloading their wireless
towers to tower operators in order to focus on running their core operations. But, were the
wireless tower operators to charge prices that are not feasible in a new, price-driven wireless
industry, the carriers ultimately can choose to not renew their leases or vertically integrate and
repurchase their towers. A drawn-out price war would be a negative for SBAC, in my opinion.
Third, and most significantly, the final element of industry dynamics that has impacted
SBAC is the increasing consolidation of the major wireless carriers. As wireless carriers
consolidate, one of the first things they do after consolidation is to begin to rationalize their
networks and remove some of their network redundancies. This hurts all wireless tower
operators, as having multiple tenants per tower is extremely valuable. Wireless tower operators
would love for the United States to have a dozen national networks that needed to use their
towers. I believe that there will continue to be four strong national wireless carriers in the US
telecom market, but that many of the smaller firms will continue to consolidate in an effort to
compete against the top networks and capabilities of the big four. If 100% of the SBAC’s
revenue came from the big four carriers, this would not be a threat. As consolidation continues,
thugh, it remains in my opinion a strong negative for SBAC.
Financial Leverage
The second primary reason I am selling SBAC is due to its financial leverage. As of the
most recent quarter ending Sep. 30, 2013, SBAC had $5.65 billion in long-term debt against total
assets of $6.58 billion, for a Debt/Equity ratio of 12.6. Both American Tower and Crown Castle
have D/E ratios of 3.6. After going through their filings and categorizing their different debt
issuances, I believe there are three overall buckets that describe the firm debt, and these three
tables are below.
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Exhibit 12. SBAC's Variable-Rate LT Debt Maturing in <6 Years and is Governed by the Senior Credit Agreement (in thous.)
Amt. Oustanding
Maturity Date Variable Interest Rate Details
Interest Rate Based on:
187,500
9-May-17
Currently 2.18%
Debt to EBITDA
Base Rate plus margin of 100 to 150 basis points
Or Eurodollar Rate plus margin of 200 to 250 basis points
Pays 2.5 mil. each Q for 1st 8 q's, 3.75 mil for next 4 Q's, and 5 mil each Q thereafter
2011 Term Loan B
180,500
30-Jun-18
Currently 3.75%
Debt to EBITDA
Base Rate plus margin of 175 basis points (Base floor of 2%)
Or Eurodollar Rate plus margin of 275 basis points (Eurodollar floor of 1%)
2012-2 Term Loan B
110,000
28-Sep-19
Currently 3.75%
Debt to EBITDA
Base Rate plus 175 basis points (with Base floor of 2%)
Or Eurodollar Rate plus 275 basis points (with Eurodollar Rate floor of 1%)
Revolving Credit Facility
0
Per Annum commitment fee of 0.375% to 0.5% of unused commitments
Eurodollar Rate + range from 187.5 basis points to 237.5 basis points
Debt to EBITDA
Or Base Rate + range from 87.5 to 137.5 basis points
770,000 available for use.
Total
478,000
3.13%
Name of Issuance
2012-1 Term Loan S
Exhibit 13. SBAC's Fixed Rate LT-Debt Maturing for >25 Years (in thous.)
Secured Tower Revenue Securities Amt. Outstanding
Maturity Date
Interest Rate
2010-1
680,000
16-Apr-40
4.25%
2010-2
550,000
15-Apr-42
5.10%
Weighted Average
1,230,000
4.70%
2012-1
610,000
15-Dec-42
2.93%
2013-1C
425,000
Apr-43
2.22%
2013-2C
575,000
Apr-48
3.72%
2013-1D
330,000
Apr-43
3.60%
Weighted Average
1,330,000
3.22%
Total
3,170,000
3.74%
Exhibit 14. SBAC's Fixed-Rate LT Debt Maturing in <7 Years (in thous.)
Name of Issuance
Amt. Outstanding
Maturity Date
Interest Rate
4% Convertible Senior Notes
500,000
1-Oct-14
4.0%
8.25% Senior Notes
243,800
15-Aug-19
8.25%
5.625% Senior Notes
500,000
1-Oct-19
5.63%
5.75% Senior Notes
800,000
15-Jul-20
5.75%
Total
2,043,800
5.59%
As can be seen, the largest bucket, made up of senior securities with extremely long
maturities and fixed maturity rates, is, apart from the large $118.5 million dollar annual interest
payment, unlikely to cause any other near-term difficulties. The second bucket (the variable
interest debt) is one which SBAC will be able to pay off with their cash flows if they manage
their capital allocation well and remain fiscally disciplined in future acquisitions. However, the
bucket that is the riskiest is the bucket of short-term fixed rate debt that will need to be
refinanced in the next seven years. The company does not generate enough free cash flow to pay
off the $478 million of the variable debt and the $2 billion in the medium-term senior notes. The
medium-term notes are the ones that expose the firm most to refinancing risk if the broader
interest rate market goes up.
SBAC has a Senior Credit Agreement that covers a significant portion of their debt, and
that agreement stipulates that SBAC maintain a 6.5x Consolidated Total Debt to Adjusted
EBITDA ratio. Of particular interest is that in the back of the most recent quarterly filing SBAC
discloses that it recently increased the highest allowed ratio from 6.0x to 6.5x in the Senior
Credit Agreement. Upon researching this further, I discovered that they are actually following
American Tower’s lead, as American Tower increased their ratio before SBAC. That said, I am
uncomfortable with the current debt levels and am not pleased to see their Debt/EBITDA ratio
getting any higher. (For completeness, the credit rating via S&P for SBAC is BB-, Crown Castle
is BB, and American tower is BBB-. American Tower is thus the only investment grade firm of
the three.)
Nowhere could I find SBAC’s definition of “Consolidated Total Debt”, but they do give
their Adjusted EBITDA figures. In an attempt to view the ratio that governs their covenants, I
used all long-term debt plus the current portion of long-term debt as the consolidated total debt
figure, and the Adjusted EBITDA number they provided. The ratios I obtained were higher than
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November 11, 2013
the Senior Credit Agreement limit allowed, and the company must be calculating it in a different
way.
Their Adjusted EBITDA figures take out acquisition and impairment figures and attempt
to portray the core business. It does
Exhibit 15. Debt/EBITDA Calculations (in thous. exc/ratios)
portray the core business, but I believed
Year
2008
2009
2010
2011
2012
it also worthwhile to calculate what I
Adjusted EBITDA
269,186 338,464 387,379 444,917
587,946
would consider the real EBITDA of the
Real EBITDA
257,027 313,491 353,000 419,805
555,613
firm, so I also adjusted their numbers to
Debt/Adjusted EBITDA
8.89
7.35
7.30
7.54
9.11
create what I thought were more apt
Debt/Real EBITDA
9.31
7.94
8.01
7.99
9.64
numbers. To the right are the corporate
Total Debt
2,392,230 2,488,870 2,827,450 3,354,485 5,356,103
adjusted EBITDA, my “real” EBITDA,
total debt, debt/adjusted EBITDA and debt/real EBITDA ratios.
Their corporate strategy is stated
at growing their tower portfolio at 5-10%
Exhibit 16. Debt Growth In Contrast to Assets, Revenues and Towers (in thous. exc/towers)
per year. They have definitely exceeded
Year
2008
2009
2010
2011
2012
CAGR
that the last few years due to several
Total Assets
3,207,829 3,313,646 3,400,175 3,606,399 6,595,617 19.7%
major acquisitions. However, their
Company Revenues
474,954 555,513 626,619 698,170 954,084 19.1%
growth in debt has actually been higher
Towers
7,854
8,324
9,111 10,524 17,491 22.2%
than their growth in the tower portfolio,
2,392,230 2,488,870 2,827,450 3,354,485 5,356,103 22.3%
assets, and revenues, which is not a good Total Debt
sign with the current industry dynamics.
Finally, the cost per tower has actually been increasing in recent acquisitions, reaching
$500,000 tower in the most recent major transaction (Crown Castle and AT&T), which means
that SBAC will have to fork out more cash for towers it acquires over the next few years. The
difficult part about SBAC’s position is that the only driver they really have control over right
now is adding more towers via acquisitions. The problem is that the most profitable towers in the
world are in the United States, and the majority of those are unavailable, with Crown Castle and
American Tower this quarter locking in a significant percentage of the remaining towers.
Acquisitions in the US are now going to be few and far between. International towers, while
cheaper, provide lower revenue/tower and have unique risks of their own. In order to keep up
with American Tower and Crown Castle, SBAC has to continue to grow its tower portfolio via
acquisitions, and that is largely only possible internationally, where American Tower is the clear
front-runner.
Discussion of my DCF Valuation
The third reason I am recommending SBAC as a sell is due to its rich valuation. To
obtain my valuation, I used a DCF analysis. For my income statement projections, I broke down
the revenue drivers for the site leasing segment into the smallest achievable pieces I could: total
towers, revenue/tenant, and average tenants per tower. Site development is an extremely
unpredictable segment and is not so easily broken down, so for that segment I simply projected
out a reasonable revenue growth rate.
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In my projections, I assumed that tenants/tower gradually shift down to 1.8 a tower over
the next 10 years, which I believe is generous. For most years, I also assumed the mid-point of
their tower growth- 7.5%, and used the revenue/tenant over the last twelve months.
Revenue Projections
Key Revenue Drivers
Average Tenants/Tower
Revenue/Tower
Revenue/Tenant
Organic Growth on Towers
Towers
Tower Growth
Built Towers
Acquired Towers
Site Leasing Revenue
Site Development Revenue
% Growth
Total Revenue
Total Revenue Growth
Exhibit 17. Revenue Drivers and Breakdown of Revenue Growth Projections (in thous.)
2013E
2014E
2015E 2016E 2017E 2018E 2019E 2020E 2021E
2022E
2023E
2.0
63.4
31.7
31.0%
2.0
65.9
33.0
4.0%
1.9
65.1
34.3
4.0%
1.9
68.4
36.0
5.0%
1.9
71.8
37.8
5.0%
1.9
75.4
39.7
5.0%
1.9
79.1
41.7
5.0%
1.8
78.7
43.7
5.0%
1.8
82.7
45.9
5.0%
1.8
86.8
48.2
5.0%
1.8
87.2
48.5
0.5%
18,100
18,824
4.0%
350
374
19,577
4.0%
350
403
21,045
7.5%
350
1,118
22,624
7.5%
350
1,228
24,434
8.0%
350
1,460
26,388
8.0%
400
1,555
28,499
8.0%
400
1,711
30,779
8.0%
400
1,880
33,242
8.0%
400
2,062
33,773
1.6%
0
532
1,146,975 1,240,568 1,274,708 1,438,827 1,624,076 1,841,702 2,088,490 2,243,698 2,544,354 2,885,297 2,946,119
140,387
148,810
157,739
167,203
177,235
187,869
199,142
211,090
223,756
237,181
239,553
30.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
1.0%
1,287,362 1,389,378 1,432,447 1,606,030 1,801,311 2,029,572 2,287,632 2,454,788 2,768,109 3,122,478 3,185,672
7.9%
3.1%
12.1%
12.2%
12.7%
12.7%
7.3%
12.8%
12.8%
2.0%
After doing this, I was wondering how they would bankroll their tower growth, so I
projected out the capex necessary to maintain the tower portfolio ($1,000 a tower, as stated by
management), to build a new tower ($200,000/tower) and to buy ($400,000/tower) a new tower.
(My estimates are of course rough, because, for example, international towers are cheaper than
US tower but provide less revenue/tower.) My conclusion from my capex analysis was that the
company will not be able to do any major acquisition without issuing a significant portion of the
purchase price in debt or equity, but that the firm will be able to grow its tower portfolio at
roughly 5.-7.5% rate using its internal cash flows. Finally, I am assuming they do not use their
free cash flow to pay off any of their debt early. Here are my capex calculations:
CapEx Projections
Cost to Build Tower
Cost to Acquire Tower
Maint. Capex @ $1,000/tower
Capex- Building
Capex- Aquiring
Total CapEx
Exhibit 18. Capex Drivers and Breakdown of Capex Projections (in thous.)
2013E
2014E
2015E 2016E 2017E 2018E 2019E 2020E
200
200
225
225
250
250
250
400
400
400
425
425
425
450
18,824
19,577
21,045
22,624
24,434
26,388
28,499
70,000
70,000
78,750
78,750
87,500 100,000 100,000
149,600 161,184 447,309 522,067 620,453 660,739 769,975
386,209 238,424 250,761 547,104 623,440 732,387 787,128 898,474
Cash from Operations
CFO less Capex
444,305
58,096
Sales
CapEx as % of Sales
493,404
254,980
579,749
328,988
747,286
200,182
2021E
2022E
250
250
450
450
30,779
33,242
100,000 100,000
845,973 928,051
976,752 1,061,292
2023E
250
450
33,773
0
239,339
273,112
890,028 1,041,576 1,217,706 1,354,307 1,607,718 1,874,111
266,588 309,189 430,579 455,832 630,966 812,819
972,426
699,314
1,287,362 1,389,378 1,432,447 1,606,030 1,801,311 2,029,572 2,287,632 2,454,788 2,768,109 3,122,478 3,185,672
30.0%
17.2%
17.5%
34.1%
34.6%
36.1%
34.4%
36.6%
35.3%
34.0%
8.6%
Throughout my Income Statement and DCF projections, which are visible on page 19 of
this report, I do not change the operating costs involved in running the tower, and assume they
will remain fairly constant as % of sales. As the firm depreciates and amortizes the major
acquisitions of the past few years during the next ten, I have D&A gradually declining as a % of
sales. For the tax NOL carry-forwards I am basically assuming a 0% tax rate in the US for the
next decade, just to be conservative. I do maintain a 3% tax rate because the firm still has
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November 11, 2013
international operations that the NOL carry-forwards do not apply to, but this only affect the
entire valuation/share by a few pennies. I am being fairly generous with the operating margin,
basically assuming that they will be able to record-high operating margins in the next 5-10 years
(at similar levels to American Tower, the wireless tower operators with the highest margins.)
The terminal FCF growth rate I am using for my DCF analysis is 2.0%, and I am thinking
of that as growth above and beyond the 3-4% annual rent escalator because the rent escalator
SBAC receives is offset by the rent escalator that SBAC has to pay. To clarify, total revenue
growth would be 5-6% but this would not result in FCF or NOPAT growth because the rent
escalator SBAC pays must also rise 3-4%. I believe this is a generous estimate. The discount rate
I am using is 9.0% as the cash flows are fairly steady and predictable, but the uncertainty of
consolidation and new technologies could mitigate that stability over the next 5-10 years. I do
not feel like I can go any lower than 9.0%.
Consensus Expectations
As far as how my projections mesh with consensus, I do not much differ. It is a steady
business model, and consensus revenue expectations make sense to me. Consensus EPS numbers
are a little more curious and widely vary, but I am quite close to their estimates for 2013 and
2014 and am below their 2015 estimate. My projections vs consensus are as follows:
Exhibit 20. Consensus EPS Forecasts
Exhibit 19. Consensus Revenue Forecasts (in thous.)
Revenues
Consensus
2013E
1,280,000
2014E
1,390,000
2015E
1,440,000
EPS
2013E
2014E
2015E
Consensus
($0.42)
($0.45)
$0.82
Mine
1,287,362
1,389,378
1,432,447
Mine
($0.48)
($0.44)
$0.27
Finally, by looking at the current price, I believe the market is implying an 18%+ revenue
growth rate for the next decade, and I believe that is simply too optimistic given the firm’s
inability to increasing inability to grow in big chunks.
Other Valuation Methods
There are several ways to value SBAC. The primary way in which I valued the firm (as
expressed above) is via a DCF analysis. However, there are some “back of the envelope”
methods that also easily demonstrate that the firm is overvalued. To me, the single best way to
value SBAC is based on recent comparable tower acquisitions. The most relevant and simple
example is the most recent major acquisition done less than a month ago.
Crown Castle acquired 9,700 of AT&T’s towers for $4.85 billion. They are all in the US,
and thus are generally more valuable than international towers. That purchase price equates to a
$500,000 purchase price per tower. SBAC’s current Enterprise Value is $17.19 billion and they
currently own 17,889 towers, including 2,500+ in international markets. At the current EV,
SBAC is selling for $961,000 per tower! That is an unheard-of price in any recent comparable
transaction. My target price of $50 is equivalent to about $700,000 a tower, which is definitely a
generous estimate. That accounts for some synergies and the value of the long-term leases, and
gives management the benefit of the doubt on their acquisitions. I simply do not see how the firm
could be worth more than that.
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Exhibit 21. 5-Year Multiple Analysis
Another way to value the firm would
High
Low Median Current
be to use multiples. This is a little less
Absolute
relevant to SBAC than others because they
EV/Sales
13.8
8.9
11.9
12.1
have not had a profitable year in years so the
EV/EBITDA
25.8
15.0
21.0
21.5
P/E multiples are not meaningful. However,
P/B
38.3
3.9
13.6
17.3
using multiples does show that on an absolute P/S
10
3.9
7.5
8.3
basis the firm is slightly overvalued. In short, P/CF
37.5
12.4
27.4
20.1
I do not believe that multiples are the best
Relative to Industry
22.3
2.4
6.0
2.4
value to value SBAC, but rather that my DCF P/B
P/S
10.5
6.3
8.6
7.5
provides the best estimate of its intrinsic
P/CF
10.5
0.8
4.8
0.8
value.
Relative to S&P 500
Finally, it is important to realize that
P/B
17.7
2.2
5.8
6.9
there is definitely value in this company. The
P/S
7.9
4.7
6.2
5.4
cash flows are reliable and predictable and the
P/CF
4.3
1.7
3.0
1.8
business has high barriers to entry. For the
right price, I would happily have SBAC in my portfolio. However, at an EV/EBITDA of 21.5, I
do not care how steady the cash flows are. That is simply too much of a premium to pay for
steady cash flows in an industry in which major profitable growth will be difficult going forward.
Risks/Concerns to Recommendation
There are a few risks/concerns with selling the stock now. The primary risk is that
wireless carriers are going to invest more in upgrading their network than consensus expects.
Over the next 5-10 years, it is well-known (and I assume in my projections) that carriers will
continue to spend on their networks, but it is difficult to estimate the exact amount that will be
spent and how much SBAC will be able to capture of that. Were carrier capital spending to be
higher, my projections could possibly be too conservative.
The second risk to the sell recommendation is that the government will release
significantly more spectrum in auctions, giving the carriers further impetus to invest in their
network capacity. More spectrum would lead directly to more investment.
The third risk is that SBAC will convert to a REIT, thus prompting further multiple
expansion. American Tower recently converted to a REIT (in 2012) and experienced significant
stock price appreciation since their conversion. However, I believe that this is unlikely in the
next few years because the advantage of investing in REITs is minimize the tax cost to
shareholders because firms return 90% of all taxable income to shareholders, and SBAC has no
taxable income. Also, SBAC has $1.2 billion in federal NOL carry forwards and $500 million in
state NOL carry forwards, all of which would offset taxable income for quite some time without
having to convert to a REIT.
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Conclusion
To conclude, I declare a SELL recommendation on SBAC shares. While the company
has had great success and growth over the last 5 years, and I would definitely own the shares at
the right price, there currently is simply too much leverage to continue that growth versus bettercapitalized competitors. My bet is on either Crown Castle or American Tower, and I believe
American Tower has the greatest growth potential due to their broad international reputation and
footprint.
In short, SBAC is in a difficult place right now. When carriers look for companies to
sell their towers to, they look for long-term stability. Both American Tower and Crown Castle
are in more stable positions financially and competitively than SBAC. The more acquisitions
those two firms do, the further they are ahead of SBAC, so SBAC has to try to keep up. The
problem is that their leverage is now quite high and it will be difficult for SBAC to keep up with
its larger rivals. In time, I believe this will diminish SBAC’s position in the industry.
My DCF valuation of $50 is equivalent to roughly $700,000/tower. To me, that is
more than generous, as the highest transaction cost I have found is $500,000 a tower. I
simply see no way the firm is worth $960,000 a tower, which is what the current stock price
is implying.
While the Ohio State Student Investment Management fund cannot short or purchase put
options, and can indeed only recommend selling the stock, perhaps some readers would be able
to short or buy puts on the name. I would recommend shorting above $90, as I believe that there
is a margin of safety at that price.
Again, by selling at $91.25, I believe one would avoid a negative 45% downside, as
the company is, in my opinion, worth roughly $50.
.
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Appendix 1: Income Statement Forecast
(in thous ands )
2008
2009
2010
2011
2012
2013E
2014E
2015E
395,541
477,007
535,444
616,294
846,094
1,146,975
1,240,568
79,413
78,506
91,175
81,876
107,990
140,387
148,810
157,739
Total Revenues
Consensus
474,954
555,513
626,619
698,170
954,084
1,287,362
1,389,378
1,432,447
1,280,000
1,390,000
1,440,000
Cos t of Revenues
168,165
180,543
199,442
202,921
279,507
379,310
413,002
389,979
Gros s Profit
306,789
374,970
427,177
495,249
674,577
908,052
976,376
1,042,468
Income Statement
Site Leas ing
Site Development
SG&A
1,274,708
48,721
52,785
58,209
62,828
72,148
102,989
111,150
111,015
Acquis ition-Related Expens e
120
4,810
10,106
7,144
40,433
6,437
6,947
14,324
As s et Impairment
921
3,884
5,862
5,472
6,383
6,437
6,947
14,324
211,445
258,537
278,727
309,146
408,467
514,945
555,751
544,330
45,582
54,954
74,273
110,659
147,146
277,244
295,581
358,474
6,883
1,123
432
136
1,128
1,287
1,389
Depreciation, Accrection, and Amortization
Operating Income
Interes t Income
Interes t Expens e
1,432
(105,328)
(130,853)
(149,921)
(160,896)
(196,241)
(231,725)
(236,194)
(229,192)
Non-Cas h Interes t Expens e
(33,309)
(49,897)
(60,070)
(63,629)
(70,110)
(38,621)
(27,788)
(28,649)
Amortization of Deferred Financing Fees
(10,746)
(10,456)
(9,099)
(9,188)
(12,870)
(19,310)
(20,841)
(21,487)
(5,661)
(49,060)
(1,696)
(51,799)
(51,494)
(69,469)
(42,973)
(1,287)
(1,389)
(63,907)
(58,710)
(Los s ) Gain from Extinguis hment of Debt, net
44,269
Other Income (Expens e)
(13,478)
Los s Before Provis ion For Income Taxes
(66,127)
Provis ion for Income Taxes
Net Los s from Continuing Ops
163
(140,627)
29
(193,416)
(165)
5,654
(124,779)
(177,092)
(1,037)
(492)
(1,005)
(2,113)
(6,594)
(1,917)
(1,761)
1,085
(67,164)
(141,119)
(194,421)
(126,892)
(183,686)
(65,824)
(60,472)
37,259
(67,164)
(141,119)
(194,421)
(126,892)
(181,390)
(67,164)
(140,871)
Income from Dis continued Ops , Net of Taxes
2,296
Net Los s
Net (Income) Los s Attr. to Min. Interes t
248
Net Los s Attr. to SBA Communications
Weighted Avg. Diluted Shares Outs tanding
Diluted EPS
109,882
$
(1,432)
36,174
(0.61)
(253)
(194,674)
117,165
$
(1.20)
436
(1.68)
353
(126,456)
115,591
$
(1.13)
Cons ens us
353
(60,119)
136,912
(1.51)
0
37,259
353
(65,471)
120,280
$
0
(60,472)
353
(181,037)
111,595
$
0
(65,824)
37,612
136,912
136,912
$
(0.48)
$
(0.44)
$
0.27
$
(0.42)
$
(0.45)
$
0.82
Appendix 2: DCF Analysis
Analyst: Micah Martin
11/11/2013
Year
Terminal Discount Rate =
Terminal FCF Growth =
2013E
Revenue
1,287,362
2014E
1,389,378
% Growth
7.9%
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Effective T ax Rate
Net Income
277,244
295,581
Plus/(minus) Changes WC
% of Sales
Organic CapEx
Organic Cap Ex % of Sales
Acquisitions CapEx
Acquisitions CapEx % of Sales
Subtract Cap Ex
T otal Capex % of sales
Free Cash Flow
358,474
1,606,030
12.1%
481,809
1,801,311
12.2%
558,407
2018E
2,029,572
12.7%
649,463
2019E
2,287,632
12.7%
754,919
2020E
2,454,788
7.3%
834,628
2021E
2,768,109
12.8%
968,838
2022E
3,122,478
12.8%
1,124,092
2023E
3,185,672
2.0%
1,178,699
25.0%
30.0%
31.0%
32.0%
33.0%
34.0%
35.0%
36.0%
37.0%
(341,151)
(354,291)
(322,301)
(337,266)
(324,236)
(324,731)
(320,268)
(319,122)
(304,492)
(312,248)
(238,925)
26.5%
25.5%
22.5%
21.0%
18.0%
16.0%
14.0%
13.0%
11.0%
10.0%
7.5%
(1,917)
(1,761)
1,085
4,336
7,025
9,742
3.0%
3.0%
(65,824)
(60,472)
514,945
555,751
3.0%
37,259
-161.6%
544,330
3.0%
140,206
276.3%
610,291
3.0%
227,145
62.0%
666,485
3.0%
314,990
38.7%
730,646
13,040
3.0%
421,611
33.8%
800,671
15,465
3.0%
500,040
18.6%
859,176
19,930
3.0%
644,416
28.9%
968,838
24,355
3.0%
787,489
22.2%
1,092,867
234,943
25.0%
704,830
-10.5%
273,968
40.0%
40.0%
38.0%
38.0%
37.0%
36.0%
35.0%
35.0%
35.0%
35.0%
8.6%
(4,687)
(1,275)
(538)
(3,212)
(3,603)
(4,059)
(4,575)
(4,910)
(5,536)
(6,245)
(6,371)
0.4%
0.1%
0.0%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
(128,736)
(88,824)
(89,577)
(99,795)
(101,374)
(111,934)
(126,388)
(128,499)
(130,779)
(133,242)
(33,773)
10.0%
6.4%
6.3%
6.2%
5.6%
5.5%
5.5%
5.2%
4.7%
4.3%
1.1%
(257,472)
(149,600)
(161,184)
(447,309)
(522,067)
(620,453)
(660,739)
(769,975)
(845,973)
(928,051)
(239,339)
20.0%
10.8%
11.3%
27.9%
29.0%
30.6%
28.9%
31.4%
30.6%
29.7%
7.5%
(386,209)
(238,424)
(250,761)
(547,104)
(623,440)
(732,387)
(787,128)
(898,474)
(976,752)
(1,061,292)
(273,112)
30.0%
17.2%
17.5%
34.1%
34.6%
36.1%
34.4%
36.6%
35.3%
34.0%
8.6%
58,225
255,580
% Growth
338.9%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
3.1%
2017E
21.3%
-8.1%
% of Sales
1,432,447
2016E
21.5%
% Growth
Add Depreciation/Amort
2015E
9.0%
2.0%
2,549,260
4,304,367
6,853,627
0.47%
OSU SIM Equity Research
37%
63%
100%
330,289
29.2%
200,182
-39.4%
266,588
33.2%
309,189
16.0%
Shares Outstanding
Current Price $
Intrinsic Value/Share $
Downside to DCF
430,579
39.3%
136,912
91.25
50.06
-45.1%
455,832
5.9%
630,966
38.4%
812,819
699,314
28.8%
-14.0%
Terminal Value
Free Cash Yield
Terminal P/E
Terminal EV/EBITDA
10,190,002
6.86%
14.5
10.8
Page 19
SBA Communications
November 11, 2013
Terminal Discount Rate
Appendix 3: Sensitivity Analysis
$50.05
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
0.0%
$49.24
$45.70
$42.58
$39.80
$37.32
$35.09
0.5%
$51.37
$47.51
$44.12
$41.12
$38.46
$36.08
Terminal FCF Growth Rate
1.0% 1.5%
2.0%
2.5%
$53.80 $56.61 $59.88 $63.75
$49.55 $51.88 $54.58 $57.72
$45.85 $47.81 $50.05 $52.63
$42.60 $44.26 $46.14 $48.29
$39.73 $41.15 $42.74 $44.54
$37.18 $38.39 $39.75 $41.28
$33.08 $33.94 $34.89 $35.94
$31.25 $32.01 $32.84 $33.75
$29.59 $30.26 $30.98 $31.78
$37.11
$34.76
$32.66
3.0%
$68.40
$61.43
$55.65
$50.77
$46.61
$43.01
3.5%
$74.08
$65.89
$59.21
$53.66
$48.99
$44.99
4.0%
$81.18
$71.34
$63.49
$57.08
$51.76
$47.28
$38.42 $39.89 $41.55 $43.45
$35.88 $37.14 $38.55 $40.14
$33.63 $34.71 $35.91 $37.26
Sources:
1. SBA Communications SEC Filings: 2008-2012 10-K ; 2013 1Q, 2Q, and 3Q 10-Q
2. American Tower Corporation SEC Filings: 2008-2012 10-K; 2013 3Q 10-Q
3. Crown Castle International Corporation: 2008-2012 10-K; 2013 3Q 10-Q
4. Standard & Poors Capital IQ: Accessed at Ohio State University
5. Bloomberg Professional: Accessed at Ohio State University
6. Thomson Reuters Baseline: Accessed at Ohio State University
7. Morningstar.com
8. Yahoo Finance
9. Google Finance
10. SBA Communications Corporate Website: http://www.sbasite.com/AboutSBA.aspx
11. “Cell Phone Tower Statistics” by StatisticsBrain.com: http://www.statisticbrain.com/cell-phone-tower-statistics/
12. “American Tower To Buy Smaller Rival GTP for $4.8B” by Phil Goldstein
http://www.fiercewireless.com/story/american-tower-buy-smaller-rival-gtp-48b/2013-09-06
13. “America’s Top Tower Companies” by WirelessEstimator.com
http://www.wirelessestimator.com/t_content.cfm?pagename=US-Cell-Tower-Companies-Complete-List
14. “AT&T Agrees to $4.85 Billion Tower Deal With Crown Castle” by Scott Moritz & Selen Saitto
http://www.bloomberg.com/news/2013-10-20/at-t-agrees-to-4-85-billion-tower-deal-with-crown-castle.html
15. “T-Mobile USA to Sell Towers to Crown Castle for $2.4B” by Scott Moritz & Kenneth Wong
http://www.bloomberg.com/news/2012-09-28/crown-castle-to-buy-t-mobile-usa-towers-for-2-4-billion.html
16. “American Tower to Acquire MIP Tower Holdings in $4.8 Billion Deal” by Chris Neiger
http://www.fool.com/investing/general/2013/09/06/american-tower-to-acquire-mip-tower-holdings-in-48.aspx
17. “SBA Communications Agrees to Acquire Over 2,300 Towers and Certain DAS Assets From Mobilitie for $1.1 Billion” by
SBA Public Relations Department: http://ir.sbasite.com/releasedetail.cfm?releaseid=650026
18. “SBA Communications buys TowerCo assets for $1.45B” by Phil Goldstei
http://www.fiercewireless.com/story/sba-communications-buys-towerco-assets-145b/2012-06-26
19. “Wireless advances could mean no more cell towers” by Peter Svensson
http://usatoday30.usatoday.com/tech/wireless/2011-02-11-wireless-everywhere_N.htm
20. Alcatel Lucent Corporate Website: http://www.alcatel-lucent.com/solutions/lightradio
21. “Verizon shows off Alcatel Lucent LightRadio-based LTE Small Cells – Deploying in 2H 2013 by Brian Klug
http://www.anandtech.com/show/6632/verizon-shows-off-alcatel-lucent-lightradiobased-small-cells-deploying-in-2h-2013
22. “Alcatel-Lucent lightRadio promises tiny 2G/3G/4G cell base-stations” by Chris Davies
http://www.slashgear.com/alcatel-lucent-lightradio-promises-tiny-2g3g4g-cell-base-stations-07131262/
23. “SBA Communications (SBAC) – Short at $71.85 (Long Puts)
http://valuetakes.blogspot.com/2013/01/sba-communications-sbac-short-at-7185.html
OSU SIM Equity Research
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