T-Mobile, Sprint merger delays could impact tower sector into 2020 – analysts

T-Mobile’s macro cell site activity appears to have slowed significantly since the first half of the year as the operator awaits a decision on its proposed merger with Sprint—a move that could impact organic growth for tower companies into next year, according to Wells Fargo analysts.

In a Friday note to investors, the Wells Fargo team, led by senior analyst Jennifer Fritzsche, indicated the firm’s checks on the tower industry left some room for pause as Sprint and T-Mobile’s merger fate remains undecided and Verizon focuses more on fiber than macro sites.

“While T continues to be a bright spot for towers, checks would suggest TMUS has seen a significant slowdown in activity as it waits on the outcome of the Sprint merger,” wrote Fritzsche. “We believe this pullback will likely be a contributor to slower 2H19 organic growth vs. strong 2018 and 1H19 trends.”

The firm noted some tower companies had suggested a possible slowdown in growth, but it’s concerned the trend could linger into 2020.

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“In the past 18 months, TMUS has been the gift that has continued to keep giving to the towers,” wrote the team, but that has changed recently. “Checks suggest in late August, there was a message from TMUS corporate to hold off new cell site deployment and amendment activity.”

The uncertainty in T-Mobile’s merger drama appears to be the culprit. The deal faces opposition from 18 states, representing more than half the U.S. population, that are suing to block the merger. A trial in the case is slated to start December 9. A final decision from the FCC is also pending; although the agency’s majority signaled earlier this year that they would sign off on a deal, an FCC order approving Sprint and T-Mobile’s merger has yet to surface. 

Just this week Commissioner Geoffrey Starks called for the FCC to pause its review after allegations came to light that Sprint had abused the government’s Lifeline program and apparently collected millions of dollars in subsidies for more than 800,000 inactive Lifeline subscribers. Democratic Commissioner Jessica Rosenworcel, meanwhile, called the agency’s review of the merger “bonkers,” and said she had not been privy to changes made to the order first circulated by Chairman Ajit Pai in August.

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As merger hold-ups continued, WirelessEstimator in August reported that T-Mobile put purchase orders on hold for new builds and 5G upgrades until 2020, and more recently that T-Mobile had stopped payments to private wireless services vendors.

“It is unclear if these longer payment cycles are only being seen by the private services companies or also being seen by the public tower companies themselves,” the Wells Fargo analysts wrote.

The firm noted that with Verizon’s eyes on fiber and the Sprint and T-Mobile merger in limbo, it “could make the comps for growth the 1H20 more challenging for the US macro activity.”

At an investor conference earlier this month, American Tower SVP of Corporate Finance and Treasurer Rod Smith noted they expected to see a step down in organic growth rates in the second half of the year, with the company’s outlook for the end of 2019 at least 7% organic growth.

Smith attributed it to a fade out in new business that had ramped up in early 2018.

“If you look towards beginning of 2018, we saw a step up in new business,” Smith said at the Bank of America Merrill Lynch conference. “When we get into Q3, Q4, that new business we saw tails off.”

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Verizon, meanwhile, seems to have its sights on fiber and small cells. Wells Fargo indicated those are the top two priorities in terms of Verizon’s capital expenditures, followed by macro sites.

Verizon has been pursuing its Fiber One project, which combines all of the company’s fiber planning and needs across its different business and use cases into one initiative. This includes fiber needed for 4G LTE, 5G, backhaul and residential and business fiber-to-the-premise deployments. Earlier this month, Verizon CEO Hans Vestberg said the carrier is now deploying 1,400 route miles of fiber per month.

“We believe VZ has been slower of late as it waits for standardized 5G equipment and a possible change in its spectrum portfolio (all eyes on C-Band),” wrote the Wells Fargo team of Verizon’s macro tower activity.

Still, with uncertainty surrounding T-Mobile and Sprint, AT&T’s “One Touch” strategy—related to its FirstNet public safety communications network buildout, where it is simultaneously adding Band 14 spectrum and upgrading equipment at sites—continues to be a bright spot for towers. According to Wells Fargo, this initiative has been a positive for incumbent tower companies like American Tower and Crown Castle, as well as smaller private tower companies.

Earlier this month American Tower signed a new multi-year master lease agreement (MLA) with A&T, that AT&T’s VP of Tower Strategy and Roaming JR Wilson called at the time “essential” for executing on the carrier’s 5G and first responder FirstNet network builds.