Crown Castle to double small-cell deployments within two years, Guggenheim says

Crown Castle plans to deploy 25,000 small cells within the next two years, according to Guggenheim Equity Research, more than doubling the number of nodes it has already installed. It’s also upping its bet on small cells by investing in fiber to connect them to networks.

And colocation will be the key for those investments to pay off in a major way.

Wireless carriers are increasingly looking to small cells to improve coverage and increase capacity, particularly in urban areas. While macrocells remain Crown Castle’s bread and butter, the massive tower company has moved aggressively to embrace the smaller transmitters even as its rivals have kept them at arm’s length.

“Among the three publicly traded tower companies, Crown Castle has uniquely chosen to focus on small cell development to supplement its macro site tower business,” Guggenheim’s Robert Gutnam wrote in a note to investors Thursday. “Currently, this segment comprises 16% of total revenue, and generates 6% ROI—intended to ultimately reach 10% as the company adds second tenants (colocation) to small cell installations.”

Crown Castle announced in April that it had agreed to acquire privately held Wilcon for roughly $600 million to enhance its dark fiber capabilities in California for small cell backhaul. Wilcon operates nearly 2,000 route miles of fiber, primarily in Los Angeles, and the deal will up Crown Castle’s total fiber assets to more than 28,000 route miles.

Crown Castle’s small-cell investments are already paying dividends, as analysts at Wells Fargo Securities observed earlier this month. And the company will spend around $1.2 billion to deliver 25,000 new nodes over the next 18 to 24 months, up from the 20,000 it has already deployed, Gutnam said.

But for the company to fully leverage the burgeoning market, it will need to entice multiple service providers to use the same sites as they densify their networks.

“While 85% of this capital is estimated to be spent on new systems, 15% of the total is expected to be allocated to colocation installations,” Gutnam wrote. “We believe colocation is crucial to the success of the strategy as incremental tenancy is necessary to generate double-digit ROI. The company is also making additional investments in the organization in order to support the delivery of 10K small nodes annually going forward (from 6-7K today).”