AT&T is likely to win the FirstNet contract in a move that would provide a significant lift to tower companies, according to analysts. But questions remain about just how much those tower companies stand to gain from the small cell market.
The nation’s second-largest wireless operator is widely considered the favorite to win the right to provide the nation’s first broadband network dedicated to public safety. FirstNet hasn’t officially announced anything yet, but ultimately that would give AT&T a 25-year contract to use 20 megahertz of 700 MHz beachfront spectrum and $6.5 billion for designing and operating the nationwide network for federal, state and local authorities, with the right to sell excess capacity on the system.
The award would be good news for tower-company investors who have recently grown concerned about potential consolidation in the U.S. wireless market.
“Consistent with our findings from MWC, it is clear to us towers are positioned to benefit from additional spend from AT&T related to FirstNet,” Jennifer Fritzsche of Wells Fargo Securities wrote in a research note as she upgraded the entire tower segment from "market weight" to "overweight." “Checks would suggest, if AT&T officially gets the FirstNet contract (which we see as very likely), AT&T has plans to touch over 40,000 towers (both new and existing) over the next five years. This would be more activity than the towers have seen from AT&T since 2014.
“If officially awarded FirstNet, we would not be surprised to see AT&T increase its 2017 capex plans,” Fritzsche continued. “Obviously, such a headline would be a very positive event for the tower sector.”
Crown Castle is particularly well positioned to benefit from an increase in AT&T’s tower investments, Fritzsche noted. Matthew Niknam of Deutsche Bank agreed, although he warned that such an increase largely wouldn’t occur until next year.
“Crown Castle noted it has yet to see acceleration in tower leasing activity (this is embedded in guidance), with carriers facing capital constraints and upcoming spectrum catalysts largely built into their ‘normal’ ~$30 billion annual capex spend,” Niknam wrote. “However, Crown Castle noted FirstNet may be an exception to this, as external financing may drive spending levels higher. Furthermore, if AT&T wins the FirstNet award, Crown Castle noted it would be well positioned, given its legacy AT&T tower portfolio. That said, Crown Castle views FirstNet to be more of a 2018 story.”
Crown Castle is also poised to see its significant investments in small cells pay off as carriers increasingly look to densify their networks and ramp up capacity, analysts said. But SBA Communications is taking a more conservative view of the small cell market, Niknam wrote in a separate research note.
“While small cells will certainly play a greater role in wireless, SBA continues to question the returns here relative to its core macro business,” according to Niknam, “especially around incremental economics associated with second/multiple tenancies.”