Barclays: Consolidation ‘a longer-term call option’ for SBA

Cellular antennas on tower
SBA Communications may eventually be compelled to tie up with a larger rival, according to Barclays.

SBA Communications may be ripe for a tie-up with a bigger rival in the tower sector, according to Barclays.

But don’t expect that to happen soon.

American Tower and SBA have both recently “pulled back from share repurchase programs,” Amir Rozwadowski of Barclays wrote in a research note to investors this morning, “which suggests M&A may be (a) top priority for capital allocation. Our recent meetings with both management teams at the Wireless Infrastructure trade show provided further support to our view.”

Either company could look to expand south of the border, Rozwadowski opined—American Tower already has “a sizable operation” in Mexico—and some European tower companies may be attractive targets. But SBA, which is based in Florida, may find a compelling partner in the U.S. market.

“Longer-term, we don’t believe that investors should rule out further larger-scale consolidation in the U.S. tower market,” Rozwadowski wrote. “To be clear, we do not believe this is a likely near-term development. Rather, we consider it a longer-term option for SBA Communications. The relatively smallest player remains committed to its leveraged growth strategy. This was a consistent message coming out of its event at the Wireless Infrastructure show.

“However, based on the company’s commentary we believe that the option is one that is not lost on management. In our view, this means that at some point down the line (we of course don’t know when), should the opportunity present itself, SBA could consider a potential opportunity by consolidating with a larger peer if the terms were attractive.”

Some investors continue to harbor concerns over the tower market as carriers increasingly turn their attention to small cells and as speculation of potential consolidation among U.S. carriers grows. Indeed, tower companies remain “everyone’s punching bag,” Cowen and Company analysts noted earlier this year, despite what appears to be a bright future.

But consolidation in the tower market may be in the offing as companies look to increase scale and reduce costs, Rozwadowski wrote. And while regulators would surely take a hard look at any major deal, they may be inclined to approve such a tie-up.

“Theoretically, (SBA) wouldn’t expect any anti-trust issues to emerge,” the analyst wrote. “Management noted, for example, that AT&T and Verizon didn’t garner any incremental scrutiny when their tower portfolios were offloaded. It would expect a similar treatment should further sector consolidation be put on the table.”

Interestingly, Rozwadowski's note was issued just a few days after Cowen analysts similarly predicted potential consolidation on the horizon for the tower segment.

"Also worth noting, once the final 60 MHz of spectrum is deployed on macro sites (several years from now), AT&T has no plans to drop spectrum on macro sites (ever) again as it pivots to the new 'rifle shot' small cell topology of the future," Cowen analysts observed in a note late last week. "If true, this could have large impacts on the tower industry as we think about Crown’s small cell strategy as best positioned for the long-term, American’s need to further diversify internationally or jump into small cell (as we published in the past with a possible takeout of Lightower), and potentially pushing SBA to consider a buyout over the next few years, in our opinion."

This story was updated June 5 to add commentary from Cowen.