T-Mobile could be 'an effective hedge' for tower investors

cell tower
A merger between Sprint and T-Mobile could be damaging for tower companies because so many of the two wireless operators' sites are in close proximity.

Investors in tower companies should consider buying T-Mobile stock as a hedge against possible consolidation in the wireless market, according to Guggenheim securities.

The wireless industry has been abuzz with speculation about potential mergers and acquisitions in the wake of Donald Trump’s winning presidential bid, with many analysts—and some executives—suggesting that the new administration would demonstrate a lesser regulatory touch. Much of that speculation has centered on a potential tie-up between T-Mobile and Sprint.

Some investors fear that such a move could negatively impact tower companies as the market shrinks from four major service providers to three.

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“Admittedly, a Sprint/T-Mobile combination would be bad for towers,” Guggenheim analysts wrote this week in a note to investors. “Tower operators have reported exposure to Sprint, T-Mobile, and the existing overlap between the two (at the tower level). On average, the implication is that 5% of revenues could be at risk—with an average remaining term in the five-year range.”

And a merger could be even more damaging than that for tower companies because so many Sprint and T-Mobile sites are in close proximity. Guggenheim estimated a tie-up could actually translate to a risk of 7% of revenues for American Tower, 15% for Crown Castle and 12% for SBA Communications, marking an average risk of 11% for the major tower players.

Like other analyst firms, though, Guggenheim saw the odds of a merger between Sprint and T-Mobile as low for multiple reasons. Not only are the economics difficult to work out—T-Mobile has become very valuable as it gained momentum over the last two years, for instance, and Sprint is still in the midst of a financial turnaround—but regulatory hurdles are still a major concern.

But T-Mobile is a compelling hedge for investors who have a stake in the tower market and fear a merger is on the horizon, Guggenheim analysts said.

“If tower investors are concerned with the combination risk, we believe T-Mobile could work as an effective hedge,” the firm said. “We see three possible scenarios (loosely): 1) Sprint buys T-Mobile: In this case the towers trade down, but T-Mobile trades up—offsetting the loss, 2) an MSO buys T-Mobile: This would be a win-win, where T-Mobile trades up and the towers trade up (on the view that industry investment will continue or accelerate), and 3) no one buys T-Mobile: In this case, the towers likely trade up on reduced risk—but T-Mobile loses whatever M&A premium is currently baked into shares.”

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