To say the least, Friday was a confusing day for investors who are long NII Holdings (NIHD), aka Nextel Lat Am. A much anticipated cell tower sale leaseback deal was announced at 9:10 AM, sending NIHD shares upward in pre-market trading to $8.42 or over 26% higher from its previous close of $6.67. NIHD 20 minutes later opened at $7.49 and quickly traded down below $7, closing at $6.54. Many traders were confused by the price action after the announcement, which seemed to be very good news for NIHD. The culprit for the confusion came from the subsequent 9:11 AM press release from American Tower (AMT), which cast a massive cloud of bewilderment on the transaction. Here is an excerpt, where we have highlighted the key point for which we attribute the volatility in price:
American Tower expects the towers will collectively generate approximately $149 million in annual run rate revenues and approximately $55 million in annual Gross Margin and anticipates that the acquisition will be immediately accretive to Adjusted Funds from Operations upon closing.
Bottom line is the Street saw the $149 million top line number in the AMT press release on Friday, which mistakenly telegraphed a nearly 300% premium or 18.3% cap rate ( borrowing rate) being applied to NIHD's actual 6.8% rate, smelled trouble and sold the stock. Nothing could be further from the truth. The $149 number includes underlying costs of $94 million annually NIHD has for the towers including land leases and associated costs before this transaction. The real number to use is the new $55 million lease cost which actually translates into a 6.8% cap rate for the $811 tower asset sale, which is a very low cost of money given NIHD's latest high yield market financing at 7.875%.
We think short sellers mistakenly saw blood in the water with the $149 million number and the corresponding 18.3% cap rate. Moreover, with the shares getting harder to borrow, the negative rebate rate has increased to 4.5% annually, nearly double what it was a month ago. Logically, the short interest is rising as reported Friday night:
Here is an excerpt from a Macquarie Capital, who has a $10 share price target for NIHD with the possibility of a doubling or tripling in price from current levels from a M&A transaction, report issued Friday afternoon:
· When incorporating escalators over a long-term period (50-years), NIHD management has indicated that the cap rate is ~8.8%. We note that this estimate is subject to change based on the escalators.
· As lease payments will be made in local currency, NIHD is effectively borrowing cheaply in local currency. As a comparison, NIHD's upsized USD-denominated May 2013 offering priced at 7.88%. In our opinion, the effective hedge against forex risk and the Brazil and Mexico tax shield is well worth the ~100bps higher interest rate.
The $149 million number confused investors, both long and short NIHD. The $55 million lease cost to NIHD actually translates into a 6.8% cap rate for the $811 tower asset sale, which is a very low cost of money given the high yield market today. As the above Macquarie analysis suggests, the local currency denomination of the lease payments may easily be worth another 1% reduction because there are no currency hedging risks for NIHD. We think the initial net cap rate could be valued at 5.8% for the early years and then adjusted higher over the life of the lease. The Macquarie report also suggests that NIHD management has indicated they place an 8.8% cap rate on the transaction. We believe there is a lot of unleashed value in NIHD shares as we have written about here at SA in the past. The confusion created by the differing press release highlights of NIHD and AMT creates a wonderful below market buying opportunity for NIHD, which may regain the pre-market highs seen Friday as the NIHD management team continues to deliver on their promises of non core asset sales to generate cash and focus on Nextel Brazil and Nextel Mexico. NIHD owns an additional 4044 towers scattered throughout Latin America. If we look at the average price paid for the tower deal announced Friday, we get an average price per tower of $182,000. If we discount the value of the remaining towers by 25% to $136,000, the total value of the remaining towers would be ~ $550 million. We have recommended spinning these off to shareholders as a means of creating a pure-play, tax friendly stock dividend for NIHD investors to take advantage of the robust market for cell towers.