Shares of American Tower Corp. (AMT) jumped higher on the final trading day of the week, after the wireless communication infrastructure REIT announced the acquisition of MIP Tower Holdings.
Despite a fair deal, on relative valuation multiples, I remain cautious on the back of high absolute valuation multiples, remaining far-stretched from any margin of safety levels to my taste.
American Tower announced that it has entered into a definitive agreement to acquire MIP Tower Holdings LLC, the parent company of Global Towers Partners.
American Tower will pay some $4.8 billion for the company which is largely owned by Macquarie Infrastructure Partners, while it also has minority partners including PGGM, a Dutch pension fund. Note that the deal values the equity in the business at $3.3 billion, while American Tower will assume roughly $1.5 billion in existing debt.
GTP owns some 5,400 domestic towers, as well as 800 domestic property interests under third-party communication sites. The firm furthermore holds 9,000 management rights over domestic sites, predominantly rooftop assets.
CEO and Chairman Jim Taiclet commented on the rationale behind the deal, "GTP has constructed and acquired an outstanding U.S. portfolio of tower, rooftop and land assets, which is highly complementary to that of American Tower. Moreover, GTP's management of these assets has been excellent, as confirmed through our rigorous due diligence process. GTP's towers boast a high quality customer base, a strong position with respect to ground ownership and lease terms, and additional structural capacity available to facilitate future leasing activity."
The to be acquired activities are expected to generate annual revenues of $345 million for 2014. Gross margins are seen around $270 million, while the deal should be accretive to Adjusted Funds From Operations upon closing.
The deal is subject to normal closing conditions, and is expected to close in the fourth quarter of 2013.
American Tower ended its second quarter with $462.7 million in cash and equivalents. The company carries along a sizable debt position of $8.86 billion, for a net debt position of around $8.4 billion. American Tower will use existing cash, the revolving credit facility and new debt to finance the cash consideration of the deal.
For the calendar year of 2012, American Tower generated annual revenues of $2.88 billion. The company is immensely profitable, as it earned $637.3 million which was attributable to its shareholders.
Factoring in gains of almost 5%, with shares trading around $72 per share, the market values America Tower at $28.4 billion.
Based on last year's performance, the market values American Tower's equity at 9.9 times annual revenues and an incredible 44 times annual earnings.
American Tower pays a quarterly dividend of $0.27 per share, for an annual dividend yield of 1.5%.
Some Historical Perspective
After trading at highs of $55 in 2000, shares of American Tower fell all the way to lows of $2 at the end of 2002. What followed was a very steady ride upwards to highs of $40 in 2008, before shares corrected towards $20 during the crisis.
From that moment in time the upward trend resumed as shares are currently exchanging hands at $72 per share. Between the calendar year of 2009 and 2012, American Tower has increased its annual revenues by a cumulative 67% to $2.88 billion. Net earnings rose by an incredible 158% to $637 million in the meantime.
Both the domestic and international mobile communication industry is transforming fast, on the back of the $130 billion deal of Verizon Communications (VZ) to buy a 45% stake in Verizon Wireless from Vodafone (VOD). Yet suppliers for the infrastructure, including American Tower are also showing a rapid pace of consolidation.
The company which owns wireless and broadcast communication software is preparing for carrier consolidation and rapid growth in bandwidth usage. AT&T (T) and Verizon Communications are increasing their capital expenditures budget while rolling out the new 4G LTE wireless technologies.
Yet the latest deal is not the first deal and won't be the last. CEO Tacilet was quoted saying that, "The Global Tower purchase was not the end of the road", as the deal adds to the 54,000 towers currently held. Back in 2005, American Tower already paid $3.1 billion to acquire SpectraSite, while just last month it bought 4,000 towers in Mexico and Brazil from NII Holdings (NIHD) for $811 million.
For the first six months of 2013, American Tower generated revenues of $1.61 billion, up 15.6% on the year before. Full year revenues are seen around $3.2 billion. Full year adjusted funds from operations are seen around $1.45 billion, while net income is seen around $675 million.
Other key competitors include Crown Castle International (CCI) and SBA Communications (SBAC). Between them, these companies are in a race to acquire assets given the explosive growth in data traffic in recent years. Future demand is set to increase further driven by video demand.
So what about the latest deal? The $4.8 billion total deal price tag values the operations at an expected 13.9 times annual revenues, based on the $345 million revenue projection for 2014. This represents a very modest premium compared to American Tower's enterprise/sales ratio of 12.8 times for last year.
In that light, the valuation of the transaction seems fair. Yet what are the implications for American Tower itself? Annual revenues, including Global Tower Partners will run at an annual rate of $3.5 billion. Note that adjusted funds from operations are seen around $1.6 billion, while net income could come in around $750 million, assuming similar profitability levels of the to be acquired activities.
So how does this compare to American Tower's equity valuation at $28.4 billion, its net debt position of $8.4 billion and the $4.8 billion deal, valuing the business at $41.6 billion. This values the enterprise at an incredible 12 times annual revenues, 26 times adjusted funds from operations and 55 times earnings.
These are just incredibly high valuations for a REIT containing wireless communication infrastructure. While future demand will increase, and large carriers have few options to switch, I think the valuation is overdone. To be in this business you simply need capital to buy or built towers, while maintaining them at relatively low capital expenditure budgets. One needs some scale as well to deal with the nationwide carriers and improve the bargaining position.
Yet the incredible run up in the share price, accompanied with increasing valuation multiples, makes me very wary, combined with the modest 1.5% dividend yield. While investors are cheering on the back of the latest deal, I remain on the sidelines being completely not impressed with the current risk/reward profile.