Crown Castle's Business Model Requires Multiple Carriers

| About: Crown Castle (CCI)

Founded in 1995, Crown Castle International Corp. (NYSE:CCI) has grown to become the largest cell tower operator in the US with 'nearly 40,000 sites'. It edged out its rival, American Tower (NYSE:AMT), when it acquired the exclusive rights to 9,700 towers from AT&T for $4.85 billion on December 16. CCI is the leading service provider in a rapidly growing industry--their AFFO (adjusted funds from operations) grew 38% from Q3 2012 to Q3 2013 and Jay Brown, CCI's CFO, painted a very positive picture of CCI's future when he was quoted in the Q3 2013 earnings release as follows:

Given the significant anticipated cash flow from our existing business and future cash flows from the AT&T towers, we expect to be able to continue to make significant investments to enhance the long-term growth of our business while providing investors with a meaningful dividend. Based on our expectation for growth in our business, we believe that we can grow our dividend over the next five years by at least 15% annually.

While cellphone usage nationwide is continuing to grow, the number of carriers has been reduced over the years to four major national carriers that comprise 84% of CCI's revenue: AT&T (NYSE:T), Sprint (NYSE:S), T-Mobile (NASDAQ:TMUS) and Verizon (NYSE:VZ) (slide 3 and pie chart below). On December 13, the WSJ and other news sources announced that S was working on an offer to buy TMUS. Since S and TMUS make up 45% of CCI's revenue, a merger of the two companies could dramatically affect the growth opportunity for CCI. In the Q3 earnings release, CCI described the opportunity for the acquisition of approximately 9,700 AT&T towers as an "opportunity to significantly increase tenancy" - the reason being "the average existing tenancy of 1.7 tenants per AT&T Portfolio site, including AT&T" compared to "Crown's portfolio average tenancy for sites operated for more than 5 years is 2.8 tenants per site." If S and TMUS were to be combined, there will obviously be less of an opportunity to lease the towers to multiple carriers.

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The stock sold off on the rumor of the merger. CCI fell over 2% from $73.91 at the close on Friday, December 13 to close at $72.15 on Monday, December 16 and gained just .82% on Wednesday, December 18, when the S&P rallied 1.66%.

I certainly don't know if S will make an offer for TMUS, if TMUS, majority owned by Deutsche Telekom, would accept the offer, and if the Federal Communications Commission would approve the merger. But a merger of two companies comprising 45% of CCI's revenue would be a significant threat to the company's growth and highlights the risk inherent in owning a stock that is supplier to a consolidating industry. I would stay away from this one until the FCC rules on whether S and TMUS can merge.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.