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Crown Castle International (CCI) announced on Friday that it will acquire 7,200 T-Mobile towers in a deal valued at $2.4 billion. Investors are not enthusiastic about the deal, sending shares of Crown Castle down 1.2% in Friday's trading session.

The Deal

Crown Castle International announced that it will acquire the cellular towers from T-Mobile in an attempt to reinforce its position as the largest provider of wireless infrastructure in the U.S. Crown Castle will have the exclusive rights to lease and operate the towers, for an average term of 28 years. Furthermore, Crown Castle has the option to buy the towers at the end of each lease period, for a total consideration of $2.4 billion.

The portfolio is urban-centric, with 83% of the towers in the top 100 U.S. markets.

CEO Ben Moreland commented on the deal: "We are very pleased with our agreement with T-Mobile, which strengthens our position as the largest provider of shared wireless infrastructure in the US, which we believe is the largest, fastest growing and most profitable wireless market in the world."

As a result of the transaction, the total tower count of Crown Castle increases by roughly 33%. However, the transaction value only represents 9% of its enterprise value. The newly acquired towers will add approximately $125-$130 million in adjusted funds from operations, before financing costs. Furthermore, the towers have sufficient capacity to accommodate at least another tenant without significant investments. T-Mobile has committed to continue to maintain its communication facilities for another period of minimum 10 years.

The impact from the proposed transaction and the expected debt financing will result in accretion to 2013 adjusted funds from operations per share by approximately 5%.

Crown Castle International expects to close the deal in the fourth quarter of 2012. The deal is subject to regulatory approval and the usual closing conditions.

Valuation

Crown Castle International ended its second quarter of 2012 with $372 million in cash and restricted cash. The company operates with $8.4 billion in short and long term debt, for a net debt position of roughly $8.0 billion.

For the first six months of 2012, Crown Castle generated net revenues of $1.02 billion. The company reported a net profit of $167.3 million, or $0.57 per diluted share. For the full year, Crown Castle expects to generate revenues of $2.09 billion. Net income is expected to come in between $206 million and $281 million. Full year earnings per share are expected to come in between $0.71-$0.96 per share.

The market values Crown Castle at $18.8 billion at the moment. This values the firm at 9.0 times annual revenues and 77 times expected earnings. The valuation compares to a revenue multiple of 11.5 times for competitor American Tower (AMT), which trades at 71 times 2011s earnings.

Currently, Crown Castle does not pay a dividend.

Investment Thesis

Year to date, shares of Crown Castle have risen some 45%. Shares steadily advanced from $45 in January to highs around $65 at the moment. Shares continued to hold their momentum after the acquisition of NextG Networks, and after Crown raised its full year outlook at the presentation of the second quarter results.

Over the past five years, shares have risen some 60%. Shares traded as low as $10 in 2008, during the darkest days of the crisis. From that point in time, shares steadily recovered. The company steadily grew its revenues from $1.5 billion in 2008, to an expected $2.1 billion in 2012.

As a result of the acquisition, full year fund of operations will increase by $125-$130 million. Crown previously guided for annual funds from operations of $772-$862 million.

The acquisition looks very reasonable. Crown Castle will receive annual funds generating over 5% of the acquisition price. Furthermore T-Mobile guarantees to use the facilities for another decade and pay inflation adjusted rates. Crown Castle can increase its tower count by roughly a third, at cheaper multiples than its current valuation.

Still, I am hesitant to invest in names like Crown Castle, as I am not comfortable with their business model. Crown operates with significant amounts of debt and razor thin margins. The total net debt position will surpass $10 billion as a result of the deal. This leaves Crown vulnerable given the re-financing needs in the coming years. In addition, shares have already returned 45% this year.

I remain on the sidelines, as I cannot find compelling value.

Source: Crown Castle's T-Mobile Towers Acquisition: Remaining On The Sidelines