When Sprint (NYSE: S) and T-Mobile looked close to agreeing on a merger, I said some of the biggest losers will be the companies that rent space on cell towers. But after the companies failed to agree on terms, Sprint is now faced with the reality that it needs to invest in its network in order to remain competitive in the wireless market. SoftBank's CEO, Masayoshi Son, is investing more in Sprint this year, tripling the U.S. carrier's capital expenditures to between $5 billion and $6 billion.
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Crown Castle International (NYSE: CCI) is already showing signs that the new capital is starting to come in. The company's fourth-quarter results benefited from "approximately $5 million associated with certain long-term customer agreements signed during the period that include a combination of contracted new leasing activity and term extensions on existing leases."
That long-term customer agreement could very well be with Sprint. The average term remaining on Crown Castle's contracts with Sprint leapt from 5 years to 7 years from the third to fourth quarters. Even if it's not, Crown Castle and tower companies like American Tower (NYSE: AMT) and SBA Communications (NASDAQ: SBAC) stand to benefit from Sprint's increased investment and several other factors. As such, it's not a big surprise that Crown Castle increased its 2018 outlook.
The long-term opportunity is much bigger than the $5 billion or $6 billion Masa Son is dedicating to Sprint's capex this year. T-Mobile CFO Braxton Carter estimates there would have been about $30 billion in synergies that stemmed from a merger with Sprint.
Sprint is now faced with the need to build out its network. It certainly has the wireless spectrum to do so, holding more licenses than any other carrier. But Sprint's spectrum is concentrated in the higher frequencies, which require a denser network. That means more equipment on more towers. So, Sprint's investment is particularly great for the tower companies, which generate high marginal profits on each new piece of equipment on their towers.
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Earlier this month, Sprint CTO John Saw told investors the company plans to add 800 MHz and 2.5 GHz antennas to pretty much all of its cell sites. He also mentioned plans to continue deploying more small cells.
Who wins the new business?
Crown Castle generated about 15% of its revenue from Sprint last quarter. By comparison, Sprint accounted for just 11% of American Tower's revenue in 2016 and 16% of SBA's. That's a meaningful portion for all three carriers, and all of them stand to benefit. Naturally, the companies that derive more of their business from Sprint should see an outsized impact from the carrier's increased investments in updating its equipment.
Crown Castle may be able to win an outsized share of the new spending, though, thanks to its investments in small cells. American Tower and SBA have neglected diversifying into the new technology, opting instead to expand internationally. Sprint isn't the only carrier looking at small cells, either. Small cells play an important role for all carriers looking to improve their networks in urban areas with large populations.
Two more big expansions
Sprint isn't the only company expanding its network this year. AT&T (NYSE: T) won the FirstNet contract to build a network dedicated to reaching first responders. AT&T received wireless spectrum from the government in exchange for building out the network. That means tower companies will have another round of new equipment in the very near future.
Crown Castle owns AT&T's legacy towers, so it stands to benefit the most from the FirstNet buildout. What's more, Crown Castle hasn't even put that potential revenue into its 2018 outlook, so the increase it just announced is rather conservative.
Meanwhile, all carriers are preparing to deploy 5G networks in the coming months. All tower companies stand to benefit from new equipments designed to deliver high speeds at low latency. As competitors compete to be the first to deliver a 5G network to their subscribers, the tower companies are poised to win more contracts.
Overall, 2018 is already shaping up to be a good year for tower companies. Investors should look for further commentary from American Tower and SBA's management when they each report earnings next month.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends American Tower and Crown Castle International. The Motley Fool has the following options: short April 2018 $130 calls on American Tower and long January 2019 $80 calls on American Tower. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.