CCI Targets T-Mobile Tower Arm

Crown Castle International (CCI - Analyst Report), one of the largest independent tower companies, is set to place yet another bid for T-Mobile U.S.’s tower arm. The firm has placed its bid for the second time after the German company named Crown Castle as a potential bidder for its tower arm in March 2012. We believe that a successful acquisition will strengthen Crown Castle’s leading position in the tower industry.

Based in Bellevue, Washington, the U.S. subsidiary of Deutsche Telecom AG owns nearly 7,300 towers and has also received bids from Crown Castle’s biggest rival American Tower Corp. (AMT - Analyst Report) and other private equity companies. T-Mobile has put its tower assets for sale after the $39 billion bid by telecom giant AT&T (T - Analyst Report) failed last year due to regulatory issues.

T-Mobile is the only large telecom carrier in the U.S. which does not offer Apple Inc’s (AAPL - Analyst Report) iPhone, and lost 1.65 million contract customers last year. It is expected that if successful, the deal could fetch about $2 billion for T-Mobile. We believe that it is selling its tower arm to generate cash, which is likely to be used to bid for the wireless spectrum and for its planned $4 billion investment in 2013 to strengthen its 4G network.

Crown Castle manages around 24,700 towers worldwide and earns a major part of its revenue through leasing antenna spaces on self controlled towers to other wireless carriers. If the company manages to acquire T-mobile’s tower arm, it will get 7,300 additional towers to provide services to carriers which will help it achieve better operational efficiency.

In recent times, mobile subscribers’ growth has significantly boosted the wireless tower industry. Moreover, future financials are likely to be propelled by strong demand for wireless voice, broadband wireless data and video networks, which require more tower space.

Furthermore, consolidation in the traditional wireless space will help the company concentrate on complementary wireless tower solutions like Distributed Antenna System (DAS). Recently, Crown Castle acquired privately held NextG Networks Inc. for $1 billion which has enhanced its DAS network by 10,000 nodes in 26 U.S. metropolitan cities.

However, we believe that the 21.74% increase in its debt in the last quarter act as a hindrance to the acquisition, making it difficult for the company to acquire T-Mobile’s tower arm independently.

Recommendation:

We are maintaining our long-term Neutral recommendation on Crown Castle International Inc. Currently, Crown Castle International has a Zacks #3 Rank, implying a short-term Hold rating on the stock.