Investors look for next takeover in tower sector

There was a flurry of trading activity last week in the communications tower sector, as high-yield investors tried to figure out which company would be the next acquisition target.

American Tower, for example, bought UNIsite for $205 million. The purchase includes 600 towers of UNIsite, which has an exclusive contract to develop towers for OmniPoint through 2012. In addition, Motorola sold its tower business last week to Pinnacle Holdings, another big acquirer and high yield issuer, for $255 million. Pinnacle saw its stock increase 20% in one day on the news.

That acquisition had a de-leveraging effect on Pinnacle's balance sheet since the issuer paid the equivalent of 10.5 times cash flow for the new towers, while it already had a slightly higher debt ratio of about 10.7 to 10.8 times, analysts said. There was a counterbalance to that, though - at least for bondholders - since the company paid for the acquisition with a bank loan, which came into the capital structure senior to the outstanding debt.

Moreover, SpectraSite Holdings Inc. recently bought Westower Corp. in deal that analysts pegged at about $310 million to $320 million.

In an industry that is riding the wireless telecom boom, but has kept costs relatively low, junk bond investors are finding value by focusing on takeover targets. With companies in this sector competing fiercely for the top spot, a number of them have opted to buy market share through acquisitions.

There are several companies with existing towers that are rumored to be selling them, sources said, to focus more on their core businesses. Airtouch has 2,000 towers; GTE has 1,400 towers; and SBC/Ameritech has 2,500. Analysts said all are likely sales at some point.

The industry enjoys cost advantages because after a tower is built, or bought, there is a low level of maintenance that needs to be done. Moreover, unlike the telecom companies themselves, there is no infrastructure or switches or bandwidth that needs to be developed.

American Tower, a manager of telecom towers, is viewed as the most likely acquirer now in the popular tower industry because even though it is the second-biggest company in the tower industry, it has the most liquidity/buying power right now, analysts said. It has nearly $2 billion on hand, in the form of cash and its own securities, to buy assets.