AT&T (NYSE:T) may be close to a deal to offload some of its network assets for cash as it pursues a potential acquisition abroad and an expensive network upgrade at home. The second largest U.S. wireless carrier is looking to sell around 10,000 cell towers to Crown Castle International in a deal that could be worth as much as $5 billion, according to Bloomberg.  While the terms of the agreement haven’t been finalized, such a sale could boost AT&T’s balance sheet and free up cash for more core strategic ventures. The carrier is in the midst of an LTE deployment phase that will cause capital spending to surge up to $21 billion this year and likely remain over $20 billion in the next two years as well. It is also rumored to be scouting for profitable overseas acquisitions in Europe, and could look at Vodafone’s assets once the U.K. company sells its stake in its wireless joint venture with Verizon (NYSE:VZ).
While the sale of towers will help AT&T better allocate its cash to more important strategic ventures and take advantage of the surging data demand in the U.S. as well as abroad, it is not without its long-term risks. Tower operators such as Crown Castle and American Tower have been aggressive at buying cell towers from carriers, which could lead to higher lease rates in the future as the tower assets get concentrated in a few hands. Last year, Crown Castle bought 7,200 cell towers from T-Mobile at around $2.4 billion. More recently, American Tower bought out the parent company of Global Tower Partners for $4.8 billion last month. While AT&T is likely to set lease rates for the next few years in the initial contract, the deal could get a lot costlier when the time for contract renewal arrives. We have a $36 price estimate for AT&T, which is slightly ahead of the current market price.
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Better use of cash in LTE upgrades
Instead of tying up capital in fixed assets such as towers, AT&T believes that it could generate more return from investing in the ongoing LTE transition and a potential overseas acquisition. Both these moves could help it better tap the growing demand for data. In the U.S. market, where LTE consumption is on the rise, AT&T’s aggressive 4G investment would bolster its competitive standing against Verizon whose lead in LTE coverage has started to have a meaningful impact on its net subscriber adds. Last year, Verizon added over 5 million postpaid subscribers, more than three and a half times of AT&T. Even in Q2 2013, when AT&T did much better, Verizon’s postpaid net adds outnumbered AT&T’s 1.7:1. (see AT&T Ramps Up LTE Rollout To Gain On Verizon In Saturated Market)
With subscriber growth stagnating, AT&T is looking to drive LTE adoption and promoting its Mobile Share data plans at the same time to increase ARPU levels. While shared data plans lock in users by allowing them to add more devices to their service plan, increasing 4G LTE adoption will incentivize the usage of more data-intensive applications and drive data consumption. Further, LTE as a network technology not only supports higher speeds but is also more efficient than current 3G networks at handling data, reducing AT&T’s maintenance and handling costs as LTE usage grows. However, all this will require continued 4G investment to not only increase LTE coverage but also improve network capacity.
European acquisition likely with regulatory reforms
However, the U.S. market is getting increasingly competitive, with smaller carriers Sprint and T-Mobile catching up with their respective LTE build-outs and aggressively differentiating themselves with unlimited data and no-contract plans, respectively. AT&T could therefore be looking to diversify away from the U.S. market with potential investments in Europe, which has fallen behind the U.S. in LTE adoption despite being among the first to launch LTE. At the end of 2012, less than 2% of Europeans were on an LTE connection as compared to close to 19% of the American population. A big reason for the lag has been a fragmented mobile market caused by the EU’s restrictive regulatory policies. This has prevented European carriers from benefiting from the kind of economies of scale that their U.S. counterparts enjoy. 
However, the EU is looking to address these regulatory issues with a telecom package unveiled last month that aims to create a single telecom market in Europe. AT&T, with its expertise in building an LTE network in the U.S., could be looking to take advantage of these reforms to play an active role in a potential consolidation of European networks. Average monthly revenue per wireless connection in Europe is significantly lower than in the U.S. According to a recent report by Navigant Economics and the GSMA, an average European connection generates about $22 in monthly revenues while the U.S. figure is more than $45. This leaves significant room for growth should the regulatory reforms spur LTE investments in the continent. AT&T is probably keeping a close eye on these developments, and could deploy some of the cash freed up from asset sales should the right opportunity arise.Notes:
- AT&T Said to Be Close to Tower Sale to Crown Castle, Bloomberg [↩]
- Europe may have once led the world on 4G, but now it’s the US that’s way out in front, ZDNet, June 6th, 2013 [↩]