Softbank’s US tower venture could spell a new approach for Sprint

There has been a near-global trend for mobile operators to divest their towers into joint ventures or to independent tower operators, and the US carriers were in the vanguard. But now Sprint may be set to buck that trend, if it is drawn into a new towerco established in the US by its parent Softbank of Japan, in partnership with Australian property firm Lendlease Group.

The new venture is branded Lendlease Towers. Each party has committed an initial $200m to the initiative, to fund the acquisition of about 8,000 towers, including rooftops and poles, and the new firm is targeting $5bn of telecom infrastructure assets in the medium term. Sprint assets will be included in the portfolio.

Denis Hickey, CEO of Americas for Lendlease, said: “Consistent with our strategy of focusing on growing demand for infrastructure, we’ve identified the telco infrastructure sector as an opportunity to deploy our integrated business model.”

Moving into a US tower space which is already crowded – Crown Castle, American Tower and SBA are the three major players – may seem off-beam even for Softbank’s maverick chairman Masayoshi Son. Most of his massive investment program is going on technologies which he believes will drive the next generation of internet services, such as artificial intelligence and advanced processors. Cell towers hardly fall into that category.

But there may be a different agenda at work, to boost the effectiveness, and market value, of Sprint, and so improve its standing in the reported merger negotiations with T-Mobile USA and its majority shareholder Deutsche Telekom of Germany. Some analysts expect a deal to be announced as early as November.

Operators may have been backing away from infrastructure, but the onset of densification, Cloud-RAN and 5G plans are diluting the belief that sites and fiber are a cost burden not an asset. Verizon and AT&T have both made recent acquisitions to improve their ownership of fiber to support small cell backhaul and Cloud-RAN fronthaul. As well as backhaul, the other challenge to densification programs is access to sites, with US operators complaining this issue is constraining their ability to support the capacity expansion which modern services require.

Increasingly, the idea of a utility operator is emerging – one which differentiates itself with superior infrastructure which not only supports its own retail services, but a significant wholesale business. That could enable large numbers of smaller MNOs or MVNOs, and the value of such activities will be bolstered in future by the shift to network-as-a-platform and network slicing capabilities.

Softbank, then, could push Sprint towards a converged model in which its spectrum, infrastructure and network are highly integrated. That would have three potential upsides:

• Enable Sprint to exploit its plentiful spectrum more effectively through greater control of its infrastructure, especially if LendLease Towers follows Crown Castle into fiber and small cell sites (“horizontal towers” as the tower calls this business extension).
• Reduce payments to other towercos – the US MNOs have had fraught relationships with these companies in recent years and have been putting intense pressure on them to lower their fees, with Sprint threatening to move some of its base stations to alternative locations such as government land.
• Enable Sprint to return to a business model which it originally envisaged for its Network Vision 4G and multi-network program – to host third party networks on its infrastructure in order to expand beyond the MVNO model and into the higher value, longer term agreements that go with network partnerships. Originally, the plan foundered when the first customer, LightSquared, filed for bankruptcy protection, but the theory remains sound.

At the same time, transferring current Sprint tower assets to the new venture will boost its cash and reduce its operating costs, while retaining control of its network infrastructure.

Towerco analyst Jennifer Fritzsche of Wells Fargo Securities wrote in a client note: “Yes it will take a long time and a lot of money (but SoftBank has MUCH capital behind it). But if we get a merger announcement between T-Mobile and Sprint soon, this could be a big-time clue in the message they come with. Think of it as the ‘3 I’ approach … Investment (job create), infrastructure (a big time focus of this administration) and innovation (5G).”

It is clear that the new towerco will not be able merely to replicate the models of the incumbents because the MNOs are determined to shake that up. It will probably need to target new customer groups as well as mobile operators (private network builders focusing on IoT for instance), and to expand into small cell sites and perhaps backhaul or active RAN services.

A year ago, AT&T formed an internal taskforce, reporting to SVP for wireless architecture, Tom Keathley, to develop alternatives to the traditional tower rental approach, warning that towercos’ current business practices “may not be sustainable”. Keathley said at the time: “There is a fair amount of frustration certainly with AT&T certainly with those business practices,. The fundamentals are cost per megabyte, and we’ve got to get to a place where we can sustain cost per megabyte, moving into cost per gigabyte. So the current business models are likely not sustainable in that environment.”

He said AT&T might consider relocating to nearby, cheaper towers and the operator has instituted a program to evaluate terms and conditions of all leases as they come up for renewal”, while pushing for a number of improvements including “fair” early termination rights, the ability to modify or upgrade tower equipment at no extra cost, reduced or eliminated price increases, and “rents reduced to competitive rates”. In an internal letter last fall, the operator said: “A ‘no’ or non-response will trigger AT&T’s review of alternate locations.”

Whether or not Lendlease Towers is part of a wider agenda for Sprint and the US market, it will still be expected to stand on its own feet financially. A merger of the third and fourth MNOs could at least give it an enlarged captive audience though it remains far from certain that such a deal would be approved, even by the current administration, with its laisser-faire approach to business.

Last week, Bloomberg reported that a merger proposal was now unlikely to be ready to be announced with the currently quarterly financial results cycle. A sticking point is differing valuations of Sprint’s 2.5 GHz spectrum, considered a key asset in any deal, insiders said. And BTIG Research analyst Walter Piecyk believes TMO investors are questioning the value of Sprint’s airwaves, when TMO has also invested heavily in spectrum which some would regard as more useful for 5G, since much of it is below 1 GHz, and so can support wide area roll-out at affordable cost. The operator spent about $1bn on 700 MHz A Block licences from a handful of companies this year, and $8bn on 600 MHz spectrum in the incentive auction. While Sprint has over 100 MHz of 2.5 GHz in each market, which is excellent for capacity and densification, TMO is far better positioned in midband frequencies like 1.8 GHz.

“We believe Deutsche Telekom would have to assign over $20bn of value to Sprint’s ‘excess spectrum’ and NOLs (net operating losses) in order to justify an ‘at market’ merger between T-Mobile and Sprint,” Piecyk wrote on BTIG’s blog. “However, we do not believe that an adjustment for spectrum is merited as T-Mobile brings its own ‘excess spectrum’ to the table and that spectrum is actually more critical for a successful combined enterprise. T-Mobile investors are therefore appropriately concerned about the risk of an ‘at-market’ transaction with Sprint.”

He also outlined the differing stakes for the two operators. “T-Mobile does not need a merger with Sprint to succeed, but Sprint might need one to survive,” he wrote. “Sprint has done a great job cutting costs and reducing churn, but there are long term impacts to its lack of capital investment and lack of deep low band spectrum position. We expect that to manifest in higher churn, lower gross additions and ultimately reduced cash EBITDA in future years. We are also skeptical that Charter or others have an interest in Sprint. Meanwhile, T-Mobile has an opportunity to buy or lease additional spectrum from Dish or utilize the CBRS band if they cannot gain access to Sprint’s 2.5 GHz spectrum.”