Crown Castle Adds Fiber Muscle With $600M Wilcon Buy

Crown Castle's takeover spree has continued with the $600 million acquisition of another fiber network operator, Wilcon.

The move comes a few months after Crown Castle International Corp. (NYSE: CCI) splashed $1.5 billion on a larger fiber operator called FiberNet and is similarly aimed at supporting the growing demand for small cell connectivity. (See Small Cell Connectivity Drives $1.5B Acquisition.)

While FiberNet gave Crown Castle another 11,500 route miles in Florida and Texas, Wilcon owns about 1,900 miles of fiber in the cities of Los Angeles and San Diego.

In a very brief statement about the deal, Crown Castle said it would have more than 28,000 miles of fiber in total following the takeover of Wilcon, whose current majority owner is private equity fund Pamlico Capital.

It expects to close the deal in the third quarter and says it should contribute about $40 million to its gross margin and add $10 million to expenses in the first year of ownership.

Crown Castle reported a gross margin of $2.2 billion last year on rental revenues of about $3.2 billion.

The operator has flourished as a "towerco" that rents capacity at sites to mobile operators such as AT&T Inc. (NYSE: T) and Verizon Wireless. More recently, it has been focused on acquiring fiber assets to provide the "backhaul" for small cells, which cater to demand for very fast connections in particular hotspots.

The FiberNet deal announced in late 2016 followed a similar move in 2015 for an operator called Sunesys, which owned about 10,000 miles of fiber in various US metropolitan markets. (See Crown Castle Bids $1B for Sunesys Fiber Assets.)

Last year, Crown Castle also paid $461 million in cash for another towers company called Tower Development Corp.

Besides its fiber network, Crown Castle also now owns and operates about 40,000 mobile towers across the US.

The takeover activity has fueled sales growth, with revenues up 7% last year. But net income fell 77% in 2016, to just $357 million, and the company's net debt equated to about 5.1 times annual earnings (before interest, taxation, depreciation and amortization) at the end of December.

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Crown Castle, however, is banking on a growing appetite for small cells, and the technologies that underpin them, as operators get ready for the introduction of 5G in the next couple of years.

"If we were on a conference call 15 years ago talking about towers, the discussion was around the transition from 2G to 2.5G and the opportunity and the returns that would drive [it] and now we are talking about the opportunity of 5G," said Jay Brown, Crown Castle's CEO, during a recent earnings call with analysts, according to this Seeking Alpha transcript.

Recent interest from AT&T and Verizon Wireless in very high frequency spectrum suggests that small cells will have an important role to play in supporting 5G services in more densely populated parts of the US. (See Report: Verizon Considering Bid for Straight Path and AT&T to Flash $1.6B for Straight Path 5G Spectrum.)

Because signals do not travel far in these frequency ranges, operators will need to invest in small cell technologies to make use of them.

This year, Crown Castle is guiding for an 8% increase in both sales and net income.

The company says it expects to finance the Wilcon transaction while "maintaining its current investment-grade credit metrics."

— Iain Morris, , News Editor, Light Reading