Crown Castle Bids $1B for Sunesys Fiber Assets

Towers company Crown Castle has announced a $1 billion cash takeover of Sunesys as it looks to strengthen its position in North America's fast-growing small cells market.

Crown Castle International Corp. (NYSE: CCI) says the takeover will more than double its fiber footprint for small cell deployments and boost its presence in some of the biggest metropolitan markets in the US. (See Crown Castle to Pay $1B for Sunesys.)

A subsidiary of Quanta Services Inc. (NYSE: PWR), which provides outsourcing services to various utilities, Sunesys either owns or has rights to about 10,000 miles of fiber in US metropolitan markets, according to Crown Castle's statement.

"The Sunesys fiber assets are both complementary to our existing footprint and located where we expect to see significant investment by wireless carriers," said Ben Moreland, Crown Castle's president and CEO, in a company statement. "We have visibility into more than 3,500 small cell opportunities on or near the Sunesys fiber."

Crown Castle says it expects to complete the transaction by the end of the year and that it will contribute $80-85 million to its gross margin, adding $20 million to general and administrative expenses, in the first year of ownership.

The company rents capacity on its towers network to mobile operators such as AT&T Inc. (NYSE: T) and Verizon Wireless , and it has recently flourished thanks to growing adoption of mobile data services.

Last week it reported a 7% year-on-year increase in revenues for the first three months of the year, to $941 million, while net income rose by 23%, to $112 million.

It expects to make a gross margin of about $2.1 billion on site rental revenues of around $3.1 billion for the full year.

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Speaking to investors during an earnings call after the publication of first-quarter results, executives revealed the small cell business is currently responsible for about 7% of site rental revenues, having never before broken out these figures.

"We're seeing capacity needs in so many urban and suburban areas that you can quickly start to figure out that we're talking about a universe here, I think, of hundreds of thousands of nodes over time," said Moreland, according to a Seeking Alpha transcript of the call.

"Obviously we will never be able to accomplish all of that ourselves, there will be many other people in this market, but the size of the opportunity honestly reminds us a little bit of the early days of towers are we are going about it as fast as we possibly can," he added.

Elaborating on Crown Castle's expectations, CFO Jay Brown told analysts that small cells will generate $50-60 million of the $150-160 million the company is forecasting in revenue growth this year, with towers accounting for the remainder.

The acquisition of Sunesys appears to build on Crown Castle's $1 billion takeover of distributed antenna systems provider NextG Networks Inc. in December 2011.

At the time, NextG was reported to hold rights to about 4,600 miles of fiber and to have about 7,000 nodes on air and 1,500 under construction. Crown Castle today owns or has rights to around 7,000 fiber miles supporting some 14,000 nodes and says it has now invested a total of $1.7 billion in its small cells business, including the acquisition of NextG.

The company has grown rapidly through acquisitions and by leasing infrastructure from big mobile operators. Its net debt equaled about 5.3 times annualized EBITDA in the January-to-March quarter, prompting concern among some analysts about the high leverage.

In February, executives said they were considering a sale of Crown Castle's 77.6% stake in CCAL, which operates 1,800 towers in Australia. CCAL is expected to generate 4-5% of Crown Castle's adjusted EBITDA this year but is not considered strategically important. (See Crown Castle Weighs Sale of Australian Unit.)

A sale of that unit could help to reduce debts and support other takeover activity.

— Iain Morris, , News Editor, Light Reading