The towering opportunity when 5G really arrives

Glenn Freeman

Livewire Markets

Telstra’s (ASX: TLS) $2.8 billion sale of a major stake in its InfraCo Towers business was welcomed by shareholders in recent weeks. The deal will unlock a large volume of capital, much of which management has insisted will flow back to investors in the form of buybacks, special dividends and the like.

It may also mark the first of several similar deals, with suggestions Optus is eyeing a divestment and also that the struggling mobile business of the TPG (ASX: TPM) and Vodafone tie-up could make similar moves

But as suggested in this recent interview Magellan Financial Group conducted with the head of a large US player, Jay Brown of Crown Castle International Corp (NASDAQ: CCI),it's not just the carriers who have plenty to gain from such deals.

The economics of telco companies are getting a major shakeup. As 5G mobile technology rolls out, mobile business margins will skyrocket as the number of device connections expands exponentially – up to 10,000 times. 

That's according to Brown, who said: “They don't need US$50, $60, $70 a month of revenue per device to make it worth giving up that slot. It may be a dollar a month."

He went on:

 "If that can incrementally increase their revenues as we move increasingly into the internet of things and connected healthcare devices, construction, clothing and augmented and virtual reality applications, all of those devices can be connected at very low cost.”

The audio of the interview makes compelling listening and was published on our site earlier in the week. You can listen to it by clicking the card below. 

Equities
Riding America’s connectivity wave

I thought Livewire readers might also benefit from a summary of the key takeaways, which you can find below. I also outline a few other locally-listed companies that may benefit from the dynamics discussed by Douglass and Brown.

KEY TAKEAWAYS

  • Around 10,000 times more devices could be simultaneously connected to any given network once 5G is at full capacity
  • Mobile towers may be the ultimate commercial, unregulated infrastructure asset
  • Small cells and macro towers: like comparing lamps to massive overhead lights
  • How Magellan investors doubled their money with Crown Castle since 2017
  • A few local plays investors might like to consider.

Who is Crown Castle and why should we care?

Crown Castle owns a large number of the towers that underpin the US’s mobile network. Telcos such as AT&T, T-Mobile and Verizon hang their technology from these poles, of which there are around 155,000 nationally.

“We saw an opportunity to acquire these early assets in the late 1990s and early 2000s and share them among multiple operators, thereby lowering the cost of deployment and providing an economic return to our shareholders,” he says.

Crown Castle approached wireless carriers and tried to convince them to sell their towers, striking successful deals early on with the predecessors to Verizon and AT&T in 1999. These towers became their initial base of assets, and the firm has completed multiple transactions like this since then.

“The need for towers is driven by the growth in data. As people use these wireless devices, the wireless operators need to deploy equipment – on towers and small cells – in order to provide that service,” Brown says.

“We’ve ridden that growth to economic returns, of providing a shared asset at a lower cost than they could otherwise build it themselves and then make economic returns for our shareholders.”

He sums up the business model as one of real estate.

“We own concrete, steel, land and then we lease that land on very long-term contracts. Our tenants, the wireless operators, initially sign up for 10-15 years, embedded escalators in those contracts, so we know what the rent is going to be over that period,” says Brown.
“And one of the key elements of is that there’s no interchangeability of locations. Once they put equipment at that site, they’re making a significant investment in the electronics, running fibre to the site, linking up and designing the wireless network to provide coverage.

 It’s not like an office space, where you can move to the next office and set up in a similar way. These sites are really unique in their design and any movement creates a ripple effect in their networks,” says Brown.

Understanding macro towers and small cells

While explaining the business model and its telecommunication technology underpinnings to Douglass, Brown uses some wonderful analogies. For example, two key elements of mobile networks are “macro towers” and “small cells”.

“Macro towers are like the big overhead lights that you have in a room and small cells are like lamps,” Brown says.
“The big lights are great, but if you’re reading and want to sit in a chair, you want to have the light right beside your chair and to direct the light to a specific location.”

In much the same way, mobile carriers are increasingly using small cells to direct wireless signal locations where there might be higher traffic, such as a shopping centre, stadium, or some other venue where large groups of people gather.

“And they’ll use the macro towers to cover larger geographies. The small cells offload traffic from the macro sites in order to cost-effectively use the macro sites to their fullest extent. The carriers need them both because as the density of users increases, the usage on devices increases.

“It’s like the wireless spectrum your mobile phone uses – it’s almost like water coming out of a garden hose. You can poke a lot of holes in it and water will still come out of the end of the hose, but eventually, if you poke enough holes, there’s no water coming out of the end.

“Macro towers work the same way. If you get enough users on a macro site, you can look down at your phone and you’ll have four or five bars, but you’ll still get spinning wheels, and the reason is that the water’s run out, all the other users have depleted the spectrum”

What does all of this mean for investors here in Australia? 

The deal Telstra has struck with a consortium headed up by the Future Fund is part of the firm’s cost reduction program – dubbed T22 – which was introduced largely to plug the $3 billion earnings hole the National Broadband Network knocked in the business.

Telstra shareholders are likely to claim around half the proceeds from this sale – around $1.4 billion – in the form of buybacks and other capital management measures. Telstra CEO Andy Penn has also earmarked a hefty chunk for CAPEX initiatives including regional infrastructure projects.

Optus is also said to be considering similar deals to hive-off its tower assets, though who might buy them is unknown. The involvement of the Future Fund, New Zealand-based infrastructure investor Morrison & Co and several super funds in the Telstra deal removes them from the running.

Uniti Group (ASX: UWL) was recently singled out by Roger Montgomery, founder of Montgomery Investment Management, as one of the key stocks in his Small Companies Fund. With a business model that, in some ways, resembles that of Crown Castle – though on a far smaller scale – it installs fibre networks on development sites and multi-dwelling unit developments. Chris Stott, a co-founder of 1851 Capital, has also been a fan of the company.

Another local player that has flown under the radar of many investors is 5G Networks (ASX: 5GN), which is in the throes of a merger with WebCentral (ASX: WCG) – as Capital H Management’s Harley Grosser discussed in a recent Rules of Investing podcast.

Education
Where Harley Grosser is finding value in micro-cap stocks

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4 contributors mentioned

Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has around 10 years’ experience in financial services writing and editing, most recently with Morningstar Australia. Glenn’s journalistic experience also spans broader areas of business...

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