High Stakes

Tower structures may be stationary, but the tower industry is just the opposite. Wireless carriers and tower companies are moving properties through mergers, consolidations, master/lease agreements and joint ventures at amazing speeds.

Crown Castle International is just one of many companies that has had a busy year. Some of its activities to date include a joint venture with Bell Atlantic, which involves almost 1,500 towers; capital lease agreements with BellSouth for nearly 2,000 towers and One-2-One, a British PCS carrier, for more than 800 towers; and more than 650 tower purchases from Powertel. Part of its agreement with BellSouth included a build-to-suit contract for 500 new towers. It also has build-to-suit contracts for more than 400 new towers for customers such as VoiceStream and Triton.

Although not all tower companies function on this scale, Crown Castle's model reflects an industrywide trend toward constant movement. And the activity doesn't stop there. Tower companies are not only acquiring carriers' towers, but one another's as well.

The trend took off late last year when American Tower acquired OmniAmerica and Telecom Towers, SpectraSite acquired GlobalComm, and Pinnacle Holdings acquired MobilMedia's towers. The transactions have continued to proliferate during the first half of 1999.

But beyond this common link of constant movement, each tower company and each carrier has a different strategy for growth. The result is a mesh of ongoing activity.

WHY LEASE?Many carriers are jumping to sell towers and lease them back from tower companies. Without tower ownership, carriers don't have to hassle with the process of securing sites. By leasing from tower companies, carriers free financial assets for direct subscriber interests such as network enhancements or providing more customer incentives. Build-to-suit contracts often are included in the leasing agreement, making costly construction the tower company's responsibility, not the carrier's.

Although carriers are selling tower inventory quickly, even those strategies differ. A handful of carriers are selling their entire inventories. Typically, though, a carrier can't unload all of its towers because it has a combination of sites, including independently owned structures -- rooftops, electric-power-transmission lines, water towers, small mom-and-pop towers -- or competitors' sites.

Although Powertel has approximately 1,500 sites, it sold less than half of them to Crown because the rest are located on towers and structures owned by others.

What it did sell has proved to be a positive agreement from a financial and operational perspective, according to Allen Smith, Powertel president & CEO.

About a year ago, Powertel began analyzing what it should do with its tower assets, said Harold Gwin, vice president of network operations for Alabama and Mississippi. Because the carrier had so many sites with numerous co-location partners, it considered creating a commercial tower company as well as the outright sale of its tower assets. But after requesting quotation bids from various companies, it decided to sell its urban, suburban and rural towers to Crown Castle as a package. The transaction allows more efficient capital deployment on core operations, while enhancing its ability to expand coverage and better serve customers.

HOLDING ONNot all carriers are jumping on the tower-selling bandwagon. Some carriers believe site issues are just another part of the business. To these carriers, towers are not problems, but assets to keep and develop.

PrimeCo has opted not to sell its towers. According to Limond Grindstaff, PrimeCo CTO, dealing with leases and zoning and environmental issues is just part of business. He added that because PrimeCo mostly uses existing sites, it doesn't really need the build-to-suit benefit somecarriers crave.

"As the first to market in many desirable sites, we have always co-located with competitors," Grindstaff said. "We swap sites with competitors, lease to competitors and lease from competitors, and we see no problems with any of those situations. We would far rather co-lease than build new towers. In fact, about 70% of our loading is on existing towers, only 30% on towers we build as a last resort."

Sprint PCS also decided not to sell its towers. Instead, it is on its way toward establishing a fully independent tower-leasing company.

"We evaluated options for our portfolio and saw an opportunity to maximize value for our shareholders over the long haul," said Bill D'Agostino, Sprint PCS vice president of tower management.

Sprint has been in the co-location business for the last four years, so D'Agostino said the next natural step was to go full scale and set the tower organization apart. As a result, it has developed a separate line of business within its business-development organization.

"It will manage our whole tower portfolio and bring additional tenants onto existing towers without having to go through middlemen," he said.

With 40 separate agreements with individual carriers, which represent 700 tenants who are all competitors, Sprint PCS is confident of its ability to handle the demands of a tower company.

"If you price the leasing reasonably, without gouging your customers, stay easy to do business with and are able to get the carrier on the tower quickly, you can be successful," D'Agostino said. "Of course, the entry stake is having the tower in the right location, which we usually do. We already have primary responsibility for maintaining an inventory of 3,000 towers nationwide, and we will add another 1,500 towers over the next 18 months, just from the growth of Sprint PCS alone. We feel we are in a unique position to handle a tower business."

TOWER STRATEGIESOnly a handful of carriers will follow Sprint PCS' lead to establish its own tower company. But many carriers are jumping on the sell-and-lease-back bandwagon. If you join this group, you'll want to choose your partner carefully. Like carriers, tower companies have growth strategies of their own. One may be a better fit for your needs than another.

Tower companies are setting themselves apart in this fast-moving, competitive market by developing focused strategies. For example, Crown Castle seeks out larger carriers and, as a result, has 4,500 towers in the United States. Pinnacle Holdings' goal is to focus on multiple acquisitions of small groups of towers. Pinnacle's plan is to acquire as many as possible of the 20,000 or so mom-and-pop tower operations scattered throughout the country.

American Tower is positioning itself as a communications infrastructure company, attacking seven industry market segments including broadcast; wireless; site construction and installation services; tower components; site monitoring; and satellite communications through its teleport division. The company plans to build 1,000 to 1,200 new towers annually and is investing capital where return is highest.

Many companies now are positioning themselves as full-service tower and siting companies. Pinnacle Holdings' decision to purchase Motorola's antenna-site business is a perfect example. Such moves prove that tower companies realize they must be sophisticated to get your attention.

Successful tower companies must be proficient in loading antennas, and handling immediate infrastructure repairs and signal interference objectively. But they are ready to meet more than these basic needs. Today's tower companies are touting other abilities such as the expertise to handle all legal entanglements.

"The speed-to-market focus of many earlier carriers may have resulted in less attention paid to leases, surveys and environmental studies," said Doug Wiest, American Tower COO. "We discover a lot of things that need to be found again. We know how to collect and organize the necessary paperwork and files. We have the autonomy to control our business without dealing with the bureaucratic issues that may be stumbling blocks within a wireless provider's company."

American Tower also is positioning itself to provide comprehensive services, from site acquisition to construction, including antenna line, maintenance and monitoring. To be close to each of its customers, American Tower operates five regional offices.

"We are able to provide a turnkey solution," Wiest said. "Co-location takes time and energy, and it's not the carrier's area of expertise. Our incentive is to get carriers on as quickly as possible, and we've learned how to manage this process most efficiently."

DUE DILIGENCEAlthough tower companies are becoming more sophisticated, carriers still need to take steps to ensure they get the quality of service and reliability they try to provide for their own subscribers. Kamal Doshi, Spectrum Resources Towers CFO, said carriers must be prudent in leasing agreements. It is vital that you choose the right tower financing: Will the company customize the deal and contribute the necessary human resources to be responsive to your needs?

"Too often, you see tower companies with a cavalier attitude in terms of buying towers," he said. "This creates problems for more deliberative companies, who want to make certain the assets make sense and fit well with the rest of the portfolio."

According to Doshi, today's intense competition for towers encourages some buyers to do whatever it takes to acquire more properties.

"With a lot of wireless companies trying to expand, the pressure on tower companies is to grow and buy towers at any cost," he said.

Carriers are forced to scramble for available sites and sometimes sign unrealistic, costly leasing agreements. James McIlree, HCFP/Brenner Securities communications equipment and services analyst, called the prevailing situation a land grab, with tower companies trying desperately to get as many towers as they can. In time, he said, these companies will face operational and cultural issues, but right now the focus is on acquiring towers, period.

"Operations will be a greater focus in the future," McIIree said. "Managing leases, collecting rents, augmenting towers, attracting new tenants all will be issues as the tower companies proceed."

But with today's trend toward consolidation, how do you know the issues you resolve today will still be good two or five years from now? The tower you lease may have a new owner in a matter of months.

Tower companies claim there's nothing to be concerned about. As long as appropriate steps are taken with contracts and agreements, and all parties adhere to basic professionalism, business should continue as usual regardless of the frenzied market.

So far, consolidation, mergers, acquisitions and all of the other activities seem to be a happy solution for everyone. Carriers and tower companies have found a trend that meets their business needs and keeps them on the move.

January: SpectraSite acquired 2,000 towers from Nextel.

February: WesTower acquired 91 towers from Koch. Pinnacle Holdings acquired 129 towers from various companies.

March: Crown Castle acquired 1,850 towers from BellSouth. Crown Castle acquired 650 towers from Powertel.

May: SpectraSite acquired 200 towers from WesTower.

June: American Tower acquired 75 towers from Illinois PCS. American Tower merged with Unisite and acquired 600 towers. Pinnacle Holdings acquired Motorola's antenna-site business.

July: American Tower acquired 108 towers from Dobson Communications and 21 towers from Watson Communications. It also completed a merger with Comm-Site International.