AT&T (NYSE: T) will start paying American Tower every time it adds a piece of equipment to a tower in 2016. The contract change should be a benefit for American Tower, which believes AT&T will need to add new equipment to its towers. Moreover, American Tower signed a new master lease agreement (MLA) with AT&T covering the carrier's Mexican wireless assets.
It's unclear when American Tower's existing, or holistic contract, with AT&T in the U.S. will expire. On the company's third-quarter earnings conference call, American Tower CEO Jim Taiclet declined to comment on the specific timing of its MLA with AT&T, but said in general the agreements it strikes with carriers have a period of time in which the operator has a lot of flexibility as to what it can do. Under holistic agreements, carriers pay a flat fee for a pre-defined amount of equipment it can deploy, but the operator does not have to pay for every new change to a site. Under the new model, AT&T will basically pay for new incremental site activity.
"There are limitations to equipment rights and other limitations within those," Taiclet said, according to a Seeking Alpha transcript. "But at a certain point those widely available rights will then revert back to retail model, if you will, which is an individual application for every single thing that the carrier wants to do. And we just go back to business as usual or pre-holistic practice, which is, we'll price that application and we'll individually negotiate it, and we'll end up getting our revenue that way."
AT&T is going to "be competitive in the U.S. market," Taiclet said, noting the U.S. wireless market is one of AT&T's core businesses. "And we expect them to be trying to capture as much of that rising demand for data as they can within their financial plan."
American Tower CFO Tom Bartlett strongly emphasized that the MLA with AT&T in the U.S. market is not expiring. "There are certain elements that Jim talked about that change over that period of time, but the MLA is not expiring," he said.
"What impact the expiration of the holistic part of the [AT&T] MLA could have on AMT numbers is not yet fully known and will depend much on AT&T's spend outlook in wireless for 2016 and beyond," Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note. "In light of this, we view AMT's strategy of diversifying its asset basis to be less dependent on the U.S. as a very positive thing, as we believe we could still see some 'choppy' wireless spending on the part of AT&T in 2016. We fully expect [AT&T] spending will come back -- but with its fiber commitment to the FCC and the broadcast auction looming, AT&T likely has other priorities in terms of near-term capital deployment."
Speaking of diversifying outside the U.S., Taiclet also confirmed that American Tower has signed a long-term MLA with AT&T in Mexico. He noted that AT&T is the firm's biggest customer not only in the U.S., but also globally and now also in Mexico.
"So we have an excellent, I think, business relationship with AT&T across the board," he said. "There's always things to talk about on contracts and such, but what we've done in the U.S. has determined a way to have mutually beneficial contractual arrangements with AT&T especially in periods where it's growing its network rapidly. And so we've replicated the same sort of arrangement with AT&T in Mexico which is, again, over half of our revenue base in the country."
The MLA in Mexico covers all of American Tower's site leases under previous agreements with Iusacell and Nextel Mexico, which AT&T bought earlier this year, and extends all of those leases for 14 years, which Taiclet said is "a really nice long time horizon to have, a guaranteed revenue stream from all those leases."
"This agreement also guarantees our company certain levels of new business from AT&T Mexico over the next several years with some potential upside on top of that depending on how active they think they need to get in the network, and again, we believe it's going to be mutually beneficial to American Tower and AT&T," Taiclet added. "And it also specifically, for our customer, provides access and flexibility for them regarding all of our Mexico assets to help efficiently accelerate their network upgrade strategy. We want to be their partner in that."
Indeed, AT&T said in June it will spend $3 billion to cover 100 million people in Mexico with LTE by the end of 2018. AT&T said the first phase of its LTE network buildout will be complete by the end of this year and will cover 40 million Mexicans, which the carrier said represents about one-third of the country's population. By the end of 2016, AT&T said it plans to cover 75 million people, or nearly two-thirds of the population.
American Tower's management "sees significant opportunity in Mexico, underscored by comparatively low smartphone penetration (~35 percent)," Jefferies analysts Mike McCormack and Scott Goldman said in a research note. "The push to 4G should drive capex spend meaningfully higher and could support 2x the number of existing towers. Notably, management dispelled reports that its existing MLA with AT&T was expiring, but noted such an event should have little impact, if any, on the business."
- see this Seeking Alpha transcript
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