Justin Goldberg
10/22/14
Case: Palm Towers
Introduction: Basis of the case is…
This case is used to solve the problem of determining how much this company (the National Tower Company) should bid for the Palm Tower, if anything at all. Contrary to many of the other cases, this case is not a case of make or break. Alternatively, this is clearly a situation of a want and not a need, as CATO is mentioned nowhere here. It becomes evident from the beginning of the case that this is definitely a tower that comes with an abundance of value. In fact, the majority of working on this case is basically a forecast showing how much profit this investment could potentially provide. We would recommend just by previewing the case a bit that a bid should be made that is near the likely competitive forecast value for there are a few other rival companies that are very successful at the moment and will likely bid as well.
The industry for these towers right now is a very competitive one as previously mentioned, this is because across the globe there are 6 billion cellular users who most of are in the process of upgrading from either 2g to 3g or 3g to 4g/LTE. This is useful information to keep in mind for the case because we try to forecast growth for this tower, which is currently sitting at 17% for a year-by-year basis, which is quite high compared to most other industrial growth averages. Unfortunately, while these major cellular companies are bringing in a majority share of the rent, numerically they currently represent only 1/3 of the tenancy of the tower. To get a clearer picture of how much more the major carriers bring to the table, the below is listed with the annualized rent from all the tenants with the three current major carriers listed first.
Tenant Annualized Rent
Verizon $54,752
AT&T $56,779
Sprint-Nextel $60,480
Cricket/Leap $42,780
Clearwire $24,297
US Cellular $18,251
US Gov. $10,246
Orange County $8,436
USA Mobility $6,000

Total $282,020
When calculated together, the three major carriers on the tower account for more than all the six others do combined. This is actually a positive considering the turnover (or churn rate) for these carriers is listed at 1% for the purposes of this case. So considering that it is unlikely to lose one of these three carriers and the additional fact that it is likely to gain the final fourth in T-Mobile, The National Tower Company should definitely give the most competitive bid it can here. The only possible foreseeable problems are the competitive bids with American Tower, SBA Comm. and Crown Castle, and the $40,000 cost of adding a new carrier, which with a couple renewal options coming up soon could lead to some problems specifically with Ce.
Analysis: Scenario Breakdown
There are a multitude of scenarios that could possibly happen to affect the TCF in this case, and even many that are delved into with the spreadsheet. With brevity in mind though, for this report we will only review the most likely three, although in the final evaluation all will be taken into account. One of the cases we will analyze is actually the base case, as is sets the basic parameters and is highly likely.
The parameters for the base case are that we have three major carriers, three regional carriers, two government carriers and one dated technology, though the dated technology chooses to drop after year 2 as it has a lease renewal option and will be soon phased out as an obsolete technology soon, especially considering its churn rate of this technology being at about 70%. For this case specifically we are talking about the tenants of USA Mobility, which is most likely there for the use of the nearby hospital. The problem with this is that many hospitals at the time were still stuck on pagers, which was actually upwards of 90% . Though this is true, pagers are extremely unsecure comparative to smartphones which makes them a clear HIPAA violation. The following shows how losing pagers would affect revenue.
As is viewable, the hit NTC would take from losing USA Mobility would not cause a loss, merely a stabilization for one year before it rockets back up. As this case dawns, we are left with a multiple TCF value of 16.212, which when considering all the other possible scenarios ends up being very middle of the road.
As a variation of the base case, we can take the route of thinking were we do not prepare ourselves for any new investing tenants until we know that they are investing in space. This is obtained by reducing the Ce to nil. While the change is nominal (.5 of a multiple approximately) it is still an addition of value and technically possible.
The second highly probably case is the one in which the Palm Tower obtains T-Mobile. It is already mentioned in the actual case that T-Mobile is interested, so as opposed to the previous major carrier churn rate of 1%, this information has flipped the script for this scenario. Once this transaction takes place, Palm Tower will have as tenants all of the four major carriers in the United States ostensibly increasing its value innumerably. These carriers claim now 93% of total market share. For an accurate depiction of how adding this major carrier affects value, here is a side-by-side comparison of its revenue to the base case.
As is visible in the Graph, adding T-Mobile gives you a significant boost in revenue. What is not listed in this graph but is also relevant is that this acquisition increases the value by 2.7 multiples of TCF.

Having gone over how it is very possible to lose the dated technology and possible to gain a major carrier (and next to impossible to lose one) the final likely scenario to be reviewed here is the first negative case. This is the case where it is analyzed how it is possible, and what happens when you lose a regional carrier. For starters, it is described in the case how US Cellular has already been selling some of their tower spaces to Sprint in an effort to become more competitive and they are by no means the only ones doing this. In fact, the death of the big regional carriers looks more imminent now especially considering during this time they were only speculating on the ability of T-Mobile to acquire Metro PCS, now it is a reality. In light of this, the churn rate for regional carriers has been adjusted from 20% to 45%. For a better idea of how this affects revenue and value, it will be compared to the previous two cases below.
The effect this has is crucial for its value because even with the inflator it takes five full years to get back to where it began after losing the carrier. Unfortunately for the tower it is also likely enough to mention (and is mention in the spreadsheet) that it is plausible to lose two regional carriers, and it is easily conceivable from this graph what losing two regional carriers would do.
Recommendations & Conclusions
My recommendations for this case would definitely be for the NTC to acquire this tower, if for no other reason than to have an additional tower that holds all four major carriers. This fact alone, especially being located in a highly residential area provides enough ostensive value. As for specifically what they should bid, that is a bit more difficult to explain. In order to calculate a weighted multiple value I used many scenarios and weighted them by their probability to occur based on calculated churn rates. Through these calculations I have arrived at approximately a multiple of 16, although multiples did range from about 13-18. Going from these numbers I would suggest bidding a maximum of 15 because you wouldn’t want to pay 100% of present and future value on an investment solely because of any risks involved. A table showing the scenario probabilities and weighted multiple value is shown below: Multiples Weight: Probability: Weighted Multiple:
Base Case 16.212 0.0404 15.78% 2.5581
Base Case w/o Ce 16.699 0.0404 15.78% 2.6349
Obtained T-Mob 18.928 0.0400 15.62% 2.9567
Gain 1 Regional 17.560 0.0222 8.68% 1.5239
Lose 1 Regional 14.690 0.0330 12.91% 1.8965
Lose 2 Regionals 13.823 0.0270 10.56% 1.4601
Lose Orange County 15.744 0.0404 15.78% 2.4841
Lose a major then gain a major 15.926 0.0004 0.16% 0.0251
Keep USA Mobility 16.534 0.0121 4.73% 0.7827
Total 0.2558 100.00% 16.3221 $ 4,368,131.68