After thoroughly reviewing the Muddy Waters document and speaking with American Tower’s management, Morningstar is reiterating the fair value estimate and Economic Moat Rating. American Tower formally addressed the most serious allegation in the Muddy Waters report via an 8-K it filed with the Securities and Exchange Commission, which documented the logistics of its payments for 666 Brazilian towers in 2011.

Muddy Waters claimed American Tower paid only $335 million for the towers from Site-Sharing, not the $585 million American Tower had previously disclosed. In the 8-K filing last week, management explained it did indeed pay $335 million through intercompany loans, but also paid an additional $184 million in equity contributions through a separate account. The remainder of the purchase price was cash from operations. While the purchase price seems exorbitant on a per-tower basis (more than $878,000), the multiple of roughly 13 times cash flow is in the middle of its historical range for international acquisitions (5-20 times).

Many analysts continue to adamantly disagree with Muddy Waters’ other key assertion that Wi-Fi and small-cell architecture (such as distributed antenna systems, femtocells, and so on) pose a grave danger to the macro tower model. These systems are complements, not substitutes, for areas where towers can’t be built because of zoning restrictions. The service ring radius for small-cell infrastructure is very small, and given the need to drag fiber to each node and the engineering difficulties associated with systems, it is much tougher to lease up to multiple carriers. It is simply not economically feasible for small-cell sites to replace the hundreds of thousands towers in place.

After some back and forth last week, the market has apparently ruled that this Muddy Waters report is a non-issue, and we concur. Analysts remain bullish ahead of American Tower’s second-quarter results (to be disclosed July 31) due to U.S. carriers continuing to upgrade their existing networks to elevate signal quality and the firm expanding its operational footprint abroad.


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