The Evil Diaries Addendum: A Short on Nasdaq for the Coming Bear Market

A competent adviser remarks to me:

“As at September 30th 2014, SBAC (SBAC on Nasdaq) had long-term debt of $6.8 billion and net current liabilities of $0.7 billion. Net PPE was $2.7 billion and so they were balance-sheet insolvent. You can add their intangibles and they still have a balance sheet deficit. This is a company that has never reported an annual profit for as long as I have checked their records (going back to 2004).

Management are not embarrassed by their losses, because they say that straight-line depreciation of their towers (terms based on the 5-15 year leases associated with those towers), does not reflect their long-term value. This is plausible, but undermined by the possibility that by the time the leases have expired, the mobile network operators they serve will have found alternative (e.g. city-based) methods of distributing their signal. Another threat is that the networks consolidate to the point that SBAC no longer has any pricing power in negotiations. The sell-side chooses to focus on “Adjusted Funds from Operations” instead of Net Income, and the possibility that it can convert to a REIT in the way that American Tower (AMT US) did – although this would surrender their tax losses.

The bear case is made most starkly when one simply checks the average transaction price of a cell tower versus the size of SBAC’s estate.

As of September 2014, SBAC had 22,500 towers, of which 15,000 were in the US. Towers in the US are worth $450,000-$500,000 each in a typical transaction, while towers in South American destinations such as Brazil, where SBAC has expanded, are typically worth around $200,000.

If SBAC received a bid for all of its towers, the amount raised could potentially be in the region of $10 billion. So, compared to an enterprise value of c. $22-23 billion, I think it is comfortable to be short of the stock. The bonds have a B1 junk rating from Moody’s.”