Here's Why Telecom Infrastructure Stocks Surged on Tuesday

Many stocks in the telecom infrastructure sector jumped on Tuesday, following the news that a federal judge has cleared the $26 billion merger between Sprint (S +0.00%) and T-Mobile US (TMUS 0.36%). That market reaction might seem counterproductive at first glance, because the tower and back-end networking businesses are watching two of their largest customers boiling down to a single entity -- fewer clients should equal lower sales, right?

But the reaction actually does make sense. Here's how.

The market reaction

The heavy hitters behind the scenes of America's mobile networks all made significant gains on Tuesday:

Data sources: Yahoo! Finance and YCharts.

The three cell tower specialists have been beating the market over the past year (and five years, and 10) while Uniti is making up for some lost ground today. As a network infrastructure manager whose largest client and former parent company is going through bankruptcy, Uniti plays a relatively small part in the wireless market. Roughly 1.2% of Uniti's revenues came from tower leases in the third quarter of 2019, down from 1.7% in the year-ago period.

So why is it good for these companies that the Sprint and T-Mobile merger is moving ahead? I'll let their own executives do the talking.

Image source: Getty Images.

American Tower

"While there may be some decommissioning of sites as the new T-Mobile optimizes its network and rolls out 5G, we would also expect significant demand from the combined company for our extensive US portfolio during that process and well into the future," said American Tower CEO Jim Taiclet in last year's second-quarter earnings call. "Furthermore, DISH (DISH +0.00%) is set to acquire Sprint's prepaid business and has made a commitment to deploy facilities based 5G broadband network capable of serving 70% of the U.S. population by June of 2023."

So American Tower expects the post-merger version of T-Mobile to step up its infrastructure investments in order to support its 5G network plans. That positive effect should be larger than the reduction of overlapping network installations.

Oh, and don't forget that the companies had to promise to keep the dream of four major competitors alive, spinning out Sprint's Boost Mobile operations to DISH Network. For the record, DISH shares rose as much as 12.6% on Tuesday.

DISH would rely on T-Mobile's infrastructure for up to seven years, but the brand-new carrier might also want to build out its own wireless network over time.

Crown Castle

"When you listen to Sprint and T-Mobile talk about the rationale for the merger, and you listen more broadly to all of the players in the space, the capital spending is going to start to transition here in the next 18 to 24 months from largely being focused on 4G to 5G," Crown Castle CEO Jay Brown said in his third-quarter 2019 earnings call. "Those activities will start in the next 18 to 24 months really in earnest. This is going to be a decade-long, we believe, investment cycle that will go through with the carriers."

Brown largely avoids talking about specific customers in these calls but he does see the Sprint deal as a stepping stone in the larger megatrend of massive 5G installations and the closely related explosion of 5G-based Internet of Things devices. Closing that deal would effectively fire one of many starting guns in that race.

SBA Communications

"There has been some slowdown since the first half of the year and the activity of T-Mobile, Sprint, and DISH as they await certainty around the outcome of the T-Mobile, Sprint merger and their future paths," said SBA CFO Brendan Cavanagh in the company's third-quarter 2019 call. "This is logical and to be expected given the circumstances. We expect an immediate escalation in activity once the outcome of the merger becomes clear and long-term network decisions can be made with certainty."

In other words, a generous handful of major players in the wireless networking space have been investing a lot less in infrastructure upgrades than they would have if the Sprint deal had been settled -- in either direction.

Uniti

"Overall, we view the potential merger as a long-term positive for Uniti, as the network investments of the combined company appear to be an increase over each company's investments as a stand-alone entity," said Uniti CEO Kenny Gunderman in last year's second-quarter call. "The commitment by T-Mobile and Sprint to invest substantially in rural broadband, and in the rollout of 5G services, would be a great fit for our overall strategy and network. We also view the possibility of DISH, becoming a major facilities-based provider as a positive."

I hear solid echoes of SBA Communications' arguments here. Uniti hopes to become a significant provider of towers and back-end network capacity for DISH as that company navigates the wireless markets.

In summary: Post-merger installations plus DISH equals more network investments

All four of these companies are actively rooting for Sprint and T-Mobile to close their merger after two years of grueling uncertainty. If they somehow manage to stumble right at the goal line, that's still better than not knowing at all, but the proposed deal structure looks like a better outcome for the infrastructure companies.

And that's why they all rose on Tuesday.