Muddy Waters Fails to Shake American Tower With Short BetNikolaj Gammeltoft and Scott Moritz
Never before has the unveiling of a Carson Block short sale done less to sway investors.
American Tower Corp. fell 1.1 percent to $73.87 yesterday, the smallest first-day drop ever in a stock after a report from Muddy Waters Research, which built its reputation with bearish calls on Asian companies. New Oriental Education & Technology Group Inc., Focus Media Holding Ltd. and Sino-Forest Corp. lost at least 20 percent after previous Muddy Waters notes.
Investors in the operator of cell-phone antennas were unshaken by Block’s analysis and firms from Wells Fargo & Co. to Macquarie Group Ltd. said they disagreed. Block said yesterday that American Tower is worth 40 percent less than its share price because it overstated the value of its acquisitions and has poor corporate governance.
“The market is sometimes a lot smarter,” William Ferer, who manages about $3 billion, including American Tower shares, at W.H. Reaves & Co. in Jersey City, New Jersey, said in a phone interview. “I took it quite positively that after a full day of digesting this Muddy Waters report the stock was only down a little bit.”
The shares rose 1.5 percent to $74.95 at 10:13 a.m. in New York today, erasing yesterday’s loss.
American Tower, the second-biggest U.S. REIT by market value, owned or leased 22,599 wireless and broadcast communication towers in the U.S. and 33,074 towers internationally as of March 31, according to its most recent quarterly filing. Matt Peterson, a spokesman for the real-estate investment trust, didn’t respond to messages seeking comment. The Boston-based firm has a market value of $29.2 billion, data compiled by Bloomberg show.
About 26.3 million shares of the company changed hands yesterday, the most in five years, Bloomberg data show. More than 171,000 put options traded, about 90 times the average for 2013 through last week.
“This stock should be mid-40s,” Block said in a Bloomberg Television interview yesterday. “Our goal with this report was for people to actually read it and I think people are reading it and after they read it, digest it and the company responds, I’m feeling very good about it.”
This is the first time Block has targeted a U.S. company. The 37-year-old investor gained fame for his short-selling calls in Asia after regulators halted trading in four of the first five companies he targeted starting in June 2010. Hedge fund manager John Paulson sold his Sino-Forest Corp. stake at a loss after Block said the company overstated its plantation assets. Sino-Forest filed for bankruptcy protection in 2012.
American Tower shares have more than tripled since November 2008. The stock trades at 25.8 times funds from operations, compared with a multiple of 19.8 for Simon Property Group Inc., the largest U.S. REIT by market value.
“I don’t think I’ve ever seen a Muddy Waters report having this little an impact on the market,” Ophir Gottlieb, managing director at San Francisco-based Livevol Inc., a provider of options-market analytics, said by phone yesterday. “It just wasn’t that big of a deal.”
Hedging by people who owned the stock may explain why the shares didn’t fall more after put trading surged, Gottlieb said. In the two days before the report, more than 40,000 bearish contracts changed hands each day, compared with a historical average of 1,900, according to data compiled by Bloomberg. The shares slid 4 percent from July 15 to 16.
There is about a $250 million discrepancy between the price American Tower said it paid for towers in Brazil and the actual sale price, the Muddy Waters report said, citing research from financial statements of the companies acquired, Brazil’s central bank and six industry sources.
American Tower rejected Block’s assertion that it paid around $300 million for the Brazilian communication sites, according to a filing released after the close of trading yesterday. The company said the price was about $585 million for the towers, financed by intercompany loans, cash from operations and equity contributions.
American Tower’s management shows a “lack of faith” in the company’s stock price, Block said in his report, citing share sales from exercised options. The company also faces weak growth overseas, such as India, Ghana and Brazil, according to the note.
“When we have gone into the field and actually rolled up our sleeves and figured out what is going on in many of these emerging markets, the reality is actually very different from what the company tells you,” Block said yesterday. “The way that this business is working overseas, it’s just not going to work as well as it has in the U.S.”
Muddy Waters failed to identify any new challenges facing American Tower, according to Andrew Hamerling, managing partner of Wavelength Asset Management, a New York-based hedge fund.
“This report was pedestrian and foolish,” said Hamerling. American Tower is one of the largest holdings in the Wavelength Asset Management fund, he said. “The emerging market risks were always there, and the company had done an admirable job managing those risks and returning value to shareholders.”
Wells Fargo’s Jennifer Fritzsche said she disagreed with Block’s contention that the business faces a major threat from Wi-Fi because data demand is growing, according to a note published yesterday. Investors should buy shares of this “high-class” company, Macquarie’s Kevin Smithen said in a report.
The stock has 19 buy ratings, five holds and one sell, according to analyst recommendations compiled by Bloomberg. The shares are down 4.4 percent in 2013.
Real estate investment trusts, whose primary income streams are from properties, don’t pay federal income taxes. In exchange, they’re required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders in the form of dividends.