eDigest: How did the wireless infrastructure M&A market in 2020 compare with the previous year? Was it affected by COVID?
Funk: 2019 was a good year, but, even despite COVID, 2020 was a very robust deal year with record prices, in terms of multiples, being paid on tower cash flow.
eDigest: Were there any deals that got done because of a fear of increased capital gains taxes under a Biden Administration?
Funk: Because Biden’s plan does call for higher taxes on capital gains, amongst other things, we did have a couple of clients that said they would rather make sure that they got a transaction done in 2020, knowing what the capital gains rates were going to be like. So we had a couple transactions that closed on the last day of the year.
eDigest: What was the reasoning behind Melody Investments purchases of Uniti Towers (now Harmoni) and CTI Towers?
Funk: Melody already had a very large land and rooftop aggregator platform called Melody Infrastructure, which was a combination of Unison Site Management and Wireless Capital Partners. So, this is really their first foray into buying towers. It was a chance for them to diversify.
Melody’s strategy could be compared with Peppertree Capital Management, which has more than a handful of companies underneath its umbrella. Other investors have taken multiple bets in the tower space and backed multiple management teams. What we’ve seen for years is that it is such an attractive asset class that if you can have more than one investment in the space and you can get the returns you are looking for, by all means, do it.
Another instance in the last year where the tower company did not exit was when Apollo Infrastructure purchased the tower platform from LendLease and rebranded it as Parallel Infrastructure.
eDigest: We lost two major players in the tower industry in 2020 when Vertical Bridge bought Eco-Site and American Tower purchased InSite Wireless Group. Do you think this consolidation will harm competition?
Funk: There will be Department of Justice involvement if there is too much consolidation in any industry. I don’t think you will see that happening in the tower space anytime soon. It’s so diverse in terms of the ownership base. From statistics in the public record, we found that the three public tower companies own a little more than half the number of domestic towers. And, the carriers have been very clear that they, in some cases, would much rather outsource their builds to private, smaller tower companies than the public tower companies. So I think as long as the carriers have an emphasis on doing that, they’ll always be okay.
eDigest: In what ways will these companies be missed?
Funk: Eco-Site was one of the leading, and first, players to go to the carriers to get large build-to-suit agreements under terms that the carriers then replicated and took to the other tower companies and asked them to match. So there is one less well-capitalized tower company to pit against the others.
InSite Wireless Group, which had a reported $100 million in tower cash flow, was one of the two largest private tower companies behind Vertical Bridge. It was a substantial player in the space. Very acquisitive and a great company to work with.
eDigest: We saw consolidation in the wireless services sector last year. Enertech Holdings acquired Washington state-based Legacy Towers, and Motive acquired AWS Communications, which has locations in Austin and Dallas, Texas; Colorado Springs, Colorado; and Tampa, Florida. Will this continue?
Funk: It has been a very active space in terms of transactions. And anytime you get the private equity money invested in a space, you’ll have an increasing number of transactions due to roll ups, and then eventually exits by those investors.
This is happening for several reasons. First, the space is very fragmented. And there’s a certain ability for an investor to pull these companies together and get economies of scale. They can go to a carrier and say we are no longer a regional company. We have the crews, expertise and geographic coverage to handle your needs nationwide.
eDigest: What kind of change did you see in terms of master leasing agreements between the carriers and the tower companies over the last year?
Funk: The tower model was built on tower leases where the carrier pays each time they put additional equipment on the tower plus a percentage annual escalator. For example, the original deployment may have started out with up to six antennas and coaxial cables running up to those antennas for $1,500 a month with a 3 percent annual escalator. And then as they added equipment, they would pay for each time they touched the tower. This is where the carriers feel they were unfairly treated, because they were amending those leases, sometimes, two or three times within 18 months or even less. Eventually, they were paying $4,000 a month. But that is business. It was an agreement that the carriers signed.
The new MLAs coming out are more favorable to the carriers. And this has been more prevalent than not over the last few years is the tower companies are allowing the carriers to do whatever they want on that RAD site. According to the new agreements, in one area, the carrier can deploy six, 12 or 24 antennas and can run all the cables for a flat price and a fixed escalator. If you’re the carrier, you love that. There are no surprises. You can go and touch the tower as much as you want. That type of lease, though, really hurts the tower model in the sense that there was a lot of growth over the years because of the amendments. That is not happening now. That is the norm, not the exception, for new towers that are getting built.