In the last few years, as prices have risen for hard assets, such as fiber-optic cable networks and wireless towers, private equity (PE) firms have shifted their focus from asset ownership to other areas such as the services side of the business, which is fragmented into hundreds of small businesses.
The M&A market has been affected by a scarcity of assets on the market, consolidation among tower and fiber companies and the entrance of many new infrastructure investment funds focused on stable cash flows over high growth. Additionally, infrastructure funds have become high bidders for towers, which has driven prices higher and return on investment lower.
“The infrastructure funds really only require a low double-digit yield on their investments, whereas private equity firms need to get a return north of 20 percent,” Andrew Bracy, vice president of MVP Capital, told AGL eDigest. “We are no longer seeing many traditional private equity funds that can make the math work to bid aggressively on towers.”
With tens of billions of dollars in telecom capex coming down the pike to build out 5G on existing towers, tens of thousands of small cell nodes and the associated fiber backhaul, a lot of PE funds are actively pursuing telecom services businesses to capture a piece of the growth.
“There is a broad trend where we’re seeing all kinds of telecom services companies, such as tower, fiber, power and data center services rolling up,” Bracy said. “Our thought is that the change in tower economics has led to people who may not have loved the services businesses, but still loved telecom space, to choose to invest in the telecom services business.”
Acquisitions Add Small Companies to Platform Companies
Private equity firms sometimes view smaller companies as an add-on acquisition to a current platform or an existing company. They sometimes see other companies as being large enough to serve as a platform for purchasing other companies. Roll ups of small, local companies can also create a new platform, such as Congruex, with regional or national footprints, according to Bracy.
Of course, telecom services has its giants — Mastec and Black & Veatch — but it also has a ton of small mom-and-pops with two to three crews. Smaller companies with $1 million to $3 million in EBITDA are going for single-digit multiples (in the +/- four times EBITDA range), while companies approaching $20 million in EBITDA can sell for double-digit multiples.
“We are now in a world where people are trying to pick up companies of all sizes – although there is still a minimum size threshold that buyers need to justify the expense and time required for each deal. From a valuation standpoint, we are seeing buyers pay an extremely wide range of multiples of trailing EBITDA based on criteria such as scale, revenue growth, customer concentration and margins,” Bracy said. “There is an enormous play for people to pick up small companies at lower multiples, integrate the acquisition, build a platform that scales up to $10 million to $20 million in EBITDA and then get a significant amount of arbitrage when they try to sell the portfolio.”
But roll ups in the tower services space don’t always work. Centerline Solutions, a Golden, Colorado-based company that specialized in developing, designing, building and maintaining wireless networks, filed for Chapter 7 liquidation under the U.S. bankruptcy code just last year.
Centerline was a combination of ATECS and MC Squared Holdings, which grew through a series of eight acquisitions, an equity investment from Concentric Equity Partners and a credit facility led by Bank of the West’s Commercial Banking Group.
“They had issues integrating their acquisitions and ultimately had liquidity challenges, but today’s buyers who are doing the rollups are much more focused and are making sure that the owners/management of the acquisitions stay on to maintain employee and customer relationships,” Bracy said.
M&A is a Natural Route to Diversification
A positive byproduct of mergers and acquisitions is a more diverse, more resilient industry. Tower services companies face danger by serving a market with only three to four customers; if even one pulls back, as T-Mobile did in the latter half of last year, it can spell doom for a company. Acquirers today are focusing on a broader array of telecom services, creating instant diversification in the resulting platforms.
“The trends are pointing toward people building more diversified businesses, covering all potential end markets and offering more services,” Bracy said. “Engineering/site acquisition companies, which only touch a small percent of a projects spend, are broadening their toolbox and getting into construction, network integration and maintenance work.”
For example, Borgman Capital has purchased wireless services provider Skinner & Cook, and additionally, purchased Virginia Tower Construction, which provides wireless tower services plus fiber and electric deployment and testing for connectivity and signal emission.
Another good example is NTI Connect (acquired as a platform by ORIX Capital in 2018), which acquired Verticom in 2019 (end-to-end turnkey solutions for wireless broadband), adding it to its platform NTI National Technologies (fiber optics, data centers, structured cabling, DAS, electrical), CCSI Networks (aerial and underground fiber deployment, antenna and line, civil construction, small cell/micro cell installations, IDAS/ODAS integration) and Fairhaven Integration Services (central office, wireless, data center engineering and installation).
“People want to capture more of the value chain. If you are building the fiber to the tower, wouldn’t it also be great to build the tower?” Bracy asked. “I just spoke with a fiber company that wants to acquire companies that build macro towers and small cells.”
Congruex, on its website says it is driven to fulfill the demand at the network edge caused by wireless, wireline, MSO and content companies, which is “expected to continue indefinitely.”