Tension between wireless communications carriers and tower-owning companies that rent equipment space to them has led carriers to renegotiate rates in some cases and to the construction of alternative tower sites in others. Clayton Funk, a managing director with MVP Capital, said the tension exists because the carriers do everything they can to squeeze efficiencies from their operations. Funk spoke at a conference session about privately owned tower companies at the Connectivity Expo convention conducted by the Wireless Infrastructure Association in Charlotte, North Carolina.
“The carriers have been able to squeeze a lot of efficiencies out due to technology changes, but the cost of renting space on towers has not decreased over time,” Funk said. “In fact, it has increased over time, because the carriers continue to modify their equipment on the towers and trigger amendment revenue.” Changes to rental contracts are called amendments, and the tower owners may use amendments to charge the carriers more money.
Funk, who said he has been representing tower owners for sales since 1997, said MVP Capital is a boutique investment banking firm that specializes in renewables, technology, media and telecom, and that also raises capital for tower companies, fiber providers, DAS and small cells.
Carriers vs. Tower Companies
“The carriers have been using aggressive tactics to negotiate for better positions,” Funk said. “That includes so-called build-to-relocate towers. They’re hiring companies to build tower sites for them to relocate to and effectively attack the business of some of their current partners, the existing tower companies.”
Those steps will continue, Funk said, unless the carriers say, “The towers are vital to our network deployments. It is what it is. We’ll just focus on the best network possible.” He said one of the things that makes owning a tower and renting space so advantageous is that, especially where property zoning is difficult, the carriers have few other choices.
Sprint and T-Mobile Merger
Participants in the session spent time discussing the potential effect of a merger of Sprint and T-Mobile US, which the companies’ boards of directors have approved, and which is awaiting government approval or disapproval. Funk said that the parties with whom he does business have a history of low expectations for rental and amendment activity from Sprint. As a result, the prospect of a combined, merged company decommissioning Sprint sites and halting further Sprint network construction in favor of shifting wireless communications traffic to the T-Mobile network causes them little concern and would have little effect on tower valuations.
“When MVP Capital represented a tower owner selling assets or when we were raising capital for a company providing shared wireless telecom infrastructure, Sprint was never really forecast as a tenant on these towers,” he said. “So there will be a potential hit if you own towers and you have T-Mobile and Sprint on the same tower. What if the Sprint network gets decommissioned in several thousand sites? But we don’t believe the tower valuations change when people are trying to buy assets. We haven’t seen any buyers telling us over the last several years that they believe Sprint will be a tenant on those towers, if they are not already.”
Towers are selling at record-high prices, Funk said. “And I know this sounds self-serving, with me representing sellers, but it is as great a time to sell as any,” he said. “We are not saying to anyone to rush to the exits now because of the uncertainty involving the merger of Sprint and T-Mobile. That is not necessarily a catalyst for selling now. It is another discussion when we say to rush to the exits before prices go down because of interest rate risk and other factors, but not necessarily because of the merger.”
Sprint and T-Mobile have significant differences, Funk said, and the differences may limit the extent to which T-Mobile could simply shift Sprint customers from the Sprint network over to the T-Mobile network, allowing some decommissioning of the Sprint network. “There’s a lot of data traffic to move over, if you’re moving from Sprint all the way over to the T-Mobile network,” he said.
5G Wireless Communications
Speaking about the coming of 5G wireless communications, Funk said he kind of jokes that when wireless carriers talk about deploying 5G in 2019, it might actually be 4.5G. He said before there was 4G, it was 3.5G.
“There’s a lot of speculation of what 5G can mean,” Funk said. “It’s obviously very low latency. It’s a significant number of cell sites — whether that’s small cells or more macro sites. There has to be a business case around it, though. In theory, potential innovations will make 5G more cost-effective. It won’t be cheap or easy to deploy. No generational network upgrade generation has been cheap and easy to deploy. Meanwhile, the carriers are figuring out ways to make more money. The subscriber model is pretty broken. Apparently, American consumers are frustrated with wireless plans that leave them paying more on a per-day basis than it would cost to walk into Starbucks and get a latte.”
Funk said that if the carriers can figure out a way to make a profit with 5G, whether with serving autonomous vehicles, telemedicine applications or any other way, the 5G rollout will be faster and bigger. In the meantime, he said, it is more likely to take years for the 5G rollout to happen, and then it will probably be steady for whatever 5G becomes.
Private tower companies sometimes may construct small cells to help their customers. He gave as an example a tower developer consulting with a local market where a carrier’s engineer might ask for help with a difficult coverage problem. “In some cases, carriers are asking the smaller tower developer to solve it with a small cell, but it is very opportunistic,” he said. “We have yet to see any privately held tower companies try to move on that in any significant way within their core.”
Perhaps as exceptions, Funk mentioned the Digital Bridge investment with ExteNet Systems, a small cell developer, and the small cell activities of InSite Wireless Group. He said, however, that many of MVP Capital’s tower company clients have been in the tower business for a long time. “They understand the model,” he said. “They get it, and they don’t necessarily need or want to get in on the small cell business, unless they’re doing it to help out their customer.”
Sometimes, Funk said, he has seen tower owners looking at actually owning the cloud-based radio access network (C-RAN) and having it be a neutral host. “We’ve seen that pop up a couple of different times,” he said. “They’re getting approached and if they have the opportunity to develop it themselves and then lease it back to the carriers, they’re trying to do that. It’s pretty rare, but they’re trying.”
Increasingly, entities are having difficulty closing purchases of towers because of insufficient documentation, according to Funk. Sometimes buyers are willing to figure out ways to solve such problems and close the transactions, and sometimes they are expecting more of the sellers, he said.
“The tower industry has become sophisticated with securitizations, and buyers are looking for reasons to buy towers,” he said. “The only reason they’re putting off closings is that they really just can’t solve for an issue, like a tower built on a Superfund site contaminated by hazardous waste or something like that.” Funk said more and more counterparties are figuring out ways to solve due diligence problems and close transactions rather than delay closings.
“The market is so efficient and so hot that if somebody’s buying assets and they know they’re paying the most, they sit there as a buyer and say, ‘I want it perfect. I’m paying you a lot of money. I want this thing locked down and without any issues whatsoever.’ So maybe there’s a little bit of that, too, coming out, because it is a hot market. I can see the buyer’s position. They’re paying premiums for assets, so they want it the way they want it. They’re not going to accept dirty assets, if you will.”
The next Connectivity Expo is set for May 20–23, 2019, in Orlando, Florida.
The FCC is planning on unveiling its final(?) plan to promoting wireless investment in the 3550-3700 MHz Band at its November open meeting. The original plan for the Citizens Broadband Radio Service at 3.5 GHz, which came out back in 2015 and called for three-tiered shared access between incumbents, Priority Access Licenses (PALs) and General Authorized Access (GAA) users, soon got swept up in 5G-mania with carriers eyeballing it as part of their mid-band spectrum strategy.
The FCC is expected to adopt limited changes to the rules governing PALs to make them more useful for 5G, as well as more valuable at auction. Most importantly, it would increase the size of PAL license areas from census tracts to counties. Making the licenses renewable and extending their terms to 10 years will also make them more carrier-friendly. Establishing seven nationwide PALs with bidding credits for rural and Tribal entities will also establish the importance of the band in 5G.
“Our 3.5 GHz proposal … reflects the Commission’s aim of freeing up mid-band spectrum for 5G and other flexible uses,” Chairman Pail told the Americas Spectrum Management Conference in Washington DC. “This order makes targeted changes to our rules to promote investment and innovation in this important band. For example, by allowing providers to renew 3.5 GHz licenses, we’ll substantially increase their incentives to develop 5G services using this spectrum.”
The Order would also permit partitioning and disaggregation of areas within PALs and facilitate transmission over wider channels without significant power reductions.
The Commission maintained its in-band spectrum aggregation limit of 40 megahertz (in other words of four PALs) of the possible 70 megahertz per license area at any given point in time. Over half of the band—a minimum of 80 megahertz—is reserved for GAA use, which is licensed by rule. GAA users can operate throughout the entire 150 megahertz of the 3.5 GHz band on any frequencies not in use by PALs but may not interfere with them.
In another speech also in front of the Americas Spectrum Management Conference, FCC Comm. Michael O’Rielly said the previous licensing structure of the Priority Access Licenses was flawed because of the growth of mobile and the emergence of 5G.
“On that note, it’s clear that U.S. wireless providers and the international community have targeted the mid bands for 5G, with the CBRS band right in the bullseye,” O’Rielly said. “The United States must be at the forefront to determine and harmonize bands and establish standards so that our industries benefit. This is particularly true for the 3.5 GHz band, which is seen as the key global roaming band for 5G.”
3.5 GHz Band Could be First Home for 5G
The wireless industry is ready to move forward to deploy fixed or nomadic wireless in the 3.5 GHz band, Tony Sabatino, SABRE Industries, said in an interview with Clayton Funk, MVP Capital, at the AGL Local Summit in Kansas City last week. 5G as a mobility service will not come out in the 2020-2022 timeframe.
“CBRS Band will be the first launching point for high-speed fixed access in rural areas,” Sabatino said. “We are working in a rural area where we will help build out a fixed wireless solution, 6 – 8 megabits down. It is an exciting project with a particular utility.”
To get the true benefits of 5G, however, a lot of spectrum is needed, said Sabatino. Maybe 100 megahertz of spectrum. As a matter of course, he suggests that the FCC expand the CBRS up the dial to include the 4.2 GHz band, which would add 700 megahertz.
“You need a big swath of spectrum. [3.5-4.2 GHz] is the most interesting piece of spectrum out there right now. It is a good band for transmission. If you want to get households involved. If you go over 18 feet, you can use high-gain antennas,” he said.
Sabatino believes building and venue owners will be interested in using CBRS to provide but fixed data to their tenants or patrons.
“Owners of multi-dwelling units don’t have to let Verizon or Comcast and AT&T into their buildings to offer service,” he said. “The building owner can provide service to the whole building, including IPTV, internet, home phone and other wireless services to their tenants, connectivity.”
CBRS may even provide competition to the carriers as utilities will have a great opportunity to mount antennas on all their vertical real estate, he added.
ExteNet Systems, Inland Cellular Prepare CBRS-Ready Fixed Wireless Service
Another company that is moving forward on CBRS is ExteNet Systems, which has announced a field trial of a FCC Part 96-ready, CBRS LTE fixed wireless network with Inland Cellular, which serves southeastern Washington and north central Idaho. ExteNet initiated the field trial for Inland in September 2018 and commercial service rollout is currently targeted for early 2019.
“At Inland Cellular we are constantly evaluating ways to advance our customer experience and provide our customer base with enhanced service offerings. Applying the CBRS use case to our existing infrastructure seemed like a natural progression for us. We are excited to work with ExteNet on this initial trial and eventual commercial CBRS service rollout for our customers,” said Nathan Weis, CEO of Inland Cellular in a press release.
ExteNet’s virtualized LTE Evolved Packet Core (EPC) solution, bundled with Nokia’s Radio Access Network (RAN) equipment, has served as the foundation for Inland’s 4G LTE service throughout its coverage area since 2016. Inland is now leveraging its existing mobile infrastructure to conduct a field trial with ExteNet on the 3.5 GHz CBRS spectrum to improve customer experience and meet demand connectivity and increased network capacity.
“For many rural service providers, finding a modern solution approach that is financially viable, operationally manageable and still carrier-grade, is a major challenge and often the barrier to rolling out the latest services,” said Jason Osborne, vice president of Business Development and Strategic Initiatives for ExteNet Systems.
ExteNet’s LTE service offering is an alternative to more traditional fiber or coaxial fixed broadband solutions, especially in expansive geographies or smaller communities. The 3GPP-compliant platform can serve as the foundation for enhanced communication services including LTE mobility, roaming, voice over LTE (VoLTE) and wireless enterprise while providing broadband speeds to amplify user experience.
Overall the wireless tower industry continues to be a frothy deal market in terms of multiples paid by buyers and the number of people trying to buy towers. For the last several years, it has remained a very seller-friendly merger-and-acquisition market. The amount of transactions has been a bit slower this past year, because there hasn’t been a lot new tower inventory in the marketplace scattered amongst dozens of tower developers as there was three or four years ago.
This is the result of carriers either not building a significant number of new sites or consolidating tower development among a handful of companies. AT&T has largely been inactive; Sprint remains inactive; Verizon, however, is consistent and has several tower developer partners across the country; and T-Mobile, which is very active, has development deals with a couple major vendors. After that there are a handful of other companies that it relies on for tower development. When AT&T was active four or five years ago, it would have 25 or 30 different companies building towers across the country depending on regional relationships. Now, similar to T-Mobile, AT&T is focusing on a small number of companies to build their new towers.
Additionally, the carriers themselves may not be spending as much money on new towers because they are spending money on small cells and fiber optics.
Besides tower developers, there is a subset of tower owners that MVP Capital remains very active in representing. For example, we have done several broadcaster sale/leaseback deals this year, ranging from a single site to nearly 20 towers. On a multiple of EBITDA basis, their towers could be worth twice as much as their stations. Utilities own towers, government entities own towers, rural wireless carrier own towers. There are still a large number of tower owners that are not your typical cell tower developers with a business plan to build and sell towers in a five to seven-year period.
MVP Capital has invested a significant amount of resources and time into the fiber, small cell and DAS space, other areas of shared wireless infrastructure that have attractive investment characteristics similar to towers. We have completed several transactions for fiber providers for selling their companies and raising capital. We raised capital for a neutral-host DAS developer/owner/operator this year and we see a significant amount of activity in that space over the next couple of years.
While the number of tower transactions in 2017 was similar to the year before, going forward I think we will see fewer, but larger transactions. From five to 10 towers up to 50 to a couple hundred. Every deal is different, but towers are regularly selling at multiples of 20 times cash flow or higher. Valuations are at peak highs and it is hard to see how they could go any higher. If you have towers, MVP Capital can work to maximize your options and take advantage of these historically high valuations.
Clayton is a Managing Director in MVP Capital’s Towers Group and has been with the company since 2004. With client relationships dating back to 1997, Clayton has personally closed over 150 deals including mergers and acquisitions, sale-leasebacks and private debt and equity capital placements totaling in excess of $2.0 billion of value.
March 10, 2016 — The tower panel at the AGL Conference, held March 8 in Atlanta, agreed that the wireless industry in general, and towers in particular, has great potential for the future. But with leasing in the doldrums last year and so far this year, the conversation surrounded when that future will get here.
The industry trends that make wireless such a successful industry are still in place, according to Clayton Funk, managing director, MVP Capital.
“The tower industry has definitely cooled off, but longer term, trend-wise, it is very positive,” he said. “The macrocellular network is still the number one way for the carriers to provide the consumer with an excellent customer experience.”
That said, the tower industry is currently in “purgatory” with a number of factors possibly causing headwinds, according Funk. Questions surround how much capex is being spent on small cells and fiber deployment, as opposed to funding macrocellular network buildout.
“What will 5G look like and how much revenue will it push to the tower companies? Don’t underestimate how long it will take to find out,” Funk said. Other big picture items worth keeping an eye on include decreasing ARPUs and cost cutting at the carriers, he added.
Black & Veatch was not spared some of the pain in 2015, according to Marty Travers, president, telecommunications at B&V, who said he was happy when the year was over. However, he is optimistic about 2016 because the reduced capex of the carriers drove the company to diversify into alternative markets, such as Internet of Things/ Machine to Machine (IoT/M2M).
“[Carrier reduced capex] caused us to look at other markets where we could apply the skillsets that we have in infrastructure deployment,” Travers said. “We are looking at alternative markets, including working with Ingenu [on IoT/M2M], where there are small sites spread across large geography. That sits well with our skillsets.”
Surprisingly, work in the wireline sector has picked up some of the slack, as well. In 2014, 95 percent of Black & Veatch’s work was wireless versus 5 percent wireline. This year it is projected to be 65 percent wireless/35 percent wireline.
“Interestingly enough, everyone thought building out wireline capacity was over. That is not the case. It is seeing a significant resurgence. Wireless is still leading the way but we have shifted to an awful lot of fiber to the home projects,” Travers said. “This is the best way to keep our teams together and our expertise sharp.”
Travers is confident carriers will come back to investing in towers, but he urged the audience to take a broader view of the telecommunications landscape.
“Nobody wants less coverage, slower speeds or less capacity. Those will all eventually fuel our industry, but we have to be smart about where else we can apply our skillsets in an effective manner,” he said. “The skillsets that we have, and that this audience has, are applicable to other services.”
Bob Paige, SVP, mergers and acquisitions, predicted that AT&T will be up year over year, Verizon and T-Mobile will be steady, but “Sprint is the wild card.”
“[Sprint has] a lot of challenges with determining their network structure and how to finance the build out,” Paige said. “From our perspective, it really has been only one carrier spending for the last two years, so it is ironic that the tower companies’ stocks have been at historic levels.”
Funk noted that the billions of dollars will be spent on spectrum at the incentive auction this year and will be a drag on tower leasing.
“I think this year is going to be rather slow in terms of capex dollars and it will pick up in 2017/2018,” Funk said. Paige agreed with his assessment.
By Don Bishop
Individual tower owners can best serve the carriers by building the towers for them. They are able to do it faster than some of the carriers themselves or even some of the large national tower companies.
In late August, AGL spoke with Clayton Funk, a managing director with Media Venture Partners in the firm’s Kansas City, Mo., office, and Jason Nicolay, a vice president with the firm. Along with Ryan Carr, an analyst with the firm, they wrote the article “Trends and Forecasts for the Wireless and Tower Industries,” published in the September issue
AGL: What is your role at Media Venture Partners?
Funk: I’m a managing director.
AGL: What is Media Venture Partners?
Funk: Media Venture Partners is a boutique investment banking firm specializing in areas of telecommunications, media and technology. “Boutique” means we’re very focused in our areas. We focus on private market mergers and acquisitions along with capital raising. Our firm is not one that would be doing any initial public offerings or high-yield debt deals that you’ll hear about from large Wall Street firms such as a Goldman Sachs. However, we are specialists and experts in our areas of focus.
AGL: How did you get started in investment banking?
Funk: In many ways, it was really good fortune. There were some guys I had gone to college with who formed a boutique, investment banking firm here in Kansas City that I was with for about seven and a half years called Nations Media Partners. In 1997, they contacted me and asked whether I would like to help them start the wireless tower division because they felt there was an opportunity for an intermediary to help represent sellers primarily in selling their tower assets, but as well looking to do some capital raising.
AGL: Why do you like to write the Tower Market Report?
Funk: We’re very flattered to be asked to write the Tower Market Report every year. We get a lot of comments on it from our clients and prospective clients and from people in the industry.
From our standpoint, it’s very good exposure, and we’re flattered to be recognized as people who can offer that to the readers.
It gives us the opportunity to take a step back, look at what we wrote last year, and ask, “I wonder what’s changed?” For us to be able to go through and edit that, fortunately, over the last two to three years, we’ve been able to say the same things: the market’s hot, prices are high, and the future is incredibly bright and almost limitless for the tower industry. Maybe it’s good luck and karma that we can continue to write this and hopefully nothing bad will happen to the industry.
AGL: Here’s something that happened after you wrote your article. AT&T announced it wants to buy Leap Wireless. What effect would a purchase of Leap Wireless by AT&T have on the tower industry?
Funk: It’s great news in the fact that people have questioned the creditworthiness of Leap as a tenant on the towers. I don’t think you’re going to see any wholesale decommissioning of sites. You’re adding a whole bunch of new subscribers onto the AT&T network.
The AT&T network has historically been very constrained for capacity for data usage. It’s good in the fact that instead of having maybe AT&T as a tenant and then Leap as somebody who is a little more suspect as far as a creditworthy tenant, you may have AT&T paying for two leases. AT&T is a very sought-after tenant for tower owners and tower buyers. I think it is a positive overall.
AGL: Multiples. Everyone wants to know, what’s the trend for multiples?
Funk: Multiples have stayed steady over the last year and a half, maybe even two years. It’s important to take a step back because whenever we are asked what towers are worth, what are they trading for and what are the multiples for towers, we can give an answer. However, it’s more important to consider what the towers look like. The multiples for a fully loaded tower with no more structural capacity or market potential for more tenants is very different from the multiples paid for what we call immature towers that tend to be new, that maybe were built for an anchor tenant and that’s the only tenant on there, but there is still some structural capacity remaining on the tower such that we think and the buyer thinks that there is some market upside for the tower for future tenants.
The multiples have stayed high, and we conclude that based on historical comps over the past 16 years of brokering transactions. They’ve stayed flat, but they’ve stayed high, which is great. Just being able to come right out of the box and give a specific number, we can do that, but we usually have to learn a lot more about the assets themselves.
AGL: If you could change one thing about the tower industry, what would you change?
Funk: In many cases, I would make it easier for individual tower owners to build towers, instead of having the carriers build towers themselves or being able to outsource to maybe a large, national tower company to do all the builds. That’s for several reasons. One, I think, selfishly, a lot of our clients could build more towers, and the more towers that they build, then the more capital they’ll need, and hopefully we can provide that or help them find that capital or the more towers they would build, they would sell more towers down the road and we’ll be able to assist them with that.
What I hear from a lot of our clients is that they can best serve the carriers by building the towers for them. They are able to do it faster than some of the carriers themselves or even some of the large national tower companies.
They are able to do it not only faster but also less expensively. They are able to deliver a level of detail and service to their clients that maybe the clients don’t always appreciate. That’s why they’ll build it either for their own account or outsource it in large buckets to the national companies.
AGL: Jason, what is your role at Media Venture Partners?
Nicolay: I’m a vice president. Within MVP, I spend my time in the telecom group, which primarily is towers, spectrum and wireless operators. I work on a lot of sell-side projects with owners and entrepreneurs.
AGL: What brought you into this line of work?
Nicolay: I started as a certified public accountant, and I had a client who had a significant amount of work in mergers and acquisitions. I knew from being on that side of it that I actually wanted to be on the front end of the deal, working for clients and helping them secure the best price and actually be able to work on the deal. I haven’t regretted moving in that direction since.
AGL: How do you view the proposed AT&T purchase of Leap Wireless?
Nicolay: The AT&T purchase of Leap Wireless is driven by their need for additional spectrum in highly coveted top-25-plus markets where they will be able to secure a significant footprint in Advanced Wireless Service spectrum. That footprint provides a lot of value for them.
The acquisition also helps their network, once they’re able to convert the subscribers from CDMA to GSM. It’s a very valuable transaction for AT&T for their network and spectrum needs.
AGL: Who do you think will be next to be acquired?
Nicolay: As you look at the wireless landscape today, the Big Four carriers, AT&T, Verizon, T-Mobile and Sprint, collectively they make up about 96 percent of all wireless subscribers. Of the remaining 4 percent, 2 percent is U.S. Cellular. These are all wireless devices, including iPhones, smartphones and tablets. It doesn’t leave a lot of room for a significant amount of growth, such as acquiring another Leap. U.S. Cellular probably is an attractive target to some, given their spectrum. But they tend to operate in rural markets. C Spire is another large operator. From there, there’s the Competitive Cellular Association with members that operate in a lot of rural, tier 2 and tier 3 markets.
They’re the next frontier, and they serve a much different customer than the customers in New York or San Francisco, for instance.
A new wave of transactions could involve mobile virtual network operators as carriers try to acquire subscribers that don’t need networks. There’s a growing number of MVNOs, which would be attractive at some point because carriers are cannibalizing each other’s subscribers because there aren’t many other subscribers to acquire.
AGL: If you could change one thing about the wireless carriers, what would you change?
Nicolay: I don’t know if there is anything I would change. Carriers have been dealt a difficult challenge to meet consumers’ needs, which are evolving faster than the carriers’ abilities to deploy networks. Consumers are driven, now, to watch a YouTube video or upload their own YouTube video to Facebook or elsewhere. There’s a large demand for data-intensive applications and uses for that in order to connect with your friends and tweet about your life. The biggest thing for carriers is being able to deploy network services quicker.
The United States is deploying wireless network services faster than most of the rest of the globe, especially with LTE. All the U.S. carriers are doing a good job of staying ahead of the curve compared with other parts of the world. They have a tough job keeping up with consumer demand.
Media Venture Partners, a telecom-focused investment bank, is a division of Financial Telesis. Clayton Funk can be reached at [email protected] or (816) 977-2822. Jason Nicolay can be reached at [email protected] or (816) 977-2823. Ryan Carr can be reached at [email protected] or (415)