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.”
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.
April 26, 2016 — T-Mobile’s Allan Tantillo proposed and Vertical Bridge’s Mike Belski agreed that the current system of tower rent escalators and other amendment-related price increases will need to change in the future, during a panel at the Inaugural Wireless West Conference (WWC), held last week, in Anaheim.
WWC was presented by five state wireless associations, representing California, Arizona, Nevada, Colorado and the Northwest. AGL Media Group assisted with programming and the moderating of the panels at the two-day conference.
During the panel, “The New Economics of Wireless Infrastructure,” which was moderated by Pat Troxell-Tant, Solution Seven, industry experts agreed that the state of the wireless infrastructure industry is healthy, but it will have to adjust to the carriers’ dramatically changing economics.
The cost of spectrum is one of the factors that have changed the economics of wireless infrastructure, according Clayton Funk, managing director, MVP Capital. The AWS-3 auction brought a whopping $45 billion in bids in 2015, and this year the 600 MHz Broadcast Incentive Auction is estimated to bring either $25 billion to $30 billion, according to JP Morgan, or $60 billion to $80 billion, according to Kagan Media Appraisals.
“Because it has gotten so expensive to buy spectrum, the carriers have to become more creative in making their spectrum use more efficient, such as network densification and MIMO,” Funk said.
Other factors in carrier economics are infrastructure build out costs, which globally between 3G and 4G were $700 billion, and falling revenue growth.
“The model of spending significant capex dollars and not getting the same return on their investment doesn’t work,” Funk said. “Whatever 5G becomes, carriers will need to make it more profitable.”
As new technologies roll out, carriers will look for ways to use spectrum more efficiently, according to Tantillo, but carriers’ cost cutting will also extend to current macrocell infrastructure as their economic model shifts. As the carriers attempt to drive down the costs, especially in tower rent, tower companies will need to reevaluate their prices if they want the carriers’ business, he said.
“It is incumbent upon those tower operators that are seeing their business threatened to adapt to new ways to do business and to find more efficient ways to serve us,” he said. “We want to go on to those old macrosites, but maybe their model needs to change. Maybe that can’t come and say, ‘Every time you add a TMA [tower mounted amplifier] on a tower it is a $150 a month increase in your rent.’”
Tantillo believes that competition among the tower companies will drive down the prices for rent and escalators, as well as amendments.
“Who wants to keep my lease? Can I put it out to auction?” he asked. “There are some very aggressive tower companies out there that are looking to be fantastic partners with us.”
Tantillo wasn’t talking chump change, either. He spoke of offers to cut leases from $3,000 to $1,500 a month and to lower escalators from 3.5 percent to 2 percent.
“They are saying, ‘give us your list of sites, and we will make it worth your while,’” he said. “We will work with you today so that when the lease expires, we will be ready for you to go on to our site and we will lower the cost curve for you.”
Mike Belski, senior vice president of leasing and marketing, Vertical Bridge, acknowledged that some leases had become unsustainable after escalating for an extended period of time, and he pledged to work with the carriers to develop a new business model.
“So the challenge for us is the paradigm shift. We have to think about leasing differently. We never thought we would add so much equipment to these towers. Vertical Bridge wants to be a part of the solution and not part of the problem,” he said.
Carriers will aggressively take advantage of opportunities to lower their tower costs and tower companies will feel direct pressure, Tantillo said.
“The challenge to the major tower companies that have most of the tower portfolios is, do you want to lose $3,000 and possibly future business or give me a deal that makes me want to stay there,” he said. “Tower companies are going to be faced with some pressure to bring their cost structures in line.”