Tower Industry Success Comes with Competition from Disruptive Companies

By J. Sharpe Smith, Senior Editor

May 28, 2019

Flush with opportunities, the tower industry is exposed to certain threats as disruptive companies try to take advantage of those same prospects, according to speakers during the Connectivity Expo panel “Investments, Partnerships and M&A in a Converged Edge/Tower Architecture,” moderated by Pat Troxell-Tant, CEO, Vogue Towers.

The tower story is a growth story, according the panelists, which included: Robert Paige, senior VP of Mergers & Acquisitions, Vertical Bridge; Clayton Funk, managing director, MVP Capital; Ron Bizick II, CEO, Tarpon Towers; Bud Blinick president, Cell At Auction; Jerry Sullivan, CEO, Strategic Wireless Infrastructure Fund; and Daniel Agresta, president and CEO, APC Towers.

While there has been some slowing in the first quarter from the top three carriers, driven by tentativeness caused by the potential merger, Paige expects it to pick up and be on par with last year, when Vertical Bridge saw an increase in carriers investing in new sites, as well as adding capacity to existing sites.

Tarpon Towers’ business has been largely amendment driven, but it has also seen increased coverage plays resulting in more builds-to-suit, according to Bizick.

“Our largest BTS customer is Verizon, and they have made a concerted effort in many of our markets to build out poorly covered or uncovered areas,” Bizick said. “We anticipate others will follow their lead, as they are a bellwether.” Tarpon also felt the effects, however, when Verizon redirected some capital from towers to small cells and fiber.

Paige agreed saying that Vertical Bridge has seen a “tremendous” BTS buildout with 200 towers last year, which it is set to surpass this year. The tower company’s revenues are evenly split between amendments and collocations.

Near term buildout drivers for the tower industry include AT&T’s FirstNet, T-Mobile at 600 MHz and the Sprint/T-Mobile. In the long-term, in four to five years, Paige forecasted, looms the much talked about 5G.

“We are hopeful that the [Sprint/T-Mobile] merger will go through, so we will have a strong number three carrier,” Paige said. “We are thrilled with the prospects of the T-Mobile buildout at 600 MHz in the short run and in the long run. The big event will be when 5G is ready to deploy, which is when you will see the next big uptick. I am a little pessimistic when that will occur. I believe it will happen 2023 to 2025, not because the technology isn’t ready, but the use cases and the incremental revenue is a little further out.”

A Dark Lining for the Silver Cloud

Tower multiples are at an all-time high and the market is frothy, according to Bizick, but a new type of tower asset is being introduced allowing low escalators and unlimited amendments.

This new class of low-cost, alternative tower company has been successful in securing the vast majority of the FirstNet tower build and even AT&T’s legacy tower build. Bizick has no doubt that it is having an impact on the traditional tower business model.

“They are setting some precedents, driving down BTS pricing. From the BTS perspective, they are taking market share. No doubt about it. They have taken opportunities away,” he said.

Agresta said the existence of the disruptive tower companies is the result of a private tower companies coming out of the carriers and new money looking for a platform to start a tower company or to invest in someone else to build a tower company.

“There are too many tower companies competing for the carriers’ business,” Agresta said. “There is the possibility the competition will drive bad behavior. We need to create partnerships with the carriers and keep things at fair market value.”

Sullivan countered that the increasing data usage (250,000 percent for AT&T since 2007) and consumer demand for the networks will require more towers well in the future. “Carriers will continue to have increasing demand for infrastructure, which will create opportunities for new entrants like my company,” he said.

Bizick noted that carriers have been looking for alternatives to the public tower companies to lower their costs for years, but the issues between big tower companies and the carriers are now affecting small tower companies, pressuring lease rates and BTS construction costs.

Paige agreed saying he is concerned that some of the new entrants into the tower market are driving everything, including new builds, collocations and M&A, to the lowest common denominator.

“Companies are agreeing to terms that are just not viable. If you sell to the wrong people, you end up cutting the rent in half,” he said. “We are seeing unlimited loading on towers. To get any decent type of return, you have to make herculean assumptions on new growth.”

The infusion of plentiful capital from infrastructure investment groups fuels the disruptive companies and distorts the tower business model, Bizick added.

“For sure. The economics of those deals seem unnatural,” Bizick said. “A low-cost source of capital is one thing, building single-tenant towers in the middle of nowhere or overbuilding is another; I don’t think it is a good practice.”

Bizick predicted that within the next five years this new class of tower owner may shake out unless it can get adequate lease up rates.

“When the music stops will these guys find a chair? I am skeptical,” Bizick said. “With regard to valuations and exit strategies, that is where it hurts. I see a shakeout in five years when the investors ask for their money and these companies try to exit, unless lease-up comes to the rescue.”