Last week was truly a remarkable one for M&A transactions and other strategically important developments in the world of Bandwidth Infrastructure, so we took the opportunity to sit down with Bank Street Group’s James Henry (JH), Richard Lukaj (RL) and Peter Beckett (PB) to get their perspectives on the news and its implications for the sector. Here is the first part of our two-part interview.
TR: Let’s start with Crown Castle’s $1 billion acquisition of Sunesys, which was not the biggest deal announced last week, but arguably the most interesting one.
JH: Yes, Crown Castle had previously assembled an impressive fiber footprint through its acquisitions of DAS and Small Cell companies NextG and NewPath as well as the Bandwidth Infrastructure pure-plays 24/7 Mid-Atlantic Network and Access Fiber Group, but this deal is its largest and most visible in the fiber network arena. Pro forma for the Sunesys transaction, Crown will own or have rights to 16,000 route miles of fiber in major metro areas across the U.S. The key question is whether the company will continue to focus its efforts on Small Cell and DAS deployments or whether it will leverage its fiber inventory to pursue the diversified carrier and enterprise markets, which represent a significant incremental growth opportunity.
TR: Another question that people are asking is whether American Tower or any of the other wireless infrastructure players will follow suit.
RL: Crown Castle was the first tower company to recognize the opportunity in DAS and Small Cell deployments and took the initiative with its acquisitions of NextG and NewPath. Those early moves are starting to pay off as the company is now generating 7% of site rental revenue from DAS and Small Cells and over 40% of its year-over-year revenue growth. While Crown has focused on broadening the scope of its Wireless Infrastructure offerings in the U.S., the other players in the sector have largely focused on buying more macro towers both in the U.S. and abroad. Intuitively, it would make sense for others to follow, but that may be at a point in the future when there are larger platforms to acquire.
TR: It seems as if Crown Castle’s focus is on Small and DAS deployments, but what about Wireless Backhaul, isn’t that another big area of overlap between Bandwidth and Wireless Infrastructure?
PB: DAS and Small Cell deployments are the first point of intersection for Wireless and Bandwidth Infrastructure and backhaul is certainly the second. With over 300,000 tower colocations in the U.S. all requiring high-bandwidth connectivity, there should be a backhaul opportunity equal in size to the overall tower market. However, the segment of the backhaul market that is most likely to be compelling to Wireless Infrastructure companies will be dark fiber or comparable deployments that look a lot like towers themselves: long-duration contracts of 10 to 20 years with investment-grade customers like AT&T and Verizon that have limited or no risk of early termination liability and price compression upon renewal.
TR: How does the valuation of the Sunesys acquisition compare with other past transactions in the sector?
JH: The $1 billion purchase price is equal to approximately 16x Adjusted EBITDA projected under Crown Castle’s ownership, which is a three to six multiple point premium over the prevailing transaction multiples in the sector. While 16x Adjusted EBITDA is not a record multiple for valuation in the Bandwidth Infrastructure sector, it is certainly the highest multiple paid for a company in a transaction of this size. Of note, the deal is projected to be accretive to Crown Castle’s Adjusted Funds From Operations (AFFO), so we view it as a positive sign for the future value of fiber network operators that a Wireless Infrastructure company – or really any REIT trading at comparable levels – can pay 16x and make a deal accretive.
TR: Although Crown Castle has been almost the only game in town paying these kind of multiples for fiber assets, does this deal create a halo effect that benefits the sector overall?
RL: We view the Sunesys deal as a very positive sign because it highlights the value of this asset class to a strategic buyer outside the sector. Crown Castle’s acquisitions overall have also served to enhance the scarcity value of the remaining independent fiber network operators and the company’s presence in the market will certainly help to keep other bidders honest in recognition of the potential for serious competition. That said, it is important to recognize that Crown Castle’s interest has also been very specific to larger metro markets and surrounding suburban areas where they have specifically identified DAS and Small Cell opportunities, so they are not likely to be interested in every company in the sector.
TR: What about the other side of the coin? Does Crown Castle’s entry into the sector create higher competition or risk to the remaining independent fiber players?
PB: We have heard from many of our clients that Crown Castle has been a formidable competitor for DAS and Small Cell contracts, but that they have not been as visible in wireless backhaul RFPs or other carrier and enterprise opportunities. Although larger players with lower costs of capital may represent a growing competitive threat to the established players over time, it is important to note that this business is still remarkably local in a way that favors aggressive and entrepreneurial companies that develop true relationships with their clients and can distinguish themselves with the ability to design and construct solutions in a responsive and timely manner.
TR: Tune in for part 2 of this interview tomorrow for Bank Street's perspective on the Lightower/Fibertech transaction!