Take Aways From Connect (X) 2019: High Multiples, Bright Horizons

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With the closing of the Connect (X) conference yesterday and its myriad of distracting activities, some of the best observers were the market analysts who have clients with skin in the game.  

“We used to call this ‘the tower show,'”said Jenifer Fritzsche, Senior Analyst with Wells Fargo Securities, “but based on our meetings at this year’s event, it is clear the net is a lot bigger than just towers.” Wells Fargo met with both public (CCI and SBAC) and private cos (six private tower cos and several other wireless/spectrum experts) in the space. 

The main thing Fritzsche said she took away from the conference was continued enthusiasm around those models that touch the 5G infrastructure.

“In our view, it will be the infrastructure players who offer a holistic solution to carriers which will be the initial 5G winners,” she said.

Spencer Kurn of New Street Research said they heard from every private tower company that T-Mobile has slowed both amendments to leases and co-locations during the past month. “They are likely waiting for the DOJ decision on the Sprint merger,” Kurn said.  “We don’t think the pause from T-Mobile will have a meaningful impact to guidance this year.” 

Kurn said they heard all of the private tower companies say small cell pricing was coming down and CCI said the small cell market was great. He said it was curious why AMT isn’t seeing such great returns.

“We heard the industry is getting more competitive with the entry of cable and other fiber providers driving down backhaul costs, and street furniture deals with municipalities driving down site attachment costs,” he said. “We think the industry may get even more competitive when Digital Bridge closes the Zayo acquisition next year.”  

Multiples are extremely high, according to Kurn, with some expected acquisition prices to be ~30x tower cash flow. “We didn’t get the sense that SBAC was enthusiastic about these portfolios at these prices. He doesn’t think U.S. tower companies will buy any sizeable assets in Europe anytime soon, though they did express interest in Latin America, “where multiples still remain palatable.”

Nick Del Deo, Senior Analyst with MoffettNathanson said the tone of the event was quite positive. He said four major themes seemed to dominate discussions this year: the impact of new money entering the space, the leasing outlook (including 5G), T-Mobile/Sprint, and the degradation of lease terms on new builds. “While none are new themes,” Del Deo said, “the sharpness of opinions felt more pointed than we have previously seen.”

Digital infrastructure, they observed, is an increasingly popular asset class for many investors with long investment horizons, pension funds, infrastructure funds, sovereign wealth funds, insurers. Del Deo said the flood of capital has had several consequences with some good, some undesirable.  

“The most notable is prevailing tower multiples, which stand at all-time highs,” he said.  “Several private operators suggested there has never been a better time to sell…though one of them also observed that he ends up saying this every year.  Expressed in the inverse, expected returns have gone down, with historical expectations of 20%+ IRRs having fallen to the 9% to 12% range, per one long-term developer/investor.”  

May 24, 2019

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