By Ben Horvath, contributing reporter
For tower companies, both private and public, the value at which they are traded is determined by a set of complex financial metrics. However, generally speaking, value can be determined by a few key components of a company’s portfolio: the number of towers presently owned by a company, its ability to co-locate these towers and the prospect for the growth and acquisition of other towers in the near future.
Spencer Kurn, an associate from the independent boutique research firm New Street Research, called the rate of collocation, the “most important driver of the tower business.” “When you buy one tower it’s generally a pretty low margin business, it’s the lowest margin tower you can buy, but when you add another tenant or a third tenant to your portfolio, you get an incredible boost to your margins,” Kurn said.
New Street Reseach is a firm that specializes in equity and debt research within the telecom industry. Kurns said the potential rate of collocation is paramount in determining a company’s overall value. “The most critical factor of what determines a company’s value is how quickly the market expects you to be able to collocate your portfolio,” Kurn said. Similarly, Kevin Byrnestad, Managing Director at Alpina Capital, said that while a company may have a “mature” portfolio, meaning they already own a number of tower sites, investors will oftentimes pay a higher multiple for less mature portfolios, because of the prospect for growth. This means that a larger company’s overall value may be far greater than a smaller company’s, but a smaller company’s prospect for growth greatly increases the multiple at which investors are willing to pay. Continue reading here.
“If a [larger company’s portfolio] is mature, then your multiple might come down, because of growth prospect, but your overall value per tower is probably far greater,” Byrnestad said.
Byrnestad also discussed the difference between publicly traded and private companies, stating the main difference, other than the much larger size of public companies, is that public companies are much more beholden to shareholders than private companies.
“Figuring out how to create more shareholder wealth, that is primarily what the publics are focused on, whereas the privates aren’t as much focused on that, at least in the short-term,” Byrnestad said. “In the long-term they are focused on what brings more value to shareholders, but they aren’t driven by the shareholders, like public companies are.”
With this focus on shareholder value, many public companies are converting to the REIT status (Real estate investment trust). This status is particularly attractive to shareholders because REITs are required to annually distribute 90% of their taxable income to shareholders in the form of dividends. Two of the largest tower companies in the industry, American Towers and Crown Castle, are currently under REIT status.
By contrast, private companies are often more focused on growing their inventory, and reaching a point where they can sell their portfolio to a consolidator. Private companies, according to Byrnestad, are being valued at a very high multiple, especially if the growth prospects are high, stating the “valuations are off the chart.”
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