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.”
March 10, 2016 — The tower panel at the AGL Conference, held March 8 in Atlanta, agreed that the wireless industry in general, and towers in particular, has great potential for the future. But with leasing in the doldrums last year and so far this year, the conversation surrounded when that future will get here.
The industry trends that make wireless such a successful industry are still in place, according to Clayton Funk, managing director, MVP Capital.
“The tower industry has definitely cooled off, but longer term, trend-wise, it is very positive,” he said. “The macrocellular network is still the number one way for the carriers to provide the consumer with an excellent customer experience.”
That said, the tower industry is currently in “purgatory” with a number of factors possibly causing headwinds, according Funk. Questions surround how much capex is being spent on small cells and fiber deployment, as opposed to funding macrocellular network buildout.
“What will 5G look like and how much revenue will it push to the tower companies? Don’t underestimate how long it will take to find out,” Funk said. Other big picture items worth keeping an eye on include decreasing ARPUs and cost cutting at the carriers, he added.
Black & Veatch was not spared some of the pain in 2015, according to Marty Travers, president, telecommunications at B&V, who said he was happy when the year was over. However, he is optimistic about 2016 because the reduced capex of the carriers drove the company to diversify into alternative markets, such as Internet of Things/ Machine to Machine (IoT/M2M).
“[Carrier reduced capex] caused us to look at other markets where we could apply the skillsets that we have in infrastructure deployment,” Travers said. “We are looking at alternative markets, including working with Ingenu [on IoT/M2M], where there are small sites spread across large geography. That sits well with our skillsets.”
Surprisingly, work in the wireline sector has picked up some of the slack, as well. In 2014, 95 percent of Black & Veatch’s work was wireless versus 5 percent wireline. This year it is projected to be 65 percent wireless/35 percent wireline.
“Interestingly enough, everyone thought building out wireline capacity was over. That is not the case. It is seeing a significant resurgence. Wireless is still leading the way but we have shifted to an awful lot of fiber to the home projects,” Travers said. “This is the best way to keep our teams together and our expertise sharp.”
Travers is confident carriers will come back to investing in towers, but he urged the audience to take a broader view of the telecommunications landscape.
“Nobody wants less coverage, slower speeds or less capacity. Those will all eventually fuel our industry, but we have to be smart about where else we can apply our skillsets in an effective manner,” he said. “The skillsets that we have, and that this audience has, are applicable to other services.”
Bob Paige, SVP, mergers and acquisitions, predicted that AT&T will be up year over year, Verizon and T-Mobile will be steady, but “Sprint is the wild card.”
“[Sprint has] a lot of challenges with determining their network structure and how to finance the build out,” Paige said. “From our perspective, it really has been only one carrier spending for the last two years, so it is ironic that the tower companies’ stocks have been at historic levels.”
Funk noted that the billions of dollars will be spent on spectrum at the incentive auction this year and will be a drag on tower leasing.
“I think this year is going to be rather slow in terms of capex dollars and it will pick up in 2017/2018,” Funk said. Paige agreed with his assessment.
June 18, 2015 — Don’t expect the status quo from the two veteran broadcast industry executives who were appointed recently by Vertical Bridge to oversee development of the firm’s broadcast towers. Mark Stennett, with 30 years of engineering roles in broadcast radio, was named senior broadcast engineer, and Gary Hess, previously with iHeartRadio and American Tower, was appointed vice president of broadcast towers leasing; they are open to the possibilities.
Broadcast towers may not be the subject of a lot of hype, but they represent prime vertical real estate. Hess and Stennett are clearly excited about the prospects of creatively putting that space to work. The two will manage the portfolio of 411 broadcast towers Vertical Bridge purchased from iHeartRadio in December 2014.
In particular, Hess is looking to unlock the additional value in these towers through innovative methods such as diplexing and aggregating AM towers, which he was not allowed to do at his previous jobs leasing for the broadcast tower industry.
“I am finding that diplexing and aggregating AM towers, moving an AM radio station to another site and freeing up the first site for real estate use is quite an attractive offer,” Hess said. “This is the first time that I have had all of these assets and all of these opportunities in a job. These towers are open to all opportunities.”
Vertical Bridge’s diverse portfolio of towers with FM, AM and television antennas represents a challenge, according to Stennett. “It is one of very intense engineering,” he said. “It is not uncommon to have multiple FM carriers running through a combiner to share a common antenna.”
Vertical Bridge will be charting new territory with respect to adding tenants to AM towers, where the tower is the antenna and it represents a challenge adding additional antennas.
“It is not impossible, but it is tedious. It involves installing equipment to avoid shorting out the AM antenna,” Stennett said. With respect to the high power levels used, Vertical Bridge enforces different climbing procedures to cope with concerns about RF exposure levels.
Vertical Bridge Preparing for TV Repack
Vertical Bridge is gearing up for the FCC’s incentive auction of television broadcast spectrum, which will permit TV broadcasters to either voluntarily go off the air, share their spectrum or move to other channels in exchange for part of the proceeds from auctioning their spectrum to wireless providers.
Vertical Bridge’s portfolio includes full-power television stations with towers up to 2,000 feet in height, and Hess said he is looking forward to the process of reassigning broadcast TV channels to free up contiguous blocks of spectrum for wireless broadband, known as TV repack. Vertical Bridge has committed capital to it and possibly master antennas, according to Hess.
“[TV repack] is going to completely rebuild this industry. It’s a big job. I think you are going to see new efficiencies, lighter antennas, and more stations combining and operating in a single system that is provided by the tower owner. We want our share of that activity,” he said.
Vertical Bridge is acquiring more than 200 towers from CiG Wireless in a transaction structured as a merger worth $143 million.
“This transaction brings together two complementary cellular tower operators, and the combined business will have a broad geographic presence across the United States,” said Paul McGinn, CEO, CiG Wireless.
The deal, which is expected to close during the second quarter of 2015, has received the support of the company’s largest shareholder, Fir Tree Partners, a New York-based private investment firm. Upon closing, the company’s employees will become employees of Vertical Bridge.
“We have known Paul and the rest of the CiG Wireless team as competitors and partners over the course of many years, and we look forward to them joining our team,” said Alexander L. Gellman, CEO and co-founder of Vertical Bridge.
CiG Wireless acquired 108 towers from 2013 to 2014, more than doubling its portfolio. It bought 38 towers from Liberty Towers in August 2013, 49 towers from Southern Tower Antenna Rental, 19 towers from PTA-FLA, Inc. and two towers from Fidelity Towers.
CiG Wireless reported $1.8 million in tower revenue for the three months ending September 30, 2014, which was an increase of $0.8 million or 87 percent compared with the same period of the prior year. The increase was primarily attributable to revenue generated from the acquisitions completed during 2013 and 2014.
The company’s loss from operations for the third quarter was flat at $2.1 million year over year. For the second quarter, it reported a loss of $2.5 million, compared with $1.5 million year over year. The loss for the first quarter was $2 million, which was flat compared with the same period for the prior year
Yet, during the same time, CiG Wireless’ stock price dropped from $3.30 to 25 cents, a 92 percent dive. The tower company’s total long-term debt grew from $19.7 million to $33.2 million in the past year. Additionally, total stockholders’ deficit grew from $6.5 million $20.1 million in the last year.
Additional information regarding the transaction will be included in the company’s information statement to be filed with the SEC and mailed to the company’s shareholders.
December 3, 2014 — When Global Tower Partners sold all of its U.S. towers, it might have seemed like Marc Ganzi left the tower industry. Nothing could be further from the truth. In the past year, he has been busy rebuilding his wireless infrastructure empire, investing in wireless infrastructure companies, raising capital and aggregating towers.
The tower industry has many success stories among the small private firms and the giant public companies. But Ganzi’s new company, Digital Bridge Holdings, which he formed with former Blackstone telecom chief Ben Jenkins, bridges the divide between private and public, taking on the advantages of each. It is, indeed, in a league of its own.
In fact, in the last 90 days, Digital Bridge has amassed more than a billion dollars in the private markets. It may be the Ganzi halo-effect but investors continue to be enamored with the prospects of tower aggregation.
Digital Bridge Holdings announced last month that it had raised $750 million in equity for Vertical Bridge, its U.S. tower arm, through investments by leading institutions, foundations, family offices and individuals, as well as The Jordan Company and major new commitments from Goldman Sachs Infrastructure Partners and Stonepeak Infrastructure Partners.
In September, Vertical Bridge Holdings secured more than $500 million of incremental capital, including new commitments from The Jordan Company, The Edgewater Funds and additional capital from Digital Bridge Holdings. Vertical Bridge also announced that it has closed on a $270 million senior credit facility led by TD Securities, Deutsche Bank and CIT as part of this recent round of capital formation.
Ganzi credits the confidence in the robust nature of the wireless industry and the private status of Digital Bridge for their early successful investing.
“I believe we have proven that we can raise capital very fast and efficiently. I don’t know if we could have had the same type of success if we were public,” Ganzi said. “The formation of capital on this scale would not have been possible, unless we believed there was still an asset aggregation opportunity within the United States to buy and build sites and support our customers.”
Digital Bridge began in earnest in November of 2013, and a year later is managing three different investments. It has invested in the United States tower market through Vertical Bridge, the Mexican market through Mexico Tower Partners and in the Chinese tower market through a small local firm.
Vertical Bridge has been active in the U.S. market having closed 23 transactions for a total of 1,051 sites. It has plans to close another 22 acquisitions before the end of the year.
“Vertical Bridge has very quietly amassed the largest private tower portfolio in the United States,” Ganzi said. “We think there is an opportunity to acquire an additional thousand sites in the next six months. We are also building quite a few new tower sites now as well … I am thrilled that we have gotten our new tower build team up to speed and in full execution mode.”
Ganzi has built Vertical Bridge with many of his former operating partners from Global Tower Partners, which itself is known for becoming a tower aggregating giant. Vertical Bridge was founded by Alex Gellman, (the former president and COO of GTP), along with Bernard Borghei (former senior vice president of operations at GTP) and Michael Belski, (former senior vice president of leasing and marketing at GTP). Ganzi has also enlisted GTP alumnus Mark Serwinowski (the former vice president of IT for GTP) as the CIO at Digital Bridge Holdings.
Ganzi is engaged in the merger-and-acquisition activities at Vertical Bridge alongside the company’s senior vice president of mergers and acquisitions Robert Paige, who formerly ran the TMT banking practice at Brown Brothers Harriman in New York, which speaks volumes about his growth aspirations. “All the critical operational aspects that we had at GTP, we have recreated at Vertical Bridge,” he said. “We have rebuilt the M&A practice, as well as our new tower development capabilities at a very high gear.”
Developing a proven management team that has performed well across multiple markets is one of the keys to gaining the trust of investors, Ganzi said. The success of GTP with the sale of its portfolio to American Tower for $4.8 billion looms large in investors’ minds.
“Vertical Bridge is a great story for our new investors,” he said. “Alex [Gellman] and I have been together for 20 years as partners and there is a depth in the quality of leadership behind Alex. We had a great team at GTP and that was a unique group of professional managers that achieved great things together — I am eternally grateful to all them. Thankfully, many of them decided to continue to work with Alex and me again. Investors liked the GTP story and that outcome. Our hope is to deliver again.”
Don’t expect Ganzi to slow up anytime soon. One of the keys to the tower industry is scale, which allows access to the debt markets in beneficial ways, he said.
“That is something that we particularly excelled in at GTP. We were able to have a conversation with the rating agencies that was similar to the public companies. We had great success in raising CMBS [commercial mortgage-backed securities] and ABS [asset-backed securities] debt on terms that were comparable to the public companies,” he said.
While at GTP, Ganzi and Gellman learned that once a tower aggregator gets past 2,500 towers and more than $50 million in cash flow, it’s a different business.
“To really achieve the economies of scale in the tower business, you need to get to a size where you are generating a lot of free cash flow,” he said. “One of the secrets to GTP was we were able to access debt instruments and debt pricing akin to the public companies and not be public. That was part of the magic of GTP and we believe now Vertical Bridge as well, as being private allows us to aggregate capital quickly and efficiently.”
Comm Infrastructure Beyond Towers
As sold as Ganzi is on towers, he still sees opportunities in other related areas of wireless infrastructure, such as fiber, data centers and small cells.
“Investors really crave the safety and the yield that comes from long-term contracted cash flows from investment-grade carriers,” he said. “It is a story that transcends towers and is now permeating other asset classes, whether it is fiber, data centers or small cells.”
Ganzi and his partner Jenkins pay homage to the diversification that John Malone, chairman of Liberty Media and several other giants, achieved in media and cable as he discusses the importance of exploring the different facets that come together to make up the wireless infrastructure ecosystem. He sees opportunities in diversifying into long-haul fiber and cloud sourcing, as well.
“There are a lot of different ways to think about communications infrastructure. We are thinking through it carefully as to where they intersect,” he said. “Investor appetite is really strong for other facets of communications infrastructure. We think there is a lot to be done in the fiber space and in the small cell space.”
J. Sharpe Smith is the editor of AGL Link and AGL Small Cell Link newsletters.