The “Towering” Opportunities for Rural Telecom Operators
Episode ID S2E02
December 16, 2022
As national wireless operators expand their coverage in rural America, rural telecom operators’ local knowledge may help them enter the tower industry. In this episode of All Day Digital, Jeff Johnston hears from Scott Soden, managing principal at Alpina Capital LLC, about what’s changed for the tower industry and how it’s achieved high valuations and predictable cash flows.
Scott Soden: Tower valuations, as things that trade on EBITDA or cash flow, and towers have been anywhere in the 30 up to 40 time range, which is astounding.
Jeff Johnston: That was Scott Soden, Managing Principal at Alpina Capital regarding the sky high valuations for private wireless tower assets.
Hi, I'm Jeff Johnston, and welcome to the All Day Digital Podcast where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank's Knowledge Exchange Group.
Wireless operator efforts to expand network coverage in rural America with mid-band spectrum is creating opportunities for rural telecom operators to get into the lucrative wireless tower industry. AT&T is deploying their network deeper into rural markets because of FirstNet, which is forcing Verizon and T-Mobile to follow suit, and given the high valuations and relatively low-risk profile of the industry, it would behoove rural telecom operators to explore this growth opportunity.
Scott is a telecom banking veteran, having advised companies in over 250 transactions with an aggregate value of more than $3 billion. With that kind of street credit, Scott is the perfect guest to cover this important topic. So without any further ado, pitter-patter, let's hear what Scott has to say.
Scott Soden, welcome to the podcast. It's great to have you here today.
Scott: Thanks for having me. I appreciate it.
Jeff: Excellent, excellent. I'm super excited to talk about the tower industry. Obviously, you've spent a lot of time in this space, so we're anxious to get your thoughts. But I guess maybe just, first off, Scott, maybe you can just give us a high-level overview of the current state of the tower industry.
Scott: The new thing that's happened over the last few years, and specifically as you know probably with the pandemic, is this whole concentration on infrastructure. Towers fall right into the infrastructure. They'd been around before and about 10 years ago they fell out of favor just because they were expensive and for some reason, the industry looked down upon them, and then since then they've just gone up and up and up in value and need and requirements.
When you talk about towers and you talk about the whole digital infrastructure, it's all coming together. We've always heard that in the telecom industry, but it truly is between fiber and small cells and macro towers and data centers. It is the telecom and broadband future and this is right in line with everything.
Jeff: No, that makes sense. I guess I never really thought about it but I should have in the context of all the M&A and investment in the long-haul fiber, now we're seeing more investment in some of these last mile operators. Yes, I guess it's important that we think about towers in that same context, right?
Scott: It's true. The big thing that happened with towers are the valuations started really becoming high. Part of that is because of the terms of a tower. A tower lease, there many times in five or 10-year increments that the tower lease is a 30-year lease. That's a long time for anything. Because of that, think of anything that has a 30-year term on it, you get along, you get a big valuation, plus there's opportunity for growth. You have new spectrum, new spectrum auctions that are adding to that, and plus the other thing with fiber the big thing that's driving the towers and requesting more towers by all the big guys is that the government's now giving all these programs to build out fiber, which is allowing people to put towers far away and they can get the fiber to it. Because before it was easy to have a tower, but you needed power, you needed the fiber to get there. I think that's driving it.
Jeff: Interesting. This is not so much a rural focus question but I'm interested to get your thoughts on it. It has to do with small cells. I thought there was a time where some of the tower operators were investing in small-cell architecture, maybe at a time, maybe a bit of a hedge against concerns around wireless operators rolling out small cells and doing less on macro towers and things like that. Is that something that is still happening or is that not much of a story anymore?
Scott: Well, I would say Crown Castle is the leader of that and they're still pretty focused on it, but the business model's hard because basically small cells is really fiber because they don't go that, you need a lot of them and you got to build 'em out. You need a lot. How do you connect those small cells? Well, it's fiber. So I think until the fiber itself catches up, you're not going to see a business plan that works as well.
Certainly, it works well when you're going to build out a stadium or a rodeo like we have in Colorado, something like that, but until, you and I live in Denver, we have a city, Cherry Creek. Cherry Creek's been getting redeveloped, so there's a lot of small cells here.
Jeff: Hey, let's talk a little bit about the ownership structure, I guess, or landscape for tower assets. Because as I mentioned earlier, I think there's been a lot of divestiture of significant number of towers on the part of the national operators. What does that ownership and investor landscape look like for the tower industry?
Scott: I think we got to talk about the valuation a little bit. What's happened is tower valuations as things trade on EBITDA or cash flow and towers have reached recently in the last couple of years have been anywhere in the 30 up to 40 time range, which is astounding.
Jeff: That's amazing. That is incredible.
Scott: It is. Statistically, when you think of a normal business, the average business basically trades between six to eight times, that's all businesses, and if you look it like a restaurant, that might trade it three to four times. Telephone companies, you go to public market, they're trading at seven times, cellular networks. Think of 30 to 40 times for a tower, and there's not that much work, right?
What's happened is the wireless carriers who had a lot of towers, they looked at it and they weren't getting value for it. They're trading at seven times, Verizon, AT&T, T-Mobile, and they have these towers that are arguably worth 30, 35 times, so they started using it as a financing mechanism. That's what started.
Jeff: Got you. Okay.
Scott: Then you saw that, and then you started seeing some private companies like Vertical Bridge. I think if I'm right, Vertical Bridge is probably the biggest privately held company. The founders of that came from other tower companies, public tower companies. There's a whole group of tower companies down in South Florida, they all came from SBA and things like that. Now, they have driven these private companies that are acquiring towers, and they have actually the best because they went to private equity firms, got financing, and built companies. They’re very, very successful, it's been a very successful business.
Jeff: With fiber, we see a lot of interest on the part of infrastructure phones, in particular, a number from Europe that have been pretty active in the U.S. market. Is that what we're also seeing on the tower side interest from those folks?
Scott: Absolutely. I actually believe those international or European, they're the ones that first came in the European infrastructure funds. They actually started with towers, they moved over to fiber and I'll talk about that briefly but they started with towers. The reason they started coming is, one, infrastructure has become popular all over the world but second, they have and had a longer-term perspective.
Then I think, specifically with the pandemic and this infrastructure focus from the government, they moved into fiber. Fiber, especially if you can get funding and you can start a new entity with a capital firm, say Europe, you get a 50% discount almost if you can get a matching, one of those matching funds, and they get their foothold here, and that's-- Put that together and you've got some big international infrastructure funds coming to the U.S., and that's what's driven the value.
Jeff: I didn't realize that towers was the beginning for these folks. Wow, I didn't know that. We hear a lot about when a fiber-rich LEC, for example, goes on the market, there's tons of bidding and valuations are very high. I'm assuming that's a similar situation with tower assets when they hit the market, pretty active bidding environment.
Scott: It is. We did some big ones a year and a half ago. We did a very big transaction. What's crazy to me always is there's really no differentiation in size. The national tower companies will bid on one tower and they don't give it much of a discount. Meanwhile, you can-- We had a tower portfolio that we are representing of 1,800 towers. We did get a premium because that was a very big project. We had over 20 bidders on that, and we could have gotten more, we just said this is enough for us to manage. I mean that's--
Scott: That's like the old days of ILEC way back when.
Jeff: That's crazy.
Scott: It is crazy.
Jeff: What about interest rates? What are your thoughts on not so much the-- It sounds like they're going to go higher for longer but usually, my understanding is there's a correlation between, a negative correlation I guess, between interest rates and valuations for tower companies because there's a lot of leverage. As interest rates go up intuitively, I thought valuations would go down, but does that logic hold true in this environment or no?
Scott: No. Look, you're an economist. I would agree with that assumption. I thought that would happen also but I would tell you they may have gone down just a hair. No more than 5% or 10%. I think what's happened is there were a lot of the bigger carrier, the bigger companies, they kept winning all the M&A projects. They were picking them up and they were paying premiums. A lot of the smaller ones, the mid-size companies that may have spun off from the bigger ones, they couldn't get them.
One, they didn't have the capital structure, or two, they didn't have enough capital for the size. I think what's really happened is now it's given the mid-size guys a better chance, so they're still willing to pay what I believe a premium price or full price, but it's allowed them to win actually, to win and get some of these assets. I haven't seen the price decrease that I or you would've expected.
Jeff: Well, good for the owners. That's great.
Scott: True. You're right. There's also one other thing that's happening a lack of portfolios now. It's been a pretty consolidated business over the last five years, so there's less and less on the market and I think that's why you see a lot of the private equity funds now looking at fiber just because of the lack of transactions.
Jeff: Okay, great. Hey, I think you've been a proponent of rural telecom operators, whether rural LECs or maybe rural cable operators or competitive fiber, whatever, but folks who are operating in the rural markets. I think you've been a proponent of those folks to take a look at the tower industry. Obviously, we've talked a lot about it so far and everything sounds fantastic, but maybe you could opine on that a little bit more and why you think it makes sense for rural telecom operators if they're not already there to at least take a look at the tower industry as a growth opportunity.
Scott: I have, and I've been a big proponent for a long time, and part of that is, as you know, my firm does mostly rural work and we feel we're very good at it, we're experts, and we talk to a lot of our clients and there's always been a push for, as you know, for the last 15 years, that our rural guys want to be in the wireless business. They had opportunities to way back when but wireless has become, as you know, a big business.
I think our guys were very positioned way back when to do it but now that it's such a big business, they're always looking for ways to stay or be in the wireless business and I've always thought, hey, if you're providing, first, if you're providing fiber to a tower, you're in the wireless business. Second, getting towers up is hard now. There was a time when it first started, you're building down highways, right? So now they have to be in different areas and specifically, AT&T took on the first net build and said, hey, U.S. government, if you give us the spectrum we'll cover every inch of the United States. That's not easy, and they have to make economic sense out of it. Then you got to get fiber out there. Certainly, there are other ways, microwave, but pretty generally fiber.
What's happened is, I believe it's a great opportunity for the small rural telecommunication guys, specifically the ILEC guys, to participate and build out towers for AT&T in my opinion, soon-to-be Verizon and T-Mobile because they're going to need to match that coverage. They have the expertise, they really do. Look they have construction crews, they have the technology, they have individuals who know their areas working with the small towns and cities. They now understand the value of towers. They become more difficult, and our ILEC guys really work through that. They've been doing that their whole lives and I think it's a great opportunity.
Owning a tower is easy compared to an ILEC. They have consumers, a lot of them, right? [chuckles]
Scott: That's a much more difficult business than having two or three carriers that you bill every month. Now there is a challenge and the challenge for our ILEC guys is how do you get the national carrier's attention to come on your tower and where do you build the tower? I actually think our guys are pretty good about knowing where to build a tower because they know their networks, they know where there's blank spots. They can work with the community, but the challenge for them is, you have one or two or three little towers, how do you get the national carrier's attention just to get them on there? It's not a panacea, but I think it's something I think everyone should focus on it because there's just a need for more and more towers as densification happens.
Jeff: Yes, absolutely. I think you made a really good point on, I just want to circle back to it real quick here, on the FirstNet builds. AT&T has contracted with the federal government to provide this public safety network across the country, were given spectrum to do that, so as a result, they've got to push their coverage deeper into rural America, which, by default, gives them a competitive advantage over Verizon and T-Mobile because they would have a larger coverage footprint, and they can brag about it because we know how much the operators love to brag about their coverage.
As a competitive response, AT&T would I think force T-Mobile and Verizon to be as aggressive in building out their rural coverage so that they're not that competitive disadvantage because growth is scarce right now for these guys, so I'm sure they're trying to beat every bush and kick over every rock to find growth. I think that's an important point in all of this when we think about the growth opportunity for these rural towers. It's not just AT&T.
Scott: Agreed. No. Look, I think most consumers literally use their phones in two or three places. They use it at their work, they use it at their home, and maybe in line at their school, at their children's school pick-up. [chuckles] Most people don't use it in that many places, but the perception that you can use it everywhere is very important and very compelling. I believe, once AT&T really starts marketing that, then I do believe the other carriers are going to have to match that. I think that is a benefit for our ILECs who decide to, hopefully, build out towers, I think.
Jeff: Is there a rule of thumb for these rural towers in terms of tenants? Are you justified in building a tower just for AT&T and their equipment, or do you need a second or a third tenant to make the business case?
Scott: No, there definitely is. Generally, one tenant provides-- There's a break-even, maybe even a little bit more per tower. If you can build for one tower, you should always do it, or one tenant I mean, for that tower. Then, once you get two, and potentially three, or even now, with some of the funding, others through some WISPs out there, wireless internet service providers that might be interested in your area. Some of the best ILECs that we've seen is they've built them for their local fire department or police department, and then get a national carrier on it, so that's always a good focus.
Jeff: Hey Scott, let’s switch it up here a little bit and just talk about spectrum because I think it's an important part of the story. The mid-band spectrum, the C-band spectrum that these operators are deploying, and 2.5, and how does that impact the tower industry?
Scott: It's having a huge impact. Frankly, it's the number one impact right now. What's happening is-- Look, if you remember, 850 was the start of the wireless environment, then they overlaid PCS, that happened 20 years ago. We've had two recent auctions, the C-band and the 3.45, actually, those are the two channels, then we just had the 2.5. Basically, the C-band and the 3.45 is promoting densification, and the carriers have realized that it's not just a suburban environment, it's needed in rural America.
Basically, on the C-band, Verizon pretty much got the majority of it. This is the way to look at it. C-band is Verizon, 3.45 is AT&T, 2.5 is T-Mobile. All three carriers are going to use those different bands of spectrum to densify their network. That requires basically more towers and its materials. The general rule, that I've always heard is one 850 tower, you need three mid-band towers.
Jeff: Oh, okay. Yes, because the spectrum doesn't propagate as far, right, so it's not that whole thing, right?
Scott: Exactly. Exactly, and people are just using more and more. If you just look at it statistically, you need three more times of the towers and that's what's happening. That is not just in non-rural area, it's in rural areas because people are using a lot of bandwidth. This is the big statistic that people don't realize, especially in a less rural environment where your phone doesn't work, 70% of all traffic now on your phone is video.
Jeff: Well, that's really interesting. I guess as we think further down the road, this whole densification effort is not going to slow down, right?
Jeff: Maybe it'll even accelerate, with augmented reality and virtual reality, that's still a ways off but if that becomes a fruition even close to what some people are suggesting, my goodness, the demands on the network are going to be enormous, right?
Scott: I always look at like a couple of things that have affected the wireless industry mostly because I'm old and I've been around a long time. Unfortunately, I'm showing my age but the big things that happened in the wireless industry, really from a consumer standpoint, was the one-rate plan. Remember it was a dollar per minute you had to pay so people didn't call, it was too expensive. As soon as they did that, you knew your bill, $150, whatever it was, that was a big deal. Then the next big thing that happened was honestly, the iPhone. Once the iPhone came out, that's where all these apps happened, video happened, that was the change. If you looked at that, 850 was the one-rate plan and then PCS, which is a mid-band, that drove the video and the iPhone. Then the 700 came in and helped that, which was a low band spectrum and it augmented that.
Now this mid-band and this so-called 5G that's coming, I think there's going to be something that we just don't know, kind of what happened with the-- The iPhone was the device that happened. It was really Facebook that drove it, these social media things.
Jeff: Yes, I would agree with you. Those were defining moments in the industry that really changed things, yes. To your point, who knows what it's going to be? As long as the underlying network is there to support, really cool applications, these super-smart people will figure out how to take advantage of that.
Scott: If I had to guess, I think it might be a combination of fixed wireless at home and mobile or just something that we just don't really know about. I'm not one of those futurist guys, but I know something will happen and that will-- The networks hopefully will be prepared to do that, I think that's what densification is all about.
Jeff: Yes, absolutely. I just want to jump back to valuations. We've talked about, they've been certainly very high and the environment is very competitive, there's a scarcity element of it in terms of assets that are available for sale. I guess, Scott, if I asked you to look in your crystal ball, and if you look out over the next, say 12 months, 24 months, pick a timeframe, do you think we'll continue to see these elevated valuations? Could they go higher? Do you think they could come in a little bit? Again, looking in your crystal ball, where do you see this stuff going?
Scott: There's a couple of things, like when I give presentations a lot, I have this chart of valuations over the last 20 years and you can see how things change, so I always think of ILECs at one point traded at 12 to 14 times, they went down to five. Now they're back because now it's more of a fiber perspective and now they're back to where they were. I think towers and fiber now are following that same pattern, but I always thought statistically, I remember when towers hit 22 and I'm like, oh, that's never going to stay. I admit I'm completely wrong on that. It's now at 30, I'm like, oh, statistically, that's impossible. You're an economist. Statistically, you would say no way is that ever happening, right?
Scott: I have to say, I think over the next 12, 24 months, I don't see much of a decrease on it, even with interest rates. If you look at digital infrastructure, there's probably 15 types and I always like, there's a chart like risk. If you go low risk, high risk, high risk, surprisingly, is a mobile network. That's a hard business and it's risky and it's competitive. Then if you go down, there's DAS systems, there's fiber, there's data centers. If you go to the lowest, so if the highest is operator, the lowest is a tower owner because you have a 30, you don't lose customers, it's 30 years, they're stuck, it's hard to move.
Jeff: Those customers pay their bills too, right? [laughs]
Scott: Exactly. [chuckles] There's no advertising. There's really not much. You got to cut the yard and plow the road to get there. I just don't see that much of a change really.
Jeff: Well, it's good to know. It's good to know. I hope you're right. I tend to agree with you on that one. Given everything we've talked about, it seems like a pretty safe bet. Hey, Scott, we're going to leave it there for this episode. I wanted to thank you very much for being on the podcast today.
Scott: You too. Thanks for having me. I appreciate it.
Jeff: A special thanks goes out to Scott for joining us on the podcast today. Private tower valuations are crazy high right now. If Scott is right, tower owners are well-positioned to enjoy lofty valuations for quite some time. These valuations, in addition to the wireless coverage growth in rural America, new high bandwidth applications needing 5G, and the local knowledge and expertise rural telecom operators have, sets them up nicely to enter the tower industry. Relative to telecom operators' core business, the tower industry is lower risk, has higher valuations, with very predictable cash flows.
As Scott mentioned, there are some challenges in getting a tower business started, but they are manageable. Once the business is up and running, those efforts should be nicely rewarded. Hey, thanks for joining me today, and watch out for the next episode of the All Day Digital Podcast.