Infra funds prioritise scale in US digital comms

Evolution is synonymous with the communications infrastructure vertical; however, the pool of potential investors has been evolving equally as fast. Today, a growing variety of infrastructure funds, asset managers and other institutional investors are driving consolidation and convergence in the space.

Evolution is synonymous with the communications infrastructure vertical; however, the pool of potential investors has been evolving equally as fast. Today, a growing variety of infrastructure funds, asset managers and other institutional investors are driving consolidation and convergence in the space.

Speaking on TMT Finance's TMT Connect: US Communications Infrastructure M&A Outlook panel, participants – Richard Lukaj, senior managing director, Bank Street Group and Anton Moldan, managing director, Macquarie Infrastructure and Real Assets – explained that infrastructure funds are being motivated by a common understanding: scale matters.

Scale advantage

Against the backdrop of increasing bandwidth demand and ageing physical communications infrastructure, the need to modernise and adapt is more urgent than ever.

However, as one panellist put it, there are many service providers in the communications space that are ill-equipped, or ill capitalised, to attack the opportunities in their footprints. "This is creating interesting investment opportunities for over-builder insurgents to grab more market share as the new player in that geography."

As a result, communications infrastructure as an asset class is becoming a core holding category for more infrastructure funds, particularly real estate-centric ones, who have historically not been the preeminent players in the ecosystem. Cable players are also upping their investments in communications infrastructure, particularly in the denser footprints, where the return on investment is best.

"We're seeing all kinds of strategic manoeuvrings to afford better overall capital access, strategic position, and other variables that are important to being successful in this ecosystem," explained a speaker. "Scale matters and the unit elements matter."

5G and fibre opportunities

The social distancing and home working measures that resulted from the Covid-19 pandemic naturally led to a strong uptick in demand for internet bandwidth. While many operators said their networks could cope, streaming services such as Netflix and Disney+ took steps to reduce their bandwidth utilisation and cut picture quality in an effort to prevent network congestion.

According to one panellist, news like this reinforces what the infrastructure funds knew already: there's an immense need and opportunity in the US to improve broadband connectivity. Macquarie's acquisition of Cincinnati Bell is a case in point. The deal, valued at c.US$2.9bn, is aimed at strengthening the company's fibre network and 5G technology.

According to the most recent figures published by the Federal Communications Commission last year, 21 million Americans remain without any broadband connection at all. While data from the OECD revealed that fibre connections only accounted for 15.55% of its total broadband connections.

"This theme is in the very early innings and what we're demanding of networks will only intensify as we start introducing much more advanced IoT applications and 5G wireless overlays to these wireline assets," the speaker said.

According to the panellists, 5G is particularly exciting, especially when looking at what it means for consumers, enterprises and government - investors can only dare to dream. However, while 5G's potential is wide, its capabilities ultimately rely on infrastructure and that's where investors will primarily focus.

Valuation bubble?

There have been a number of high-profile acquisitions over the last few years by infrastructure funds, as well as strategic buyers. For example, in May 2020, EQT Infrastructure-owned US fibre company Segra completed its US$240m acquisition of NorthState, a provider of high-speed bandwidth services in North Carolina. Searchlight Capital Partners and WaveDivision Capital completed their US$1.3bn acquisition of the Northwest operations and assets of Frontier Communications. While private investment firm GI Partners recently announced its acquisition of a majority interest in Florida-based fibre company Blue Stream from Twin Point Capital.

This growth in interest has led to a significant increase in fibre valuations. In today's market, it's not unusual to see fibre platforms going for 15-20x EBITDA. However, in many cases valuations are based on projections. Indeed, over the last 18 months, a variety of processes have come to fruition with a notable disconnect between what the sellers were seeking and what the buyers were willing to pay.

However, this does not mean the market is witnessing a bubble. One panellist pointed out that the market is also seeing assets trading in the single digits; sometimes in the mid-single digits.

He said: "This highlights the market's ability to discern quality and to understand the risk-reward paradigm that exists with each circumstance, this shows a lot of rationality."

"I believe we've seen a true bias to quality where people are leaning in for a strategic nature," added the other panellist.

Further, the influx of interest coming from infrastructure funds has caused a re-rating of the entire sector, in some respects to a new return on capital expectations that's not in line with the more traditional venture growth and private equity parties, added the panellist.

"As a result, there's a new foundational layer on returns that has become the new practical reality for anyone who wants to play in the space, but I don't view that as a bubble, I view that as a characterisation of the asset class adapting to where it's likely to find its participants for the foreseeable future."

The full panel session can be viewed on-demand at https://www.tmtfinance.com/tmt-connect/us-communications-infrastructure-ma-outlook-leadership-fireside-chat-bank-street-group

TMT Connect is the new digital platform for TMT Leaders, M&A Executives, Investors, Financiers and Advisers to share knowledge and partnership opportunities globally.