M&A in US Telecom Infrastructure

This Industry Viewpoint was authored by J. Drew Mullin, Partner, ATLANTIC-ACM

Investment in US Telecom companies has been red-hot for 15 years and remains strong despite broader economic concerns. Infrastructure asset M&A is highly active, and multiples that were once 10-20 times EBITDA have risen to 20-30 times EBITDA. MetroConnect and PTC, two of the larger investment tradeshows in the telecom space, have grown significantly over the last 15 years to reach record attendance in 2023. 2022 saw declines in M&A deal volumes, but this was driven by the coupling of larger macroeconomic trends and a very strong 2021 deal flow, not a lack of confidence in the sector.  

Why does infrastructure investment continue to climb? Why do the EBITDA multiples continue to increase? What makes US telecom infrastructure so attractive to operators and investors?    

What is driving US telecom infrastructure investment?

Driver #1: US Bandwidth Needs Continue to Increase

U.S. bandwidth usage continues to rise. Connectivity has become essential and is the foundation of many things that we do in our everyday life – whether it’s helping you navigate to work with Waze or allowing you to binge-watch the latest show on Netflix. Not only are consumers streaming more, but machine-to-machine connectivity growth is driving bandwidth demand. We continue to find new and inventive ways to use bandwidth, with exciting technologies that push the boundaries on innovation, like Artificial Intelligence.

The U.S. government is also fueling bandwidth usage and infrastructure investment with programs like BEAD and E-Rate, which bring public funds into the overall investment pool.  These programs help lower the risk profile for operating companies, and in some cases, they provide grants that make connectivity more affordable for consumers. Hybrid work environments that have evolved from the COVID-19 pandemic have accelerated Fiber-to-the-Home deployments. In ATLANTIC-ACM’s 2022 Business Survey, 30% of respondents indicated plans to increase bandwidth in the next 12 months, increasing from 25% in 2021.  From a product perspective, 21% of respondents stated that they plan on increasing Broadband spend over the next 12 months, with other products like SD-WAN, DIA, and Ethernet showing similar trends. You can argue how much US bandwidth is growing from a percentage standpoint, but the simple fact is that bandwidth is growing. Bandwidth is like closet space – as soon as you have it, you fill it, and you want more!

Driver #2: The Number of Investors Continues to Increase

There are more investors in the telecom infrastructure space. Traditional telecom operators are looking for cost-effective ways to increase their footprint or fill product gaps. Innovation in telecom is essential, and many of the older companies use M&A as a way to stay competitive, whether they buy a company and integrate it fully, or buy a company and operate it as a separate entity.  

In addition to traditional operators, private equity companies have a strong interest in the space, and aggressive private equity investment over the past decade has transformed the telecom M&A landscape. They have long investment horizons and can take much longer paybacks on operational business cases. Large enterprise sales opportunities that typically had 25-30 month paybacks on capex can be stretched to 30-40 months, or even longer for strategic deals, which allows for improved pricing and high win probabilities. Infrastructure-focused PE firms have access to a significant amount of capital, and there is plenty of dry powder left for investing. In addition to the capital they have access to, and perhaps more importantly, PE firms are nimble, strategic players, who understand how to create value, and can move quickly in and out of investments. Investing in the telecom sector helps PE firms diversify their funds through investments in lower risk/higher return profile companies compared with those in other traditional sectors. While each PE firm has different investment criteria, most PE firms have a few telecom infrastructure companies in their funds. 

#3 Driver: Infrastructure is a Future-Proof Asset

Telecom infrastructure is a scalable asset with a proven track record for providing predictable revenue and EBITDA streams. While there are certainly exceptions to this rule, infrastructure is an extremely stable asset for capital investment. Even when businesses ebb and flow over time, infrastructure companies have a tangible, long-term asset that will be accessible for the next 20-30 years, if not longer. And fiber is an unlimited, scalable technology that has an infinite amount of bandwidth compared to other mediums, like copper or wireless. The amount of bandwidth you can put over a single fiber pair is only limited by the optronics that you place on either end.  As technology improves, we continue to split the light into more wavelengths, and increase the capacity of every fiber pair.

US TMT Infrastructure Market Is Competitive

The US telecom operator landscape is admittedly getting more competitive. In the early days, small regional fiber companies could fly under the radar, and take a small share of the market to generate attractive returns. But those days are gone, and simply taking share in a market has become more difficult. Larger operators, including the incumbent LECs and Cablecos, have improved operations and become savvier at delivering competitive service offerings.  The cost of building and operating networks has also increased. And while the cost of operations has increased for all, it stands to reason that larger operators with scale can weather the inflation storm better than most. End users are also becoming more demanding, and expect highly reliable, scalable bandwidth with virtually zero downtime. Networks are increasingly complex to manage, and companies are looking for operators that can provide a full range of connectivity solutions.

While there is no shortage of capital to invest in infrastructure, the market has become more competitive, and operators and PE firms are looking for the right places and geographies to invest. Many of the larger traditional operators are cutting back on network expansion / edge-out capital expenditures, choosing to focus their efforts to build density in existing markets. This creates an opportunity for many of the smaller companies and PE firms who have long investment horizons, and advanced methodologies for investing capital in the correct areas. But the stakes of finding the “correct area” for investors have gotten even higher in recent years. Given the capital investment size, and the effort needed to participate in the M&A space, making the wrong decision on an investment can have a significant impact on a buyer, or a fund. Before making an M&A investment, understanding the competitive landscape at a granular level, and the total opportunity for a geography, as well as the risks, has become more and more important.

So where do we go from here? 

The fundamentals of the U.S. telecom market are strong, driven by an insatiable need for bandwidth, rapid technological innovation, and the introduction of additional government assistance, all aligning to catalyze further investment in the space. M&A deal volumes wavered in 2022, but interest in the sector remains high, and the future is bright for US telecom infrastructure.

About ATLANTIC-ACM

Founded in 1991, ATLANTIC-ACM, is a leading strategic consulting firm to the telecom and technology sector. ATLANTIC-ACM assists corporate and investor clients in evaluating strategic growth opportunities for successful investment, market entry, optimization, and long-term planning. For over three decades, Boston-based ATLANTIC-ACM has helped leading companies identify opportunities, capture and retain market share, and navigate changing market dynamics, economies, and technologies. For more information, visit ATLANTIC-ACM’s website at http://www.atlantic-acm.com.  LinkedIn: https://www.linkedin.com/company/atlantic-acm/

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Categories: Industry Viewpoint · Mergers and Acquisitions