Month: May 2021

AT&T: When you are in a hole, stop digging

I took a break from this column last week as I think I was a bit of deer in headlights as I digested the big AT&T news.  It almost was personal to me as I vividly remember when AT&T’s CFO announced during a conference at my prior firm that its Time Warner deal was being reviewed by the DoJ.  After he exited the stage that day, there were literally 100+ arbitrage investors that surrounded him (think of a rugby scrum…that is what it looked like!).  Then after that day a hard painful approximately seven months followed until the deal finally closed in 2018.  So my shock and awe when I saw the WSJ story hit that AT&T was reversing course was real.

But now a week out, I have what I think AT&T also  does….strategic clarity.  I understand for AT&T investors, employees, and probably several layers of management, that this is a painful time.  But there is an expression:  “When you are in a hole…stop digging.”  John Stankey put down the shovel.

Of course, much can be said and written about how AT&T could not compete with Netflix’s content budget, DTV was a mess, and that their trouble all started when they did not get T-Mobile deal done in 2011…but that is all rear view mirror stuff.  What happened last Monday was significant because AT&T (some would say finally) is going back to its roots and is now focused on  its pipes.  These (broadband and wireless) pipes were getting rusty.  But now they have the capital to put toward  scraping this rust off.    With a sole focus on fiber expansion (30 million homes by 2025) and 5G and smaller dividend shackles, this could get really interesting.

One thing to me that was noteworthy in listening to all the talking heads on this deal was the discussion about Comcast.  There was a lot of “Can Brian Roberts let this happen?” talk-about.  I mention this because I think most are missing a very obvious point.  If you are Roberts, you may not only be sore because you missed a media asset.  But you may have to have a heart-to-heart conversation with your Board that your broadband competition will  be getting a lot more fierce, and this broadband business is the heart of Comcast’s core profitability.   This is also true for Charter.

Altice can be separated from the conversation given its front-footed approach to fiber.  For Comcast specifically,  NBC and amusement parks are nice and all, but the broadband pipe contributes to  the majority of  its free cash flow.   With Monday’s announcement, AT&T said it plans to grow its fiber connected homes to almost 50 percent of their footprint and will be building out more homes / year than it has in the last 10.   Where AT&T has fiber, it succeeds (check their earnings supplemental if you doubt this).   What AT&T did Monday was simplify.  It used to be a company full of spinning plates – 5G, HBO, legacy Turner, Broadband, Enterprise, etc.  Going forward it won’t be anymore and that is a very good thing.  But others may be…..

In my first six weeks at my new job I have learned much from the international team here.   One of these learnings I did not appreciate as a domestic-only focused analyst in my prior life was that the Europe telecom operators who woke up to fiber gained share from cable.    The same trend is happening in Canada (Bell Canada gaining share from Rogers, etc).    The breadcrumbs for the telecom fiber-love were there before AT&T’s big announcement.  Look at what Frontier, Windstream, Consolidated, etc have all been saying and doing.  It was almost hiding in plain sight, but AT&T’s move is shining the light directly on it.   If one steps back and thinks about this, AT&T’s move may be  a much bigger issue for some of the cable players than a good media asset passing them by.

 

Digital Colony acquires Landmark Dividend for $972 million

Source: DataCenter Dynamics

Infrastructure investment firm Digital Colony has announced plans to acquire Landmark Dividend LLC.

Affiliates of Digital Colony this week entered into a definitive agreement to acquire the real estate and infrastructure acquisition and development company, including its Landmark Infrastructure Partners LP subsidiary, for $972 million.

“The acquisition of Landmark Dividend is our first strategic step to secure a stronger future for Landmark Dividend and its various affiliated entities, including Landmark Infrastructure Partners,” said Steven M. Sonnenstein, senior managing director at Digital Colony.

“We look forward to working with the Landmark Dividend team to advance our shared mission of acquiring and managing critical digital infrastructure assets that deliver quick, reliable and responsive service for customers.”

The deal is expected to close in the coming weeks. TAP Advisors, Simpson Thacher & Bartlett LLP, RBC Capital Markets, Latham & Watkins LLP, and Regions Securities LLC assisted in the transaction.

“As a recognized leader in the digital infrastructure space with a proven track record, we believe the Digital Colony team’s expertise is crucial to advancing our strategy in today’s rapidly evolving market,” said Tim Brazy, Landmark Dividend CEO. “We are confident this acquisition by Digital Colony will position us to accelerate our pursuit of strategic consolidation in our fragmented industry and drive growth over the long-term.”

Digital Colony, Colony Capital’s digital infrastructure investment arm, recently raised $4.1 billion for its second fund.

Landmark Dividend’s most recent data center deal saw it acquire a third data center from Chirisa Investments in March.

The company and its affiliates have acquired 17 data center assets in the last 12 months in deals totaling more than $400 million.

The importance of connectivity-rich data centers to 5G

Equinix (EQIX) recently published its third annual Global Tech Trends Survey (GTTS).  This survey gathers views and insights from 2,600 IT enterprise decision makers in 26 countries across EQIX’s three regions (Americas, Asia-Pacific and EMEA).  It never disappoints!  Given its strong connectivity reach, one could argue that more than any company, Equinix has the most ‘tangible touchpoint’ as to how enterprises are viewing the digital infrastructure space and their future needs.

While this report had many take-aways and learnings, the three most interesting data points in my view were as follows:

  1. Virtual Is Way Of Future– More than half (57%) of companies still plan to expand infrastructure but more importantly, almost two-thirds (63%) of them plan to achieve this virtually rather than investing in physical IT infrastructure.    In reading this stat, it  reminds me of what AT&T once said: ‘we are moving from a hardware company to a software one….vendors that support this will be with us…ones that do not will not be along for the ride’.
  2. The Clouds Will Continue to Get ‘Puffier’  Almost 60% of respondents are planning to invest in technology to make their businesses more agile post-COVID.   While this is not surprising – how much they are bear hugging the cloud to increase this agility is.  Specifically, 68% of enterprise respondents said plan to move more functions to the cloud.  So that runway is still very long.   Put another way, if you are a data center or fiber company, the cloud most definitely will continue to be your friend, not foe.
  3. 5G – The New “Frenemy”? –  This was the point most interesting to me.  50% of the respondents agreed that 5G will have the biggest impact in getting them  access to new technologies, but in the same breath, over one-third are nervous they will need to  “rearchitect infrastructure” to do it.   In some ways this is somewhat contradictory  to point # 1 above. Based on their answer above,  there is a realization by enterprises there is a  need to spend.  However, unlike IT infrastructure (which can bend more virtual), it is hard to get around any 5G infrastructure without a lot of physical hardware behind it.  Virtualization in 5G is happening, but you need a whole lot of physical infrastructure to get there.

It is all ol’ chicken and egg discussion with 5G: Build it and it will come, but it won’t come until it is built.   Those enterprises that sit out on this spending run significant risks of being part of the ‘left behind’.  We think most realize it and if you are a company leveraged to this space (towers, small cell, DAS owners, private network players, edge compute, etc) the roaring 20s may be just beginning!

While we know an author is always biased toward their own work, those companies which are at the center of these themes are the connectivity-rich data center entities.  Equinix and Digital Realty top this list.  A perhaps overused line in the wake of COVID has been “companies need to make a digital pivot.”  Of course this is true.  But there are layers underneath this ‘digital pivot’ that should not be ignored.  While the loud sucking sound of the cloud has been appreciated for a while, the impact of 5G on data centers has not.

In word searching the last EQIX Q1’21 earnings conference call, it is interesting to note that while the word ‘cloud’ came up 18 times, the phrase ‘5G’ came up only once.   Dollars to donuts (to quote my 75 year old mother!) that mention goes up big time this time next year.

Gravis launches digital infrastructure fund

Gravis Advisory Limited, a subsidiary of infrastructure and real estate investment specialist Gravis Capital Management Limited, has launched the VT Gravis Digital Infrastructure Income Fund (‘the Fund’) the firm’s fourth OEIC and a unique addition to its existing range.

The Fund will be managed by Gravis’ Director of Real Estate Securities, Matthew Norris and will invest in companies which own physical infrastructure assets vital to the digital economy, including data centres, telecom towers, fibre optic cable companies, logistics warehouses, and the digitalisation of transportation.

In line with the existing Gravis range, the new fund is expected to deliver capital growth by investing through market cycles in global listed securities including real estate investment trusts, equities, and bonds. It will target an annual dividend yield of 3 per cent.

Norris says: “The growth of the digital economy has moved rapidly in recent years and it now underpins huge swathes of our lives. What is taking place, largely out of the public eye, should be regarded as the fourth industrial revolution. It is almost impossible to function effectively, either in a private or business capacity, without access to the connected digital world, and the digitalisation of society is transforming the face of traditional sectors of the economy. To support the explosion in demand for connectivity, physical infrastructure assets are required, and behind the headlines a vast new infrastructure sector has been developing to support and sustain the new digital economy. The global pandemic has only hastened the transition to a digital economy, in some areas accelerating growth by five years versus expectations.”

William MacLeod, Managing Director of Gravis Advisory Limited, says: “We’re thrilled to be launching our fourth Gravis OEIC, investing in a vital but largely unrecognised sector of the global economy, and one which is growing at an extraordinary pace. We intend to invest in the companies that form not just the backbone, but the entire skeleton of our day-to-day business and home lives. The infrastructure which supports the digital world has become absolutely critical to us all, ensuring we are able to keep operating smoothly and efficiently, wherever we are.”

The Fund will launch with an offer period which will run from 4–31 May 2021, with the Fund officially launching on the 31 May 2021.

Source: PropertyFundsWorld.com

Diamond Communications to Acquire Melody Wireless Infrastructure For $1.625B

Diamond Communications LLC and Sculptor Capital Management, Inc. (NYSE: SCU) yesterday announced that they have entered into a definitive Stock Purchase Agreement to acquire Melody Wireless Infrastructure, Inc.(MWI). MWI is a private U.S. REIT that owns a portfolio of approximately 2,300 tenanted wireless communication sites. These sites include a combination of rooftop installations, communication towers and ground leases under communication towers located throughout the U.S. in all fifty states.

Steven Orbuch, President of Sculptor Real Estate (SRE), Diamond’s long-time partner and founding shareholder, said, “We are excited to be continuing our 15-year relationship with Diamond, investing in the wireless infrastructure sector, and we commend the Melody team on the quality of the assets that they have assembled.”

“Melody has built a great company with a diverse group of assets,” said Ed Farscht, Diamond’s Chief Executive Officer. “This transaction is transformational for our business and will further solidify Diamond’s position as one of the largest privately held wireless infrastructure companies in the United States. The Melody assets complement Diamond’s existing portfolio and positions Diamond to drive long-term organic growth and significantly enhance our customer relationships. We are also excited to build on our relationship with Sculptor, which has supported Diamond from our founding in 2006.”

Omar Jaffrey, a co-founder of Melody, who led Melody’s efforts, said, “I am pleased that we have found a great home with Diamond and Sculptor for an exceptional pool of wireless infrastructure assets and business that we built over seven years while delivering great value for our investors.”

The closing of the transaction is subject to customary closing conditions and is expected to be consummated by June 2021. The purchase price is for $1.625 billion, subject to certain adjustments and other conditions of the Stock Purchase Agreement.

Source: InsideTowers.com

$40 billion in Capital Expenditures. In 3 months?

Amazon’s  Q1’21 earnings report came out this past week.  While I was never a technology analyst, there was no question this print was VERY good all around.  But the number that REALLY jumped out to this old telecom analyst was in their FCF (Free Cash Flow) Reconciliation slide (slide 16 of their earning’s presenation) which outlined their “Purchase of Property & Equipment, Net of Proceeds from Sales & Incentives.”  In perusing this slide, I most definitely did a double take.  Why?  Because it said in this category, Amazon spent $40B in  Q1’21….yes – $40B in capital expenditures –  in  3 months.  To put this in perspective, this is 2.6x more than the $15.4B it spent in Q1’20.

But more importantly in reading this stat, it jogged my memory to a press release put out by AT&T on 11/8/2017.  The release was saying that AT&T would invest an additional $1B if the Competitive Tax Rate was enacted in the US.  In making its case, AT&T argued that it “Since 2012, AT&T has investment more in the US than any other public company.”  Like all carefully worded press releases, there was the all-important footnote.  The footnote noted that between 2012-2016 AT&T’s total investment in the  US, including acquisition of spectrum (never cheap!) and wireless operations, was $135B.

So going back to the earnings from Amazon this past week, consider this: the $40B Amazon spent in 90 DAYS was 30 percent of all the capital which AT&T spent in four years (or 1460 days).    While I recognize that Amazon is spending on different things than AT&T (mostly in the form of data centers vs. spectrum), one has to take a moment of reflection of how much has actually changed in the past 3.5 years.

I remember sitting on panels and one of my ‘talking points’ was that AT&T spent more capex than any US entity, second only to the US government.  And guess who was right behind them?  You guessed it…Verizon.  Now, fast forward three years…times most definitely are a changin’!

In my new job, I have spent the past month reconnecting with some of my favorite management teams and contacts.  In beginning one of those conversations, one of my smartest contacts saying: “Jen, did you think you would come back to the industry and see Microsoft and Amazon emerging as the largest telecom companies?!”  While they don’t have broadband pipes and spectrum in their tool kits, they certainly have the spending power and deep (deeeeeppppp) pockets to spend to create connectivity either through their own spending or partnerships.

On its recent Q1’21 call, Microsoft did not back away from this view.  Specifically noting: “…whether it’s on the hybrid infrastructure or the multi-cloud, multi-edge world, which I believe is going to be the world 10 years from now, we are very well-positioned. We have led in it, we currently lead in it, and we plan to continue that.

We have written before that the lines between the Communication Infrastructure silos are indeed blurring.  But maybe this ‘blurring’  it is a much bigger theme than just the infrastructure space and may apply to the carriers and tech players themselves.  If so, five years from now history will show that that quote from my very smart contact was quite clairvoyant!