M&A Advisory The Big Three Towercos and the Data Center Market

By Angela Floyd, Managing Attorney, Law Office of Angela Floyd, LLC

Appeared in Intelligence by Inside Towers: Wireless Infrastructure Industry: Market Analysis Report 2023 Volume 3

Up until quite recently, tower companies kept it simple. They bought, sold, owned, operated and managed cell towers. Made sense. Made money. But over the past few years, as technology has evolved in unimaginable ways, Uber, self-driving cars, IoT devices and now AI, tower companies started exploring other strategic initiatives, like DAS, small cells, and most notably, data centers. But, still, macro towers were the bread and butter of most tower companies.

 Data centers had traditionally been owned by large enterprises like telcos and cloud vendors for their own use, or by colocation providers. Fast forward to today and talk of data center demand and expansion is everywhere.

Several different types of investors have thrown their hats in the ring, but tower companies have proceeded cautiously, trying to make sense of how to play in this space and generate income. How do they best integrate existing assets with data centers and create a new, independent revenue stream? Should they buy existing data center businesses or build out smaller, edge data centers? Should they lease out data center facilities to companies and carriers as a neutral host or take a more active role? Does the model for creating tower infrastructure work with data centers? How will the carriers, tower companies’ current customers, fit into the data center business?

Trying to answer these questions and make the right decisions in the constantly evolving data center market is not easy. Between 2018 and 2021, each of the big three U.S. tower company REITs, American Tower, SBA Communications and Crown Castle, began investing in data centers to test various business models and uncover answers to the question of how best to be positioned for the growth of edge computing.

Crown made the earliest and arguably the most aggressive foray into edge computing with its 2017 investment in Vapor IO, then an edge computing startup providing hardware, services and data centers, with plans to build a nationwide network of edge computing facilities.

SBA built its first edge data center in Boston in 2018 through a partnership with Packet. In 2019, SBA purchased its first data center acquiring New Continuum, a colocation and interconnectivity provider in Chicago. The following year, SBA doubled down and purchased a second data center, JaxNAP, a colocation and interconnection hub with two international subsea cable systems, in Jacksonville, Florida.

American kicked things off in 2019 with its purchase of Colo ATL, a colocation and interconnectivity provider in Atlanta. In 2021, American purchased DataSite picking up two data centers and that same year delved in much deeper, purchasing CoreSite for $10 billion, which was, at that time, the largest investment made by any of the three tower companies in a single data center transaction. The CoreSite purchase yielded American 25 data centers, 21 cloud on-ramps and more than 32,000 interconnections.

American, SBA and Crown have all taken different approaches to their mobile edge computing strategy, but they all got into the game. Both American and SBA focused their acquisitions on data centers in major metro markets betting, perhaps, on the ongoing demand for more data in densely populated, urban areas, while Crown took a deep dive into micro data centers with Vapor IO. There were many upsides for these tower companies investing in data centers, learning more about data centers and edge computing, having high credit quality tenants with massive data needs, such as Amazon, Google and Microsoft and the certainty that demand for data from customers was only going to increase going forward.

However, there were concerns about getting into the data center market. Tenant leases were not as long and that the deal value was not as easily understood given the lack of history around these deals. In addition, the high capex for the initial cash layout to build or acquire a data center, along with future spending to maintain equipment and infrastructure and expand capacity were also concerning issues. Furthermore, spending too much investing outside of the core tower business with no clear pathway toward developing a new revenue stream had to be a concern for shareholders of these public companies.

Today, the demand for data is soaring with the need to get closer to the end user and with AI now pushing data and traffic demands even further than expected, but the M&A landscape has shifted these past few years. Inflation, high interest rates and high deal multiples are affecting deals across the board, and the data center market has its own issues tempering additional investments by the tower companies.

First, there is a lot more competition for potential acquisitions, namely private data center owners and private equity firms, including a mix of technology, infrastructure and commercial real estate investors who have been willing to pay the big money, driving acquisition multiples up.

In 2021 and 2022, we saw several notable billion-dollar transactions, including Blackstone’s acquisition of QTS, the KKR and GIP acquisition of CyrusOne, the DigitalBridge and IFM acquisition of Switch, and Stonepeak’s acquisition of approximately 29% of American Tower’s U.S. data center business. This year, Brookfield Infrastructure Partners, along with the Ontario Teachers Pension Plan, is set to acquire Compass Datacenters in a deal expected to be priced at $5.5 billion, and this deal was preceded by a bidding war with DigitalBridge.

According to recent reports, Blackstone is preparing to invest billions into subsidiary QTS Data Centers to fund new development as the firm looks to capitalize on the rising data demand generated by AI. Second, on top of the fierce competition for deals, operating margins are under pressure. AWS and Google Cloud are still major anchor tenants, but they are increasingly building their own data centers giving them leverage in lease negotiations to sign shorter leases and demand more favorable lease terms.

The large hyperscale data centers providing cloud infrastructure that are being built in record numbers are largely located in rural and industrial centers outside of city centers and are typically owned by data giants, such as Google, Amazon Web Services, Microsoft, Meta and Apple. Looking at 2023 to date, the major tower companies have not made many significant investments in buying data centers but appear to be focused on developing their existing assets and refining their edge computing strategies.

Crown appears to be maintaining its focus on small cells while Vapor IO pushes forward. In June of this year, Vapor IO announced a pilot program with Comcast to integrate Vapor IO’s edge services with Comcast’s network infrastructure. SBA and American are forging ahead with building out micro edge facilities at or near existing macro tower sites.

American has a portfolio of nearly 30 data center facilities, which includes the data centers picked up in the CoreSite and DataSites deals and has announced recent expansion into the highly desirable Northern Virginia, Silicon Valley and Denver markets through new Coresite data centers. American has also reported continued development of edge data centers to be integrated with existing tower assets.

SBA continues to own and operate its Chicago and Jacksonville data centers, along with a data center in Brazil acquired in 2022. In addition, the company reported this year that it had approximately 40 to 50 edge sites active or in development at or near its existing tower sites. This summer, SBA announced that its new microedge computing facility in Arlington, Texas, is now operational.

Tower companies taking the lead in the data center market? Makes some sense. Tower companies are the leaders in wireless infrastructure. Makes money? To be determined.

One thing these tower companies will need is to be able to do whatever they decide to do at scale. When the market settles down, we may see tower companies revisit the initial approach of acquiring interconnectivity providers in major metro areas, but, for the near future, we can expect to see them continue their strategy of rolling out the smaller edge data centers at or near existing tower sites with a goal of being able to build out at scale. The way tower companies have done with towers.

Could we see some expansion into urban data centers? Acquiring and operating data centers presents big challenges – getting the right piece of property at the right price, whether entering into a ground lease or acquiring real property, having sufficient and wellpriced energy resources to operate the data center, including electric, water, storm and sewer municipal systems, and navigating zoning and environmental permitting.

These problems are exacerbated for urban data centers, but the need to get closer to the end user and provide reliable, low latency coverage is only going to increase for the spiraling demands of IoT devices, autonomous vehicles, and AI systems like ChatGPT, in addition to our rising data and connectivity needs for cell phones, computers, televisions and gaming.

The question still needs to be answered: Who will emerge at the forefront of providing the wireless infrastructure of the future?