If you can’t beat them – join them
May 30, 2023 | That was my first thought when we saw the (very surprising) news at ConnectX around the Vertical Bridge (VB) and Verizon (VZ) joint press release on May 9th. While exact financial details were not disclosed, the two companies are creating an LLC and share the profits from Verizon’s need for a “rapid expansion for new cell towers” (this quote was in the title of the PR itself!).
This release has implications for many! We listed below some thoughts as to how (and who) we are seeing impacted by this development as well as a quick “streetlight” (Good, Neutral, Bad) view on this impact.
Vertical Bridge – Impact: Good – Stating the obvious, this was a huge (stealth) win for Vertical Bridge. With the financial sponsors it has behind it, Vertical Bridge is in a unique spot in that it is one of the few tower players who has permanent capital in place. This allows it to be front footed in their strategy and (as evidenced by this PR) allow for some ‘out of the box’ type thinking to their customers. While these towers will be less profitable than their typical tower (given economics will be shared with VZ), this partnership speaks loudly to the trust factor carriers have in VB. Expect more creative thinking announcements to come from these Florida peeps!
Verizon (VZ) – Impact: Good – VZ has always been a company that wants total control of its network. Macro towers protect the integrity of the network. Through this agreement, VZ now has its thumb on the scale of where these towers need to go and is shoulder-to-shoulder with a well capitalized player to do it. Oh and by the way it gets some coins in its pocket along the way.
Public Tower Companies – Impact: Neutral – While this announcement likely came as a surprise to the “publics” (AMT, CCI and SBAC), it really has little impact on their overall businesses. Why? It is simple – the publics build almost no towers anymore. The US businesses of the public tower companies are more based on leveraging off their tremendous scale than organically building new towers. There is no need because it would not move the needle.
The next logical question is could these new VB/VZ towers cause threat to some of the public tower assets where VZ is a tenant? It is possible, yes. But we estimate the number of tenants that are vulnerable to be (well) less than five percent of total VZ exposure. This is because most of the contracts VZ has signed with the public tower cos are very long term in nature (10-20 years) and it is hard to “undo” these from both a contractional commitment as well as a cost burden. While this is a positive, American Tower, Crown Castle and SBA probably very much understand that, through this announcement, a clear message is being sent that VZ would like to play with others in the ‘tower sandbox.’
Other private tower companies – Impact: Wishy Washy! Neutral (with positive bias) / Bad – This one is harder to call given the details which the press release does NOT address. For example, with this new partnership, what happens to the tower builds which Verizon has promised other tower cos to build? Is VB now at the front of the line for those future tower builds? Unclear. If that is true, it is hard to make the case this is a positive for this group. I would give it a “neutral” (with positive bent) rating to it as well. In the glass half full view of the world, if VZ is seeing a need for more tower infill building (likely a direct function of the $45B+ [pre-Clearinghouse costs] it spent on C-Band spectrum) other carriers must be too. If so, the rising tide may lift all boats!
Wireless Service Companies – Impact: Good – One of the main take-aways coming out of the ConnectX conference in NOLA was that investors view wireless E&C service companies as a logical addition to the 5G thesis. The elevator pitch pulls on the wise words of Mark Twain: “During the gold rush it’s a good time to be in the pick and shovel business.” Thus, as it relates to the VB / VZ announcement, it is simple: more towers built = more service companies will be needed to do search rings, design the towers, and build them = good backlog for the companies doing this type of work.
Other National Carriers (i.e., AT&T, T-Mobile and [kind of sort of] DISH) Impact: UNCLEAR WILDCARD! – My biggest question when I saw this press release was: “What do AT&T and T-Mobile think of this?” Like above, it is a tricky question to answer. At first blush, the other national carriers may have viewed this announcement not so happily as they may see that their (meaning the non-VZ carriers) leasing on these structures as putting capital in the pocket of one of their competitors (VZ). (Sidebar note: During my time as an analyst, it is fair to say there were not a lot of kumbaya moments between these carriers.)
Another concern for AT&T, specifically, is that they may see this announcement as a bad omen of things to come for its own network (note: AT&T spent $23B in C-Band auction and $9B+ in the 3.45GHz auction). Recall, VZ historically has been a first mover on the network side and to say they are leaning in here is an understatement (further evidence of this seen here.)
Despite the above mentioned concerns, if the other non-VZ carriers step back and think about the structure of this announcement, it may not be such a bad thing. This arrangement represents the first of its kind infrastructure agreement between a carrier AND a tower company which is both capital efficient AND (perhaps most importantly!) aligns the interests of the two parties. In a period of rising rates, carriers must think of things differently in an off-balance sheet sort of way. This announcement is an example of this which may be the first domino to fall. We already know that through the AT&T / BlackRock JV (Gigapower), AT&T is already thinking that way on the wireline side of the house. And speculation is rampant T-Mobile may also be on the fiber hunt. Maybe now it is time for these folks to think about it on the wireless side as well.
Big Red may have first mover advantage, yes. But in the end, does it matter? There is much wireless infrastructure wood to chop here given the amount of naked C-Band and 3.45GHz spectrum sitting out there. As we have written before, this spectrum is worth a hill of beans unless there is infrastructure in place to light it up.
As the world turns, so too does the world of towers. This announcement will have implications for many no doubt - who and how remains the question.
(I will review my report card on these predictions in the May 2024 edition of the Fritzsche’s Forum blog!)