Organic Growth Drives Telecom Returns as U.S. Sees Fiber Buildout, Financiers Say
ORLANDO -- It might take some time for investors in telecom infrastructure to see a payoff, but when they do, it can be substantial, said speakers at a Comptel panel on mergers and acquisitions in the communications market. “The story here really is about organic growth,” said Gillis Cashman, managing partner at M/C Partners, a private equity firm focused on venture capital investments in early-stage communications and information technology companies. The industry is in year five of a 15-20 year upgrade on legacy infrastructure, Cashman said, citing a good potential for growth as most communities aren’t connected to fiber.
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The telecom sector has seen great performance over the past few years, and when companies do take on debt, they use it to complete projects that eventually have great returns, said Steve Soraporu, managing director at Waller Capital, a New York investment bank focused on the cable and telecom industry. A few “anchor tenants” stand out in the fiber market, he said, with wireless carriers by far the most active, mostly in terms of fiber to the tower buildout. The E-rate program has given many companies opportunities to expand their offerings to school districts, he said. Hospitals and their increased need for bandwidth also have provided an opportunity to expand networks in a financially feasible way, he said.
Soraporu is bullish on more active investments by cable and ILECs, he said. As cable companies’ commercial service arms get larger, they realize this can drive significant growth for the overall business, he said. The challenge is internal, he said. Network operations people “always want to do everything themselves if they can. They don’t want to buy someone else’s network,” he said. It’s a “visceral reaction.”
Selling dark fiber and looking at indefeasible right of use (IRU) contracts is “a way to monetize the network,” said Kevin O'Connor, CEO of Tech Valley Communications. An IRU is essentially a long-term lease of some amount of the fiber’s capacity. “That’s going to continue to happen,” especially with wireless networks, O'Conner said.
One concern is that if a big part of a company’s business is 100 percent IRUs, that could strip the company of leverage, Cashman said. The dynamics in the fiber industry lead not just to a capital barrier of entry, but also to a physical barrier in some municipalities, he said. Actual ownership of the fiber is “critical,” he said. Companies that hold only IRUs will be in a “tough spot” because they don’t have a lot to trade.