Andrew Lipman’s 10 themes to watch at Metro Connect 2024

 “The soft landing story looks like it is happening. The inflation rate is coming down, even though it is still at historic highs. Long term bond yields have recently dropped, suggesting the market has priced in falling interest rates. Yet so far, the broadband sector is doing better than most other industries, especially for cash generating broadband assets.

“The adverse impact on deals in the sector last year was real, especially with larger deals delayed and deal values declining. New debt issuances have also slowed due to rising interest rates and market volatility – the horizon is cloudy.

“Of course, M&A is fundamentally built on optimism, and investors are slowly becoming more optimistic. In 2023, the most active sector was fibre and broadband deals followed closely by data centre deals. We expect this to continue in 2024.”

“We still see BEAD (Broadband Equity Access and Deployment) funding on time with funds flowing, starting in mid-2024 with the majority in early to mid-2025. This will happen on a rolling basis, starting with Los Angeles and Virginia, with Massachusetts, DC, and Florida other likely bookends. We saw middle mile awards in June, and the ReConnect Program is also chugging along.

“However, BEAD markets are mostly rural and sparsely populated, with densities below 50-60 homes per road mile, and this can be challenging, especially with cost inflation and the elimination of the Affordable Connectivity Program (ACP) low-income subsidy program for 23 million low-income households. This is less of a challenge for incumbent telcos, cable companies and rural electric co-ops upgrading their networks that are today considered unserved or underserved. Another issue is how fixed wireless will end up as opposed to fibre, with the NTIA (National Telecommunications and Information Administration) putting their thumb on the scale for fibre projects.”

“Hyperscalers are as dominant today in this infrastructure space as Taylor Swift is in Miami Beach, and interest in both is at an all-time high. This is especially the case for data centres, with all other digital infrastructure asset classes in demand too. In 2024, we will see AI becoming more important and investors and carriers come to better understand these growth drivers and their opportunities, efficiencies, and risks.

“Some key questions are: how will AI efficiencies contribute to better operational performance and improve EBITDA, especially as to training, thus further accelerating cloud computing power? How will AI drive volume demand? And to what are business models at risk from AI as a disruptor? Huge impact is likely across the broadband waterfront, but there may be a particular impact on data centres. We would expect demand for AI compatible co-location space from the hyperscalers to continue to spike, driving growing demand for low latency AI workflows, especially at the edge.”

We are - and will increasingly be over the next several years - in a land grab phase, particularly in the residential fibre space. We are seeing increased competition for limited resources for contractors, workforce, materials, and labour. This is all exacerbated by Buy American restrictions, a huge issue that the NTIA, Federal Communications Commission and Department of Labor (DOL) are all struggling over; especially given the 3- or 4-fold increase in broadband funding and aggressive build strategies, for example 4 years for BEAD. To illustrate this, a client told me recently that there is no fibre splicer in the country that is under 50 years old.

“There are, however, several buckets of money at the DOL for broadband workplace training and we are hearing this issue will likely be given great weight by the State Broadband Offices in evaluation and judging BEAD applicants.”

“Our limited 2-month perspective is that deal activity in 2024 will be higher than in 2023. Multiples in the infrastructure sector may have come down in some instances as interest rates rose last year, but firms are finding ways to get deals done with increasingly creative capital structures. Activity is picking up, with a high amount of unallocated capital on the sidelines.

“We are seeing growing convergence and a narrowing of the valuation gap between buyers and sellers. So far, we have seen less platform M&A and more financings bringing in the next leg of capital, either via debt or structured equity, to allow businesses to invest in their networks and expand. We saw fibre and cable deals slow modestly last year, with data centres, towers, and other infrastructure deals increasing. Smaller deals are perhaps taking precedence, but we expect several large deals this year as well. Processes that were pulled or delayed in 2023 are increasingly coming back to market.”

 “Will companies in metro fibre, towers and data centres expand laterally and horizontally into each other's space? Or will we see dis-integration, such as the Elliot Advisors critique of Crown Castle’s fibre assets holding and Jana Partners’ pressure on Frontier? Overall, we are seeing convergence of complimentary infrastructure asset classes, with greater willingness to break through silos and invest in parallel space. One headwind is that the US Department of Justice and the Federal Trade Commission are taking a harder line on vertical deals. There is also continued resistance, especially in a Democratic administration, to 4-3 deals and wireless consolidation.

“We see this activity increasing. Infra funds and private equity funds are raising more and more capital. There is a larger and larger total addressable market. Broadband is increasingly recognized as an infrastructure component, and there is an ongoing evolution and expansion of the financial and strategic buyer universe. In several cases, these investors sought recapitalisations as a way of refreshing capital structures while maintaining growth. We are also seeing infrastructure investors looking to the private markets to raise capital through minority stake sales to fund growth.”

“Private equity, with its traditional leveraged buyout model, will likely see more opportunities come to market.”

“FTTH in the US is a $125bn market opportunity, perhaps larger than any other broadband sector –people will give up the keys to their house and car before they give up their broadband. But nearly 70% of US households still lack access to fibre. Will the trees keep growing? Greenfield assets like FTTH will likely require further capital before they can fully deliver on their business plans and become EBITDA positive. Metro fibre has consolidated, but 75% of US multi story office buildings still don't have fibre.”

 

“We've been talking grandiosely for at least 5 years about how 5G was going to be a total game changer for infrastructure growth. But AI is very likely more substantive and more meaningful to the infrastructure industry than 5G. We will be hearing a lot over the next few days on AI. I suggest we continue to look at it clear eyed and ask the hard questions – which in a nutshell is what Metro Connect is all about.”