American Tower: Interconnection is Key to the Converged Digital Future

American Tower has spent years studying edge computing, and the economics of distributed infrastructure. Its conclusion: The business value of the edge is tied to the cloud, and will require connections that run through data centers at the core of the network.

That’s the strategic thinking behind American Tower’s plan to pay $10.1 billion to acquire data center operator CoreSite, which operates 25 data centers in eight strategic network hubs.

These data centers are profitable, and will remain so going forward. But the CoreSite platform’s real value is providing the link between cloud platforms and American Tower’s network of 219,000 wireless towers. CoreSite facilities support 21 cloud on-ramps and more than 32,000 interconnections between customers.

“Digital transformation is going to be cloud-based, interconnected and distributed,” said Tom Bartlett, the President and CEO of American Tower, in a call with analysts. “What’s really unique about CoreSite is the interconnection platform.

“This transaction positions American Tower as a leading player across multiple classes of communications real estate,” Bartlett added, saying that the emergence of 5G wireless and the convergence of wireless and wireline networks will allow American Tower to “create a hub-and-spoke network originating from the core and extending through the various layers of the edge.”

The Convergence Trend

With the emergence of edge computing, a growing number of wireless companies have been acquiring assets in the data center sector, preparing for a future with greater integration between data centers, telecom towers and antennas. As real estate investment trusts (REITs) focused on digital infrastructure, American Tower and the other major tower companies have the potential to be major players in edge computing. They are optimized for acquiring properties, and can finance growth through many means, including securitized loans that can provide a low cost of capital.

At DCF we’ve been tracking the growing overlap between the data center and wireless worlds, a trend we first noted in our 2018 forecast (8 Trends That Will Shape the Data Center Industry in 2018). A key transition for both the wireless operators and data centers is the re-architecting of telecom networks to become more cloud-like, shifting to a software paradigm that will make the networks easier to reconfigure.

Software defined networking (SDN) separates the programming of routers and switches from the underlying hardware, allowing administrators to automate many network functions. A related tool is network functions virtualization (NFV), which packages many network tasks in virtual machines. This makes it simpler to deploy telecom services – including 5G – from data centers and cloud nodes as well as central offices and towers.

A Gradual Move into Data Centers

Monday’s buyouts and the bullish presentation by American Tower sparked a rally in shares of publicly-held data center companies, which saw gains of 2 percent or better. Among the biggest gainers was DigitalBridge, whose shares soared 8 percent in the session. DigitalBridge is also pursuing a strategy focused on the convergence of digital infrastructure, with assets including data centers. towers, small cells and fiber.

In 2019 American Tower acquired colocation provider Colo Atl as a way to evaluate the edge market and understand the interconnection business. Last year the company unveiled its American Tower Edge offering featuring data modules at the base of cell towers in six cities – Atlanta, Jacksonville, Denver, Boulder, Austin and Pittsburgh.

American Tower’s rival public tower REITs have also made investments in data center companies. SBA has bought interconnection-focused data centers in Chicago and Jacksonville, while Crown Castle is an investor in edge data center specialist Vapor IO.

But the CoreSite deal is the biggest move yet for a tower operator. Bartlett’s discussion with analysts Monday highlighted a number of details about the CoreSite acquisition and American Tower’s plans going forward.

• The CoreSite leadership will remain in place. American Tower says it values the team’s experience, execution and discipline.
• CoreSite, whose data center footprint is entirely in the U.S., will expand internationally “The combination of CoreSite’s data centers, industry expertise and interconnection platform, and American Tower’s global wireless presence creates an intriguing option to expand the core data center platform internationally,” said Bartlett.
• American Tower will likely provide capital for CoreSite to add capacity on expansion parcels at its existing data center campuses, as well as enter new U.S. markets.

The Investment Thesis in a World of Narrowing Options

Some analysts wondered about the price of the deal, which values CoreSite at about 27 times EDITDA, and were skeptical about whether American Tower’s rationales for the deal were sound. The analysts argue that competing in the data center sector is more complicated than the tower business, and owning a platform could be an issue for customers focused on provider neutrality.

Even if those critiques are accurate, a key question is how companies with data center ambitions proceed in a rapidly consolidating market filled with would-be acquirers with deep pockets. Infrastructure funds, sovereign wealth funds, private equity firms, strategic players and SPACs are all circling around the dwindling number of available platforms, with two of the most attractive targets now – CoreSite and CyrusOne, which was bought Monday by KKR and GIS – being taken off the field.

And if interconnection is the missing component, CoreSite is the largest platform that isn’t Equinix or Digital Realty – two companies that likely see themselves as acquirers rather than targets in the current consolidation.

The key question for companies like American Tower is whether they want to build or buy. If they desire scale, buying is a faster path, which matters in the fast-moving world of digital infrastructure.

“We anticipate accelerated growth of compute that goes beyond just hyperscale data facilities, and includes enterprise companies in in tier 2 or tier3 markets,” said Bartlett. “The opportunity for us is to be able to take advantage of the real estate we’ve spent 20 years developing. CoreSite enables us to interconnect them, and benefit from their relationships with cloud providers.”