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Summary

In 2007, when M/C Venture Partners and Pamlico Capital acquired metro fiber and wireless tower assets from National Grid for $290m, they saw an opportunity to build one of the largest fiber network services providers in the US, which later became Lightower Fiber Networks. On July 19, Crown Castle announced its intention to acquire Lightower for a reported $7.1bn. The higher valuation is a testament of the fact that fiber networks are the most important communications infrastructure today. It also underlines the necessity for carrier-neutral tower companies to diversify into new verticals for long-term gains.

Crown Castle attracted by Lightower's rapid growth

When the rumors of a sale of Lightower emerged in August last year, CenturyLink, Zayo, and Crown Castle were listed as potential suitors. In 4Q16, CenturyLink inked a mega-deal with Level 3, Zayo agreed to acquire Electric Lightwave, and Crown Castle agreed to purchase FiberNet. With close to $4bn already spent on fiber acquisitions, Crown Castle has made a move toward diversifying away from its traditional tower business and densifying its existing fiber network. Thus, the Lightower deal is not surprising.

While Lightower ownership has changed hands on multiple occasions, it has consistently been under the leadership of Rob Shanahan who was appointed as the company head by M/C Partners and Pamlico in 2007. The company has grown both organically and through M&A activity, beefing up its regional and nationwide fiber network footprint.

Following guidance from experienced private equity owners, Lightower made strategic acquisitions to expand its fiber network. From a small base of 1,100 route miles of fiber in 2007, the company now has more than 32,000 across the Northeast, the Mid-Atlantic region, and the Midwest. The majority of its fiber assets are clustered in the Northeast and the Mid-Atlantic region. In 2010, the company expanded its product offerings by acquiring Lexent Metro Connect, which provided low-latency routes between financial exchanges in New York City and New Jersey and data centers. In the same year, the acquisition of Veroxity added a national long-haul network connecting major US cities.

Lightower created a small hub for western operations (Indiana, Ohio, and Detroit) through the acquisition of Fibertech Networks in 2015. Today, Lightower offers a broad portfolio of networking solutions, including Ethernet, dark fiber, internet access, video transport, and managed private optical networks.

The acquisition of Lightower will enable Crown Castle to more than double from 29,000 route miles of fiber to 61,000 and to further expand its small cells network. Wireless towers with small cell deployments are increasingly in demand by wireless carriers as they try to boost coverage and increase capacity, especially in urban areas. The purchase price of $7.1bn represents a high EBITDA multiple of 14x but seems justified for Lightower's dense metro network. In financial terms, Crown Castle expects the deal to add about $850m–$870m in site rental revenues, $163m–$213m in net income, and $510m–$530m in adjusted EBITDA in the first full year of ownership. Based on the fundamentals, this seems achievable.

Appendix

Further reading

Datacom Optical Components Forecast Spreadsheet: 2016–22, TE0017-000094 (April 2017)

"Have we reached a tipping point for fiber-to-the-premises?" TE0009-001592 (January 2017)

"Crown Castle's FiberNet acquisition reflects how site owners are building market share in wholesale small cells," TE0012-000587 (November 2016)

Author

Gaurav Shukla, Senior Financial Analyst, Intelligent Networks

gaurav.shukla@ovum.com

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