American Tower (NYSE: AMT) today announced that it has agreed to acquire CoreSite Realty (NYSE: COR), a data center operator, for $170.00 per share in cash, implying an equity value of $8.3bn and an enterprise value of $10.1bn for CoreSite. As a result, CoreSite is being valued by American Tower at ~29x 2021E EBITDA and ~27x 2022E EBITDA. Finally, American Tower expects to close this transaction by the end of 2021, or shortly thereafter.
American Tower, in combination with CoreSite, intends to create a global leader in neutral host, multi-tenant digital infrastructure. Together, the companies will pursue the emerging multi-access network edge, on a global basis, as a catalyst for business growth.
CoreSite Realty – Overview
CoreSite Realty operates 25 data centers, representing 220+ megawatts of power capacity in locations throughout the United States. In aggregate, these data center facilities comprise 2.8 million net rentable sqft (NRSF) and host 21 cloud on-ramps.
CoreSite provides colocation services and 32k+ interconnections (~14% of total revenue) in 8 U.S. markets. As shown above, the company’s data centers are located in Silicon Valley, Los Angeles, Northern Virginia, New York, Chicago, Boston, Denver, and Miami.
Through these data centers, CoreSite supports over 1,370 customers with the company’s top 10 customers driving ~40% of total revenues. Additionally, in terms of revenue mix, CoreSite’s customers include enterprises (41%), cloud service providers (35%), and network operators (24%).
Financial Performance – Q3 2021 – Annualized
Based on Q3 2021 figures, CoreSite generated annualized revenue of $655m and adjusted EBITDA of $343m. Therefore, the company’s EBITDA margin was 52.3% as of Q3 2021.
Transaction Overview – American Tower Buys CoreSite
Initially, American Tower anticipates that its acquisition of CoreSite Realty will be “modestly accretive” to its adjusted funds from operations (AFFO) per share. Subsequently, the CoreSite transaction will drive meaningful long-term AFFO per share accretion (shareholder value) for American Tower as capital is deployed towards development initiatives.
Process
American Tower, through its wholly-owned subsidiary Appleseed Holdco, will commence a tender offer to acquire all of CoreSite Realty’s shares of common stock. Following the tender offer, American Tower will effectuate a merger to acquire any untendered shares of CoreSite at the agreed value / price of $170.00 per share.
Financing
American Tower intends to acquire CoreSite Realty with a financing mix that will maintain its “investment grade credit rating”. To this end, American Tower has fully-committed bridge financing in-place from J.P. Morgan.
Upon completion of the transaction, American Tower expects its near-term net leverage to rise above 5x. However, the company foresees a path to deleveraging, back to its 3x to 5x net leverage target range, over time. As part of this strategy, American Tower expects there to be an equity funding component for its acquisition of CoreSite.
Pro Forma Financials
As shown below, CoreSite’s data center business will comprise 7% of American Tower’s pro forma revenue and 5% of the company pro forma operating profit.
Transaction Rationale – American Tower Buys CoreSite
American Tower views the acquisition of CoreSite as creating a comprehensive and interconnected digital infrastructure company, with the transaction having 5 primary groupings of rationale, including differentiated assets, 5G / convergence, edge computing, international expansion, and diversification. Each of these focus areas contribute to American Tower’s future vision of a cloud-based, connected, and globally distributed network architecture.
Differentiated Assets
CoreSite operates differentiated, network-dense, interconnection facilities, housing key cloud on-ramps. In turn, this gives the company strong relationships with large U.S. cloud service providers and telco customers. At the same time, CoreSite’s footprint, interconnection, and cloud on-ramp positioning are difficult to replicate, which factored-in to American Tower’s buy-versus-build decision.
Additionally, American Tower intends to invest in CoreSite’s U.S. development pipeline to accelerate its build-out. Indeed, this development capacity positions CoreSite for significant long-term, future expansion. Also, American Tower notes that it plans to expand CoreSite’s data center portfolio into additional U.S. metro areas.
5G and Wireless / Wireline Convergence
American Tower is extending its breadth across multiple sub-sectors of digital infrastructure, which will allow the company to capitalize on growth from global 5G deployments and the convergence of wireline and wireless networks. Specifically, American Tower’s globally distributed real estate portfolio will complement CoreSite’s interconnection-focused data center business in a 5G and converged environment.
Overall, American Tower will augment its market position and increase its influence with wireless carrier, cloud service provider, network, service integrator, and enterprise customers. In turn, the company aims to shape the ‘core to edge’ wireline and wireless evolution, as well as ecosystem.
Ultimately, American Tower will leverage its towers and data centers to form a suite of connectivity solutions for its customers. These solutions will serve demand for future latency-sensitive use cases, reductions in transit costs, and holistic networking and compute offerings. In terms of customers, American Tower views the cloud service providers as critical to its future organic growth.
Edge Computing
American Tower’s acquisition of CoreSite will be transformative for its mobile edge computing strategy, which ties-in with its support of the proliferation of 5G low-latency applications. Particularly, to facilitate these applications in the cloud, enterprise, and network ecosystems, American Tower is establishing a converged communications and computing infrastructure offering. This mobile edge computing strategy offers distributed points of presence across multiple edge layers, as shown below:
Mobile Edge (Cell Towers and C-RAN Hubs)
American Tower’s broad, exclusive, and distributed real estate portfolio and wireless connectivity resides at the mobile edge. Specifically, this includes the company’s 43k+ U.S. communications sites and 175k+ international sites.
As broad adoption of 5G leads to new low-latency use cases, these applications will operate across wireless carrier and cloud service provider platforms at scale. In turn, new wireless interconnection exchanges will form at natural mobile traffic aggregation points, such as American Tower’s sites. Ultimately, the need for compute at the edge of the mobile network will drive demand for neutral host facilities to house these low-latency mobile edge applications.
At the mobile edge, American Tower delivers strong customer relationships with wireless carriers, while CoreSite brings extensive customer relationships with cloud service providers. By 2026, American Tower estimates that the mobile edge will be a total addressable market of ~$1bn in revenue.
Metro Edge (Tier II / III Markets)
CoreSite’s development pipeline and American Tower’s funding will accelerate the build-out of metro edge deployments. American Tower expects that the edge will evolve into Tier II/III metro markets, where reducing latency to <20 milliseconds is important.
As data traffic increases and latency-sensitive applications emerge, the cost of transport access delays across ‘multi-hop’ networks will drive latency-sensitive workloads to more local data centers. As a result, American Tower anticipates accelerated growth of compute needs – beyond just core hyperscale data centers – into facilities in Tier II and Tier III markets.
At the metro edge, American Tower has made small-scale data center investments to-date and only has a modest regional presence in the southeast U.S. However, CoreSite propels American Tower’s position in colocation, cloud, and interconnection while giving it a relationship with cloud service providers. By 2026, American Tower estimates that the metro edge will be a total addressable market of ~$2bn in revenue.
Core (Tier I Interconnection Markets)
CoreSite’s existing 25 interconnected data centers in 8 large U.S. metros reside at the core edge. Specifically, these data centers will remain important pieces of the 5G network topography as edge evolution begins from the core.
International Expansion
Under American Tower’s ownership, CoreSite’s data center business could expand beyond the U.S. and into international markets. Particularly, American Tower notes Europe, Latin America, and ‘developing markets’ as geographies where it is evaluating data center opportunities.
Internationally, American Tower already has a significant operating presence. The company has 219k communications sites globally, of which 175k+ are located in international markets, throughout 23 countries.
Overall, by expanding CoreSite’s data center portfolio internationally, American Tower becomes a unique provider offering towers and data centers globally.
Diversification
American Tower is diversifying its business and revenue into the data center sub-sector of digital infrastructure. As a result, the company is reducing its reliance on wireless carriers including Verizon, T-Mobile, AT&T, Telefónica, and Airtel. Instead, American Tower is broadening its customer base to include CoreSite customers like Amazon Web Services (AWS), Microsoft, and Uber.
Transaction Advisors – American Tower and CoreSite
American Tower’s financial advisors were J.P. Morgan and CDX Advisors. Additionally, American Tower’s legal advisor was Cleary Gottlieb Steen & Hamilton.
CoreSite’s financial advisor was Evercore. Additionally, CoreSite’s legal advisor was Wachtell, Lipton, Rosen & Katz.
