During Colony Capital’s Q3 2020 earnings conference call, Chief Executive Officer, Marc Ganzi shared his perspective on Colony’s approach to fiber-to-the-home investments. While Colony Capital is evaluating every fiber-to-the-home acquisition opportunity that comes to the market, their focus remains on finding investments that have long-term, investment grade contracts.
Colony posits that there are two kinds of fiber-to-the home business models. Firstly, is a partnership with a carrier, telecommunications provider or CableCo, on a wholesale basis. Secondly, is a direct-to-consumer approach. Below we highlight how Colony distinguishes between the two types of fiber-to-the home business models.
Partnership with Carrier, Telecommunications Provider or CableCo
In the partnership format, the investor owns the fiber network infrastructure and enters into long-term agreements with carriers, telecommunications providers or CableCos, on a wholesale basis. Colony has used the partnership model in three of its portfolio companies, including Beanfield Metroconnect, Andean Tower Partners, and Highline do Brasil.
Beanfield Metroconnect – Wholesale Fiber-to-the-Home Example
Colony Capital, through their investment in Beanfield Metroconnect, did a sale-leaseback with Cogeco (TSE: CGO), acquiring the fiber assets of Cogeco. Therefore, Beanfield owns the fiber, has a wholesale partnership with Cogeco and Cogeco is Beanfield’s primary customer. Further, Beanfield has continued to lease-up this fiber to other third-party companies. Additionally, Beanfield continues to build fiber laterals to support Cogeco as well as other customers.
Beanfield invested in the Cogeco fiber, on a wholesale basis, at a valuation of ~$130k Canadian dollars per fiber route mile. This represents, ~1.4x fiber replacement cost of ~$90k Canadian dollars per fiber route mile. As a reference point, fiber replacement costs in the United States are ~$65k per fiber route mile.
Replacement cost analysis helps Colony Capital frame whether they should be buying or building new fiber assets. When buying assets, Colony targets investing at close to replacement cost.
Andean Tower Partners and Highline do Brasil – Wholesale Fiber-to-the-Home Example
Colony is also building fiber-to-the-home in Latin America. Specifically, Colony is building fiber-to-the-home through Andean Tower Partners and Highline do Brasil. However, in these investments, Colony is entering into long-term 15-year to 25-year contracts with investment-grade customers. Specifically, Colony sells fiber capacity on a wholesale basis to telecom customers, in these geographies, after building the network for them.
Marc Ganzi used the example of Stonepeak’s recent $8.1bn acquisition of Astound Broadband from TPG as a key case study for how Colony’s approach to fiber-to-the-home investments is differentiated.
Astound Broadband – Direct-to-Consumer Fiber-to-the-Home Example
Astound Broadband is a consumer-facing business that does not have a long-term wholesale contract. Additionally, the consumer fiber business is a very competitive landscape in Astound’s markets, particularly given the brand is an “over-builder”.
Astound is deemed an “over-builder” because they are deploying their broadband network in communities already served by another broadband provider. Being an “over-builder”, makes Astound either the second or third operator in their respective markets, meaning it is very competitive. In turn, competition translates into the Astound business facing significant customer churn.
Additionally, operations for consumer-facing businesses are more intensive. For example, technicians need to be sent to each individual household, in order to set-up connectivity. In turn, operating margins are lower for these consumer fiber businesses, as compared to wholesale fiber businesses.
Colony Capital’s Fiber-to-the-Home Strategy Differs
Colony evaluated the Astound Broadband transaction but did not think it warranted a valuation of over $400k per fiber route mile, which represented 5.3x replacement cost. In contrast, Colony Capital purchased Zayo, and paid about $12.6bn (which is net of the zColo divestiture). For Zayo’s fiber business, Colony paid ~$100k per fiber route mile, which represented 1.3x replacement cost.
When comparing the Astound Broadband transaction to the Zayo transaction, Colony paid a much lower multiple of replacement cost. Moreover, Zayo’s business has long-term lease contracts and lower churn, which reduce the risk of the investment. Whereas, Astound Broadband has short-duration contracts and significant churn, adding to the risks of Stonepeak’s investment.
Overall, Colony Capital takes a thoughtful approach to underwriting each digital infrastructure asset class, including fiber. Specifically, Colony analyzes the quality of the fiber infrastructure, quality of the network and cost of the network. This is because Colony is building new digital infrastructure assets across all four of the key digital infrastructure verticals. These include towers, data centers, fiber, and small cells & distributed antenna systems.
In summary, Colony’s view is that the best method of investing in fiber-to-the-home is through long-term, investment grade contracts, not short-term, consumer-facing businesses with high churn.