A valuation gap exists between buyers and sellers of some types of digital infrastructure, three sources told Mergers & Acquisitions. According to Anthony Belinkoff, managing director at investment bank DC Advisory, telecom towers are experiencing highest demand while optical fiber and data centers are viewed as harder to “model” and value.
“Valuations are lower today than 12 months ago,” says Belinkoff. “Capital’s more expensive due to interest rates, consumer issues, cost of fiber and labor, and that’s having an impact on valuation. If an asset was 11x cash flow in January, now it’s 9x to 11x.”
Fiber valuations are especially pressured, says Belinkoff. “The real issue isn’t existing fiber. It’s new fiber build outs. They require significant capital, but business models have yet to play out. Capital is scarcer for new builds.”
Last week, Liberty Global and Telefonica announced a 50/50 joint venture with InfraVia and a $5.5 billion investment, and Belinkoff called the U.K. an area of “overbuilding” that in time will “shake out” and generate M&A.
The data center space is also experiencing pressure, says Belinkoff. “There aren’t a lot of pure data centers transactions. There’s debate about long-term growth rates. Hyperscalers AWS, Meta and Google are enormous users with significant growth. But they’re more likely to keep that business in house. As things move to the cloud, there’s growth but enterprises have a significant need for hyperscale.”
Towers meanwhile, despite the economy and interest rates, are still in high demand, says Belinkoff. “If you view telecom infrastructure as towers, data centers and fiber, towers have higher quality. Valuations are high, 15x to 18x Ebitda, perhaps into the 20s. Towers have fewer customers than other digital infrastructure, but they’re not transferable. There’s no reason to move from one tower to another or cut rates.”
Irtiaz Ahmad, managing director and head of digital infrastructure and services at Solomon Partners, has a more optimistic view of digital infrastructure dealmaking.
Solomon Partners recently advised Archer Datacenters on the launch of a data center joint venture in Nashville with Evoque, a portfolio company of Brookfield Infrastructure Partners, and Star America Infrastructure Partners on an investment in Canadian Fiber Optics Corp.
Parties are attracted to these types of investment transactions to fund development projects and platforms as they allow for smaller upfront equity checks, ability to invest a lot more capital over time, superior returns potential in the high teens range, and access to new regions and opportunity to build platforms of scale, says Ahmad.