Uniti may be taking an aggressive stance with its fiber network expansion, but the service provider is using a targeted method that’s focused on customer needs, rather than relying on a Field of Dreams strategy of "if you build it,they will come."
Mark Wallace, EVP and CFO for Uniti, told investors during the Deutsche Bank 25th Annual Leveraged Finance Conference that the service provider continues to build fiber networks in response to customer requests for dark fiber and small cell backhaul.
“By design we are deploying success-based capex in the Uniti Fiber business,” Wallace said. “Carriers have a desire for long-term dark fiber projects and those have very attractive return characteristics to them.”
However compelling dark fiber and small cells are, Wallace added the service provider is not relying on a "build-it-and-they-will-come" promise.
“We don’t do speculative transactions on small cells and dark fiber,” Wallace said. “We always have an anchor tenant and always run models that show what the lease up potential is both in the long-term and short-term so we have a good understanding of what the economics are.”
Diverse assets available
As it looks to complement its organic fiber builds, Uniti wants to acquire assets associated with long-term contracts with anchor tenants that have good credit ratings.
Wallace said that Uniti continues to have conversations weekly with other service providers as potential acquisition targets.
“The M&A pipeline is very active and very healthy,” Wallace said. “There’s been some assets recently in the market we’re very interested in looking at and all of our transactions are moving along.”
Wallace did not specifically call out any of these targets. “It’s pretty much across the board,” Wallace said. “It would be regional fiber operating companies that need capital to expand and would be interested in monetizing their existing network and taking the proceeds and redeploying that in the business.”
Wallace said that another possibility could be a traditional telco that might only want to sell a nonstrategic portion of its business.
“It might be telecom companies who may not be interested in selling their entire network or doing an entire sale leaseback, but might have an interest in either doing a market or a few states,” Wallace said. “We could even structure those in a programmatic method to monetize additional assets over time in a sales leaseback structure.”
New funding models
To fund new M&A targets, Uniti has other options it can pursue. One option is to finance acquisitions privately.
Uniti said it is in a better position to place equity with a counterpart than it was when it emerged over two years ago.
Part of this includes Uniti realigning itself, a few months ago, into an UPREIT (umbrella partnership real estate investment trust). In an UPREIT structure, the owner of a property contributes it to an UPREIT in exchange for securities called "operating partnership units" or "limited partnership units” instead of selling the property.
“This allows us to issue an operating partnership unit as opposed to pure equity,” Wallace said.
Wallace added that “we do think about being more creative on the financing side, and creative means placing more equity privately with the selling counterparties.”
Another option is to consider what is known as a property company (Prop Co) structure. For these deals, Uniti could work with a partner to acquire another company. Under this structure, Uniti would own the property and the other company would own and operate the majority interest with a sales leaseback between the two.
“There’s a lot of different structures we look at,” Wallace said. “It all comes down to us looking at all these different options we have outside of the public securities market and making sure we have outside of the public securities market if need be and making sure we match those to the appropriate M&A transaction we have going on.”