American Tower on Monday expanded its edge efforts in announcing a $10.1 billion deal to purchase CoreSite including cloud on-ramps, interconnections and 25 data centers in eight U.S. markets – but some analysts are questioning if it’s the right move.
American Tower envisions a hub-and-spoke model as the edge evolves, where its existing tower sites can serve as locations for edge data facilities, connected back to core data centers in major metros, as well as metro data locations in Tier 2 and 3 markets.
The evolution of the edge is tied to ongoing shifts of workloads to the cloud and edge processing for future applications that require very low latency. Utilizing its distributed communications real estate assets to create a market in the edge space is something American Tower has been eyeing for a number of years and already has made small scale acquisitions and initiated trials sites.
After American Tower disclosed the CoreSite deal, financial analysts at MoffettNathanson and Wells Fargo emphasized that CoreSite has high-quality assets but were left questioning if operating under the American Tower umbrella would help or hinder the tower company’s edge ambitions and CoreSite’s operations.
Wells Fargo analysts noted that the deal rapidly scales American Tower’s platform to address edge solutions.
“However, we think the strategic justification for such a large acquisition at a very full multiple remains somewhat questionable, even if we do believe COR's asset portfolio is of very high quality,” wrote Wells Fargo analysts led by Eric Luebchow in a Monday note to investors.
On a call earlier in the day regarding the acquisition, American Tower executives laid out a $1 billion mobile edge market opportunity and $2 billion metro edge market by 2026. However, Wells Fargo pointed out that those numbers are small compared to the existing retail colocation and hyperscale data center business, which the firm said is a $50 billion-plus annual market and growing.
“In other words, what we still don't know is whether COR's interconnection-dense retail colocation business (the largest addressable market) will run more effectively as a subsidiary of AMT,” wrote Luebchow.
Advancing the edge strategy?
American Tower’s tower sites are utilized by multiple operators as the company is a provider of neutral-host communication infrastructure. Executives have been clear that it views neutral host as the most effective way to provide edge data facilities as well.
The data center business model also is neutral host, and MoffettNathanson analysts agreed that CoreSite has a difficult to replicate ecosystem and that the hub-and-spoke model is how edge architecture is likely to evolve.
That said, “we don’t see how owning CoreSite advances American Tower’s edge strategy,” wrote MoffettNathanson analyst Nick Del Deo (emphasis Del Deo’s) in a Monday note.
Both businesses would essentially remain neutral host providers, he added.
“However, combining the two under a common ownership umbrella could make them less appealing to potential customers, in our view,” Del Deo wrote.
The firm questioned whether having the data center business under the tower company’s purview might turn off some customers who aren’t necessarily looking for an end-to-end provider that might be seen as constraining in terms of getting to pick and choose where distributed compute workloads could be placed.
“A customer could have an existing deployment in Equinix or some other operator’s space that it wishes to leverage, or find that CoreSite’s offering isn’t appealing for some reason, which might steer them to use another data center/tower combination,” wrote Del Deo.
American Tower has said the deal doesn’t stop them from partnering, but the analyst firm believes that becomes trickier if others now see the tower company as a competitor rather than straight-forward partner. It also views Equinix as a stronger partner than CoreSite or other players, “especially if one believes the edge opportunity is global (as American Tower argued), given the unmatched depth and global reach of its platform.”
While it’s still the early days, if the mobile edge opportunity ramps, MoffettNathanson thinks the CoreSite acquisition could actually turn into an advantage for other players in American Tower’s space, calling out Crown Castle, SBA, Equinix, and Digital Reality as beneficiaries if customers don’t prefer to take the entire hub and spoke from one entity.
American Tower in its presentation earlier in the day highlighted that having CoreSite’s interconnected, cloud-based ecosystem has advantages over partnering, but Del Deo said it’s not clear how the evolution of those data center ecosystems could be better managed as an end-to-end offer.
Wells Fargo analysts still think American Tower will have a strong case in going after the $3 billion edge market but noted it will be a bit of time for those use cases to be material.
“The bigger question is whether AMT can truly improve execution at COR in attacking the much larger addressable colocation market, other than access to a larger balance sheet and some financing synergies,” wrote Wells Fargo.
MoffettNathanson also doesn’t expect American Tower investors are likely too keen for the deal to close.
“The CoreSite deal is smallish is isolation, but American Tower’s management has effectively made an open-ended commitment to take this idea global,” wrote Del Deo. “It is highly likely that American Tower will buy additional data centers in the coming years.”
Compared to tower leasing, MoffettNathanson said the data center business requires more capital, is more competitive, has higher maintenance spending levels, and faces risk of the growing negotiating power of large cloud players.
And while tower leasing involves pretty straight forward model, the firm said the new acquisition is more complex strategically and operationally than expanding American Tower’s portfolio via earlier deals.
Risks are increased “if American Tower tries to take CoreSite into new countries, since CoreSite has no overseas experience and developing this sort of network-dense ecosystems is very hard to do from scratch. One could imagine many potential hiccups versus, say, adding additional towers in existing or adjacent markets,” Del Deo said.
American Tower CEO Tom Bartlett on Monday highlighted the opportunity to expand CoreSite abroad and in the U.S., possible with deeper pockets of the tower company. Wells Fargo sees Europe as the next logical step (where American Tower recently expanded its tower footprint), as well as smaller markets in the U.S. that fit the metro edge category.
MoffettNathanson, meanwhile, raised the question of whether CoreSite’s assets even meet American Tower’s edge needs in the U.S.
“More specifically, we don’t know what sort of effective radius a hub metro data center like CoreSite’s can serve as it relates to mobile edge compute applications,” wrote Del Deo. “Will CoreSite’s campuses in the Bay Area and Los Angeles fulfill American Tower’s needs to tie its towers in Phoenix, Las Vegas, Seattle, Portland, and other West Coast markets to hubs? Or will it require additional investment?”
American Tower expects the CoreSite deal to close before the end of 2021.