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American Tower (NYSE: AMT) is a behemoth in the real estate investment trust (REIT) sector. The communications-focused infrastructure REIT currently clocks in at a nearly $100 billion market cap, more than $25 billion above the next-largest REIT, industrial giant Prologis (NYSE: PLD). American Tower has grown to such a large scale by gobbling up cell towers in the U.S. and expanding overseas, becoming the largest global tower operator.
That global scale is about to get even bigger after the company agreed to buy Telxius Towers, a large-scale communications site owner in Europe and Latin America. Here's a closer look at the transaction and its impact on the company.
Digging into the deal
American Tower is buying Telxius Towers from leading global telecommunications company Telefonica (NYSE: TEF). It's paying $9.4 billion at current exchange rates. The REIT expects to close the deal in several phases starting in the second quarter and will finance it in a way that maintains its investment-grade credit rating.
Telxius currently operates about 31,000 communications sites in Germany, Spain, Brazil, Chile, Peru, and Argentina. Most of the sites are in Germany (around 12,500) and Spain (roughly 11,300). In addition to that operating portfolio, American Tower expects to spend $500 million to build approximately 3,300 new sites in Germany and Brazil through 2025.
The existing towers should produce steady revenue and earnings for American Tower, backed by long-term contracts with Telefonica and other tenants. The company anticipates they'll generate $775 million in property revenue and $390 million in Adjusted EBITDA per year when adding the sites it expects to build.
How this deal impacts American Tower
"This transaction is transformational for our European business and will establish American Tower as one of the largest independent communications infrastructure providers in Europe," stated CEO Tom Bartlett. It will grow its site count by six times and its property revenue five-fold on that continent. He also noted that the deal is "complementary for our Latin American portfolio and positions us to drive strong long-term organic growth across both regions while augmenting our new build programs and enhancing our relationships with key tenants."
The transaction will be immediately accretive to the company's consolidated AFFO per share. Thus, it will provide American Tower with some incremental cash flow to support continued dividend increases. The company has expanded its payout at a more than 20% compound annual rate since its conversion into a REIT in 2012. It seems likely to keep that streak alive in 2021 following this deal and last year's $3.5 billion purchase of InSite Wireless Group, which bolstered its North American operations.
Meanwhile, the acquisition gives it two longer-term growth drivers to support future dividend increases. The first power source is the pipeline of 3,300 new sites it will build in Germany and Brazil for Telefonica over the next several years. As these sites come online, they'll generate incremental cash flow for the company.
The other growth driver is adding new tenants to the existing towers. Because Telefonica built this portfolio to support its network, it's the primary tenant (it currently supplies 88% of the portfolio's revenue). However, once American Tower takes control, it will have greater flexibility to add more tenants to these sites. Overall, the portfolio currently has only 1.3 tenants per tower on average.
Those future additions can significantly enhance its investment returns. For example, a typical one-tenant tower in Latin America generates a 9% return on investment. Adding a second tenant can boost that return to 17%, while a third can push it up to 25%. Thus, as demand for tower infrastructure grows due to steadily rising data usage, the company can organically increase the cash flow produced by this portfolio as it secures additional tenants for these towers.
A needle-moving deal for the industry behemoth
American Tower is already the largest REIT and a dominant player in the global communications tower market. That didn't stop it from securing a deal to enhance its leading position. The transaction should pay near- and long-term dividends for investors by supporting steady AFFO and dividend growth. This increased growth visibility makes the REIT look like an even more attractive buy right now for long-term investors.
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