When two tenants on the same towers merge, one of the two antennas comes down. The rent goes, the costs stay, and the exit multiple turns the gap into the real loss.
A merger between two tenants on your towers costs you every duplicate tenancy the merged operator switches off, and because colocation rent is almost pure margin, that loss falls straight to EBITDA and is then multiplied at exit. On an illustrative portfolio of 850 towers bought for $282 million, 60 colocation tenancies removed over two years take equity IRR from 10.06 to 9.02 per cent, cut year-10 EBITDA by $1.56 million and knock $32.34 million off the exit value.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The case is Pellam Towers, the fictional portfolio of The Digital Infrastructure Investor: 850 towers carved out of a mobile operator, which stays on every tower as anchor tenant, and 382 colocation tenancies from the second and third operators. Every figure below is the book's assumption, not a market quote.
| Input | Value |
|---|---|
| Towers | 850 |
| Colocation tenancies at purchase (tenancy ratio 1.45) | 382 |
| Anchor rent per tower, $ a month, escalating 2.5% a year | 2,050 |
| Colocation rent per tenancy, $ a month, escalating 3% a year | 1,750 |
| New tenancies per tower a year | 0.03 |
| Colocation churn a year | 1% |
| Price / entry cost with 2% transaction costs, $m | 282 / 287.64 |
| Exit multiple of year-10 EBITDA, less 1.5% exit costs | 21x |
| Debt: 7x year-1 EBITDA at 6.25%, refinanced at 7x in year 7 at 6.5% | 7x |
| Merger: the second and third operators combine in year 4 | 60 tenancies removed |
Half the 60 duplicates come down in the merger year and half the year after, as the overlapping leases reach their termination windows. Nothing else changes: the anchor stays, the towers stay, ground rent and site costs stay.
Closing tenancies = opening + new tenancies − churn − tenancies removed by the merger
Year 4, base: 446.4 + 25.5 − 4.46 = 467.4; merger: 467.4 − 30 = 437.4
Colocation revenue = average tenancies × 1,750 × 12 × 1.03year − 1
Excel: =(Open+Close)/2*Rent*12*(1+Esc)^(Year-1)/10^6
The gap does not stay at 60. Churn is charged on a smaller base after the merger, so by year 10 the portfolio has 56.8 fewer tenancies than it would have had: 532.5 against 589.3, 9.6 per cent of the colocation book, and a tenancy ratio of 1.63 instead of 1.69. Sixty removals equal 2.35 years of new leasing at 25.5 tenancies a year.
| Year | Tenancies, base | Tenancies, merger | Colocation revenue lost | EBITDA lost |
|---|---|---|---|---|
| 3 | 446.4 | 446.4 | 0.00 | 0.00 |
| 4 | 467.4 | 437.4 | 0.34 | 0.34 |
| 5 | 488.3 | 428.6 | 1.06 | 1.06 |
| 6 | 508.9 | 449.8 | 1.45 | 1.45 |
| 7 | 529.3 | 470.8 | 1.47 | 1.47 |
| 8 | 549.5 | 491.6 | 1.50 | 1.50 |
| 9 | 569.5 | 512.1 | 1.53 | 1.53 |
| 10 | 589.3 | 532.5 | 1.56 | 1.56 |
Revenue lost equals EBITDA lost, line for line. A tower's costs are set by the tower, not by the number of antennas on it: ground rent, site costs and overhead are the same with one tenant or three. That is what makes colocation so profitable on the way up, and it is exactly why a removal hurts on the way down. Over the ten years the merger takes $8.93 million of revenue, all of it margin.
Exit value lost = year-10 EBITDA lost × exit multiple × (1 − exit costs)
= 1.56 × 21 × 0.985 = $32.34 million
Net exit value: 574.8 base, 542.5 merger
The exit is where the money is. The annual losses add up to $8.93 million; the exit loss is more than three times that. And because the acquisition debt is refinanced at 7x year-7 EBITDA, the merger also shrinks the refinancing from $155.6 million to $145.3 million, so less cash comes back to equity in year 7.
Unlevered IRR falls from 9.11 to 8.35 per cent and equity IRR from 10.06 to 9.02 per cent, a loss of 1.04 points, on a merger that removes 15.7 per cent of the tenancies held at purchase and leaves year-10 EBITDA only 5.6 per cent lower. A fund with a 10 per cent target clears it in the base case by six basis points; it takes just 3.3 removed tenancies to use that cushion up.
Put as a price: with the merger in the model, $266.0 million earns 10 per cent and $265.1 million restores the base 10.06 per cent. The merger is worth $16.9 million, 6.0 per cent of the price, to a buyer who sees it coming.
| Tenancies removed | Equity IRR | Points lost | Net exit value, $m | Tenancy ratio, year 10 |
|---|---|---|---|---|
| 0 | 10.06% | 0.00 | 574.8 | 1.69 |
| 30 | 9.55% | 0.51 | 558.6 | 1.66 |
| 60 | 9.02% | 1.04 | 542.5 | 1.63 |
| 90 | 8.48% | 1.58 | 526.3 | 1.59 |
| 120 | 7.92% | 2.14 | 510.1 | 1.56 |
Each 30 tenancies costs about half a point. Timing matters less than size: the same 60 removals cost 1.13 points if the merger lands in year 2 and 0.86 if it lands in year 8, because the exit loss is almost the same in every case and mainly the years of lost rent change; a merger after the year-7 refinancing also leaves the refinanced debt untouched. To win the base return back through the exit alone, the buyer would need 22.74x instead of 21x.
Treating the merger as a revenue line: 60 tenancies at $21,000 a year is $1.26 million, "about 4 per cent of revenue", and the analysis stops there. That misses two things. The lost rent is margin, not revenue, so it comes off EBITDA in full; and by exit each tenancy pays $27,400 a year, which at 21x net of costs is $566,774 of sale price per antenna taken down. The naive $26.5 million (1.26 times 21) undercounts the exit loss, and ignoring the refinancing undercounts the equity loss again. Model it in the roll-forward, through the debt, to the equity IRR.
The roll-forward, the debt and the merger scenario are live in the free workbook for this case. Why the second and third tenants carry the return in the first place is worked in how the tenancy ratio drives cell tower returns, and the entry multiple in what EBITDA multiple to pay for cell towers.
Two operators that each rented space on the same tower need only one site after the merger, so the duplicate lease is cancelled when it expires or is bought out. The rent disappears while the tower's ground rent, site costs and overhead do not. In the illustrative case, 60 removed tenancies at $1,750 a month cost $1.56 million of EBITDA by year 10.
Its rent at exit times the exit multiple, net of exit costs, because colocation rent is almost pure margin. A tenancy paying $21,000 a year today escalates to $27,400 by year 10 at 3 per cent, which at 21x less 1.5 per cent of exit costs is worth $566,774 in the sale price.
Price it, rather than hope. Identify towers where two operators that could merge both sit, model the duplicates as removed, and ask whether the return survives. In the illustrative case the merger costs 1.04 points of equity IRR, and a price $16.9 million lower, 6.0 per cent, restores the base 10.06 per cent.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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