Digital Colony, an evolution of Digital Bridge which was founded by Marc Ganzi and Ben Jenkins in 2013, don’t mind being first movers. The team are among the pioneers of the convergence of towers, data centres, fibre and small cells, including their most recent acquisitions that included consolidating towers in the Andean States and acquiring Scandinavian broadcast towerco Digita. Another of their recent additions has been the recruitment of digital infrastructure investment veteran Steven Sonnenstein. TowerXchange exclusively spoke to Steven at the TowerXchange Meetup Americas 2018, and received fascinating insights into Digital Colony’s vision, and the execution of that vision.
TowerXchange: How did your professional journey bring you to your new role at Digital Colony?
Steven Sonnenstein, Managing Director, Digital Colony:
I’ve been an institutional investor for over a decade, having led investments of close to US$2.5 billion into infrastructure, the majority of which has gone into telecom infrastructure. I’ve always had an operational mindset, which was initially cultivated at Brookfield and more recently at PSP. One of my landmark deals was PSP’s investment in French towerco TDF, an investment where I eventually served as Chairman of the Board.
I share an operational mindset with (Digital Colony co-founders) Marc Ganzi and Ben Jenkins, who I first met as competing bidders on TDF in 2013. We subsequently went on to review four or five opportunities of mutual interest as potential partners, closing on several. I got to know Marc, Ben, Alex Gellman and Raul Martynek even better when PSP invested in data centre acquisition Vantage in 2016, and I was impressed with both their vision and capacity to rollup sleeves to get stuff done.
After Digital Bridge’s successful entry into six verticals since 2013, Marc and Ben realised, along with several other investors, that exciting investments like Vantage shouldn’t be a one-off. The timing was right to launch a dedicated investment firm. Digital Colony has already made two investments: the acquisition of Digita in Finland and ATP’s acquisition of Torres Unidas.
TowerXchange: What is Digital Colony – is it a rebrand of Digital Bridge, or does your alliance with Colony Capital open up new strategic directions for the business?
Steven Sonnenstein, Managing Director, Digital Colony:
Digital Colony is an evolution of Digital Bridge which was founded by Marc and Ben in 2013, and which already has investments in Vertical Bridge, Mexico Tower Partners, Andean Tower Partners, DataBank, Vantage and ExteNet Systems.
Digital Colony is a dedicated telecom infrastructure investment firm, created to seek out opportunistic investments in Europe and the Americas in four key verticals:
1. Telecom and broadcast towers
2. Enterprise and hyperscale data centres
3. Fibre
4. Small cells
TowerXchange: Between your spells at Brookfield, PSP and now Digital Colony, you’ve doubtless looked at multiple opportunities in the adjacent infrastructure categories of macro towers, data centers, small cells and fibre. What are the commonalities in their respective business models and cash flows that create comfort in investing across these categories?
Steven Sonnenstein, Managing Director, Digital Colony:
All our businesses are part of the digital infrastructure universe: the nuts and bolts of everything that makes everything digital work.
The MNO is increasingly a customer-facing, service-orientated business, but in order to provide that service they require infrastructure: towers, fibre, data centres and small cells. Digital Colony seeks to invest in, own and operate the passive infrastructure that allows the digital universe to operate.
All these infrastructure businesses are characterised by high barriers to entry, such as their capital intensity. And they are underpinned by long term contracts, generally inflation protected, with a small number of credit-worthy counterparties.
What is driving valuations of digital infrastructure to stratospheric levels at the moment is that people are pricing in growth today and accepting lower returns for these assets than they might have otherwise.
Some other bidders lack the operational experience we have. For example, if you buy a toll road you only need to do is really understand the traffic studies and macroeconomic tendencies and competing roads. Toll roads aren’t generating the same alpha returns they once did, and digital infrastructure is no road! With a telecom tower network you need to understand the key operational performance metrics, and you need to operate at the highest levels of efficiency and performance both to achieve the desired performance, and to deliver operational excellence for customers. Investing in digital infrastructure is more complex than operating a toll road.
TowerXchange: Congratulations on the acquisition of Digita in Finland – Digital Colony’s first foray into Europe. What are you buying and why? And do you want more assets like Digita in Europe?
Steven Sonnenstein, Managing Director, Digital Colony:
While other prospective industry buyers might buy cash flows, we buy opportunities.
When evaluating any new market or new opportunity, large investors principally look at the cash flows today, and see growth as a question mark to which a weighted probability is ascribed.
Digital Colony does not see Digita as just a single Scandinavian broadcast tower company – we look at the opportunity and where we can take the business. We see Scandinavia as a fragmented market where there is a tremendous opportunity, and we have the operational know-how to execute on our strategy.
How do we do it? We have an excellent management team, optimally incentivised and aligned with our investor base. You can’t just have employees running these complex digital infrastructure business – you need to have partners running your businesses.
Returning to what we’ve acquired in Digita; we’re looking at the macro story of Scandinavian digital infrastructure as a whole, and see an opportunity to execute on a strategy to return great value to the stakeholders. We’re looking beyond broadcast towers – we’ve acquired a network of high quality, interconnected metal infrastructure.
Broadcast tower assets might not be as ‘in vogue’ as pure telecom towers, but it’s a sector I’m personally very comfortable with given my background with TDF. A lot of North American investors don’t understand broadcast, because we have cable, which is cheap and which connects many consumers seamlessly. Pureplay broadcast infrastructure is a declining business, but there’s a price at which investing in it makes sense.
We’re acquiring digital networks of interconnected steel and concrete that will become the utilities of tomorrow!
TowerXchange: How far down this vector of separating retail telecom from telecom infrastructure can we go? Is there a future in which telcos acquire spectrum licenses and manage customer experiences, whilst specialist infracos manage connectivity end-to-end?
Steven Sonnenstein, Managing Director, Digital Colony:
We 100% buy in to that vision – that’s why we’re investing in this sector!
Look at it from the perspective of an MNO that still has passive infrastructure depreciating on their balance sheet – why? It doesn’t directly generate ARPU. Is it because you don’t trust third parties to run it? Is it just because you’ve always done it? Many MNOs simply can’t afford to retain this outdated view.
What differentiates MNOs today is the content and the convergence that they can offer the consumer. They’re all offering same product – mobile connectivity. They can compete on price, yes, but if one MNO is offering free premium content from an OTT player like Netflix, consumers will start to value that differentiating factor more and more.
Most MNOs cannot achieve and sustain the same leverage ratios as digital infrastructure specialists like Digital Colony can – we offer a more efficient capital structure. MNOs can flip their towers for US$ billions and free up capital for redeployment into higher return investments like equipment and content.
MNOs will need to continually invest in spectrum. When a 3MB photo becomes 30MB of photographic content because everyone shares everything, that data growth will eventually force them to sell all their infrastructure in the end. 80-90% of all the digital data in the world was created in last 24 months – MNOs will always need to use digital infrastructure like fibre, towers and data centres, but they do not need to own the nuts and bolts any more!
Introducing Steven Sonnenstein
Steven Sonnenstein, recently appointed Managing Director at Digital Colony, is an accomplished telecommunications infrastructure executive with over 20 years of global mergers and acquisitions, asset management and operations experience.
Steven was most recently a Senior Director at PSP Investments, one of Canada’s largest pension investment managers, where he created a telecommunications infrastructure asset class within the broader infrastructure group. He can be credited with completing PSP’s first direct investment in the telecommunications infrastructure space and was responsible for PSP Infrastructure’s inaugural direct investments in France, India, and Turkey.
During his six years at PSP, he put in final bids worth more than C$7.5 billion of equity, closing on more than C$2.2 billion - predominantly in the telecom infrastructure sector - and co-led and asset managed over C$1 billion of additional investments.
Before joining PSP, Steven worked for Brookfield Asset Management in its Private Equity and Infrastructure Groups with particular focus and experience in South America. Prior to that, Steven spent several years working in mergers and acquisitions and distressed advisory.
Steven holds a Bachelor of Commerce from McGill University, and a post graduate in Chartered Accountancy.
