Let's do a quick illustrative example:
Let's say the average annualized going rate for tower rent for the 250 tower sites in question is $100,000/yr. per user. Let's say Cumulus only has one antenna of its own per tower to keep things simple. Let's say 100 of the 250 tower sites have two third-party lessees who lease space at a much lower height, and those users pay Cumulus $50,000/yr. each.
American Tower's gross profit margin is about 70 percent. Let's assume a buyer can purchase the Cumulus sites with adding little to no incremental SG&A expense (below the Gross Profit line expense). Let's assume American Tower is willing to pay 10x cash flow.
If American Tower were to purchase all 250 sites using the economics from the above example:
- They presumably would charge Cumulus the $100,000/yr. rate for all 250 sites. Annual revenue generated by American Tower from Cumulus = $25,000,000.
- American Tower would also receive the benefit of the $50,000/yr. rates from the 200 third-party users who currently occupy space on the Cumulus sticks. Thus, 200 x $50,000 = $10,000,000.
- That adds up to $35,000,000 in annual revenue for American Tower. Remember, their margin in this example is 70%. So, $35,000,000 x 70% = additive cash flow of $24,500,000.
A 10x multiple applied to $24,500,000 = $245,000,000 in sale proceeds for Cumulus.
Now, let's see what happens to Cumulus' P&L statement on a pro forma basis:
- $245,000,000 of debt is retired early. Assuming a 7% interest rate, that will save Cumulus $17,150,000 a year.
- Cumulus loses out on the revenue stream from third-party tower lessees. That will *cost* Cumulus $10,000,000 a year.
- Cumulus will now need to pay tower rent to American Tower. That will *cost* Cumulus $25,000,000 a year.
Net negative cash flow impact to Cumulus = ($17,850,000). It will take them over 13.7 years to "outrun" the $245 million in proceeds.
I believe there is about $1.1 billion in debt on Cumulus' balance sheet, and I believe their Adjusted EBITDA is somewhere around $230 million. Leverage ratio = 4.8x.
If the $245 million in proceeds are used to pay down debt, then Cumulus would be left with $855 million in Debt against pro forma EBITDA of $195 million. Leverage ratio = 4.4x.
So, under this illustrative example, based purely on the economics, it would not be a bad deal for Cumulus. That said, it wouldn't be a transformative deal, either.
My example, of course, is simplistic. Who knows how close my illustrative monetary figures are to reality. The other question is this - for how long would any buyer(s) enter into tower site leases with Cumulus as lessee? 20 years? 30 years? Longer? What type of rate step-ups or reopeners would be included in such agreement?
The point of my example is to suggest that there parameters under which this *could* be a decent deal for Cumulus. It's not going to be a make-or-break moment, though, for Cumulus' long-term viability.
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