Vertical Reality

Throughout the 1990s, the founders of Lattice Communications witnessed firsthand how the value of communications towers could be squandered if they weren't properly managed and wholly used. And for entrepreneurial types, one person's squandered value is another's opportunity.

As principals of Crisler Co., Dean Meiszer and Steve Kaufmann had a decade of experience together brokering mergers for TV, radio and other communications businesses. They knew how valuable the real estate on communications towers was — that a tower can pay for itself many times over if it's loaded up with the right kind and number of tenants. They also knew that many tower owners in the Midwest were not taking advantage of that opportunity, either because they didn't see it or because they didn't have the resources to manage it. Meanwhile, the large, publicly held tower companies were interested in big deals, not regional plays.

Enter Lattice, which Meiszer and Kaufmann formed in March 1999 with Sam Johnston, the former general manager of Blue Grass Cable Co., and venture capital backing. At its inception, Lattice had 83 tower sites in its footprint. The company's goal was to relieve wireless carriers of everything related to tower ownership, site buildout and management — to manage tower locations as a third party based on economic drivers that are broader than those of a single-carrier tower owner. And because the founders were adept at the acquisition game, getting into the tower business was as simple as cutting some deals.

“At the time, we felt there was an opportunity to be the largest single owner of towers in Ohio, Indiana and Kentucky,” said Meiszer, who is president of the Cincinnati-based company. But just a few months after Lattice was formed, the big companies that dominated the tower sector got even bigger, making major acquisitions of tower sites from wireless service providers.

“All of a sudden, it was a rapidly consolidating business, so our tack changed a bit,” Meiszer said. “We realized at that time it was still very much a real estate business — you didn't need 1000 towers, but you needed the A properties.”

In addition to knowing the region and having the expertise to identify the A properties, Lattice has another inherent strength: a corporate investor that just happens to own a lot of property AND needs space on towers.

Lattice is partly owned by Cinergy Communications, a subsidiary of gas and electric utility Cinergy Corp. Lattice has a master agreement with Cinergy, Meiszer said, and can develop tower and substation sites using the utility's existing infrastructure. In addition, Cinergy — which maintains its own communications and dispatch systems — is an anchor tenant on many of the sites Lattice owns and maintains. “It's nice having a wireless tenant on there that operates a private network and is not affected by the credit rating challenges the big wireless carriers are facing,” Meiszer said.

The economic climate of the wireless service provider industry, currently flattened along with the rest of telecom, begs the question of what value there could be in owning and maintaining what might be perceived as a static part of wireless carrier networks. The answer is simple: It changes all the time.

Even in their currently reduced capex modes, wireless carriers are under constant pressure to keep their networks as up-to-date as possible, in terms of regional expansion and coverage and in response to changing customer needs. Lattice believes it is well equipped to respond to those needs immediately.

“The carriers still have a need for speed to market,” Meiszer said. “Once they've decided they need a site, they need it now. Our focus is on deploying the customer on the tower as soon as they need to be there.”

Lattice is able to do that, Meiszer said, because of the information it maintains on carriers' tower needs and knowledge of how its tower sites match them. That includes height requirements, electrical and telephone needs and shelter space. As it happens, many of the tricks of the tower trade are not up in the air, especially when it comes to wireless carriers' network evolution.

“One of the biggest limitations as carriers move to 2.5 and 3G is going to be ground space at these towers,” Meiszer said. “One of the mistakes some of the earlier construction designers made was not enough ground space.”

As for its own evolution, Meiszer envisions more expansion by acquisition. Despite the economic downturn in communications, Lattice — the country's eighth largest tower owner — is relatively well protected as a privately held entity and is still able to buy as opportunities present themselves.

“We've done a good job keeping our balance sheet well capitalized, so we're still in a position to be an acquirer,” Meiszer said. “Meanwhile, the stocks of the public tower companies have fallen considerably. Our purchase price per tower as a multiple of cash flow has been significantly less than public companies have paid for the same type of towers.”

Last August, Lattice purchased 194 towers from Broadwing Communications Services. The company now operates more than 350 sites. As part of the Broadwing transaction, Lattice also purchased a digital microwave network with capacity for 24 DS-3s.

And while Lattice plans to continue expanding, it will do so in a targeted way within the regions it currently operates. That strategy matches up well with wireless carriers' network clusters and allows Lattice to rule the roost in the areas where it owns towers, Meiszer said.

“We don't have any desire to be at 10,000 towers. We're really trying to pick off some small tower groups that would be very valuable to our investors,” he said. “When Wall Street first starting supporting this business, they didn't realize it's really just real estate. But once you get it built and zoned, you do have an oligopolistic business.”