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European telecom towers become hot assets amid rollout of 5G

Burdened by high levels of debt and the prospect of costly investments to roll out 5G networks, European telecommunications companies are realising they have been sitting on assets for which investors are willing to pay dearly: their towers.

Following years of sluggish revenue growth, the industry has warmed up to the idea of sharing infrastructure to cut costs. Some of the largest operators on the continent are now rethinking their approach to tower ownership, possibly paving the way for a wave of mergers and acquisitions in a market where dealmaking is already well under way.

Spain’s Telefónica, backed by global private equity firm KKR, this month sold its Telxius Telecom tower division, comprising about 31,000 tower sites in Europe and Latin America, to American Tower. The $9.4bn transaction will make American Tower the second-largest independent tower company in Europe and is the latest in a string of deals in the sector.

Several smaller European operators have moved to unload their tower assets in recent years: Frances’s Iliad, Switzerland’s Sunrise Communications Group and Ireland’s eircom Group have all sold tower assets to specialist companies such as Spain’s Cellnex Telecom or Blackstone Group-backed Phoenix Tower International. Others have sold their towers to infrastructure or private equity investors.

Biggest acquisition
Dealmaking continued during 2020 despite the coronavirus pandemic. In November, Cellnex struck its biggest acquisition to date: It agreed to take over CK Hutchison Holdings’s European telecom sites in six separate transactions worth a total of €10bn, equivalent to $12.16bn.
“Seven or eight years ago, the model of external management of towers had to be explained. We had to tell operators that sharing infrastructure, like radio and TV networks did, made perfect sense,” a Cellnex spokesman said. “That pedagogy isn’t necessary nowadays.”

Now, larger European operators are also starting to see the appeal of separating out their tower assets. Vodafone Group has already set up its tower assets as a separate company called Vantage Towers, and is targeting an initial public offering in Frankfurt in early 2021. France’s Orange is in the process of carving out its tower assets into a company that will house its masts in France and Spain, while Deutsche Telekom is also weighing its options regarding its tower portfolio.

The latest moves from larger European operators show that their mind-set has been evolving, according to HSBC telecoms analyst Luigi Minerva. “Some [operators] have understood that the better value creation opportunity does not come from an outright sale, but from carving out and developing the towers business,” Minerva said. The motivation behind such moves has been debt reduction and the potential to exploit tower assets’ higher valuations, he added.

Tower companies lease out space in their sites to wireless operators, usually under long-term contracts, which generate predictable revenue streams favoured by investors. Independent tower companies can host several tenants, which multiplies their earning potential – another factor that helps them command higher valuations.

Tower specialists like Cellnex or Inwit of Italy have significantly higher valuations than telecom operators, as measured by their ratio of enterprise value to earnings before interest, taxes, depreciation and amortisation. While Cellnex’s enterprise value stands at nearly 34 times ebitda, Deutsche Telekom has a ratio of 6.77 and Vodafone’s is 5.02.

Whether investors will be willing to give equally high valuation multiples to tower companies carved out from telecom operators will depend on their independence, Minerva believes. “A ‘captive’ towerco – one controlled by a telecoms operator – will always have a weaker growth potential than an “independent” towerco. So, the full value-creation potential may only come once operators accept that they should no longer control the carved-out tower business,” he said.

Independent businesses
Düsseldorf-based Vantage Towers, whose portfolio of 68,000 towers spans nine European countries, has been operationally separate from Vodafone since May, and recently nominated an independent supervisory board chairman. Orange has also said its tower company will be run as an independent business.

Less than a third of Europe’s telecom towers are owned by an independent tower company, according to Jefferies. Towers still in the hands of mobile-network operators are likely to be the most fertile segment for M&A, the investment bank’s analysts said.

The launch of 5G networks is set to further strengthen the case for tower outsourcing. With the arrival of 5G expected to trigger a surge in data usage, operators will need more infrastructure. Tower companies are seen by many as best placed to deploy it in a cost-efficient manner, meaning there could be many more deals to come.

Tower outsourcing by European mobile network operators is still lower than it was in the US 20 years ago, Vantage chief executive Vivek Badrinath said during a recent press conference. “The European tower sector has significant room for growth,” he said.

With a war chest of €1bn, Vantage has signalled it is ready to invest in organic growth and acquisitions, suggesting that M&A activity might speed up in a market that was hot even before the arrival of the new tower companies. Private Equity News

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