Telxius bolsters its position in the German market with the addition of 10,100 Telefónica sites

On 8 June, Telxius announced that it had reached a deal to acquire 10,100 sites from Telefónica Deutschland Holding AG for €1.5bn, with the deal including a build-to-suit commitment of up to 2,400 new sites. Once the acquisition and the BTS programme are finalised, Telxius’ total site count will exceed 32,800 sites, placing the company as one of the top ten largest towercos in the world. TowerXchange examines the deal, Telxius growth story and how the move fits into both Telxius’ and Telefónica’s strategies.

At the start of June, Telxius announced that it had reached a deal to acquire 10,100 sites from German MNO, Telefónica Deutschland for €1.5bn. With Telefónica having transferred the vast majority of it’s German ground based towers to Telxius back in 2016 (selling 2,350 towers for €587mn) the vast majority of the acquired portfolio are rooftop sites. Historically, there has been limited infrastructure sharing of rooftop sites in Germany (with the structure of contracts with landlords eroding the benefits) and as such, the tenancy ratio of the portfolio sits just above one (1.04x).

52% of the sites being acquired are in the main regions of North Rhine-Westphalia, Baden-Wurtemberg and Bavaria, with 45% of sites located in urban areas and 55% in semi-urban and rural areas. This complements Telxius’ existing portfolio in the German market, where 84% of sites are located in rural areas.

In addition to the acquisition of 10,100 existing sites (which will be completed in two tranches, with 60% being acquired initially and the final 40% by August 2021), the deal includes a build-to-suit commitment of up to 2,400 new sites. Once the acquisition is finalised and all sites under the BTS agreement completed, Telxius total site count in the German market will stand at 14,900 sites.

The agreement, which is subject to regulatory approvals, amounts to €1.5bn with 90% of the value of the acquisition to be financed through a capital increase and internally generated resources and 10% to be financed through incremental debt.

Speaking on the transaction, Mario Martín, CEO of Telxius, said “This agreement marks an important transformation of Telxius’ profile. It consolidates us as a leading infrastructure company and we significantly increase our exposure to both the tower business and the largest European market. In addition, we ensure an extraordinary growth profile.”

The German tower market is characterised by a prevalence of operator owned towercos. Deutsche Telekom was the first MNO to create an infraco, forming Deutsche Funkturm back in 2002, with Deutsche Funkturm now owning a portfolio of over 31,000 sites as well as a further c. 5,000 rooftop sites inherited from Telefónica and held under the Omega Towers brand.

In June 2019, Vodafone announced that it too was carving out its towers into a pan-European towerco, with the company recently announcing that the headquarters for the towerco will be in Dusseldorf. The incorporation of the operator’s German towerco is expected to be finalised imminently, with Vodafone’s 19,400 sites (of which around 4,000 are ground based towers) transferring to the towerco.

Telxius’s acquisition of 10,100 sites from Telefónica will place the towerco’s site count in the country at 12,500, a figure set to rise to 14,900 when the company’s build-to-suit commitments are finalised. Of Telxius 12,500 sites, around 2,400 are ground based towers although this figure will double under the BTS programme, with the vast majority of the 2,400 sites to be added expected to be greenfield sites. Telefónica is understood to retain a portfolio of around 8,900 sites in the country, of which around 2,000 are ground based towers and the balance, rooftops. 

In addition to broadcast towerco, Media Broadcast Group, American Tower’s ATC Europe completes the towerco landscape in the German market (see figure one). American Tower entered the German market back in 2012 with the acquisition of KPN’s 2,000 E-Plus towers for €393mn (KPN having since sold E-Plus to Telefónica). American Tower have since transferred their German assets to ATC Europe (American Tower’s joint venture with PGGM, in which the towerco has a controlling 51% stake) and their portfolio has grown slightly over the last six years to a total of 2,211 sites (as of Q1 2020).

The announcement that Telefónica will be selling 10,100 sites to Telxius does not radically alter the dynamics in the German market, although it rules out any obvious opportunities for ATC Europe to expand via M&A or for another independent towerco to enter one of Europe’s most attractive telecoms markets at scale. That being said, opportunities for BTS contracts could emerge, and whilst it it is highly likely that DFMG, Telxius and Vodafone’s towerco may receive significant orders from their parent MNOs, neutrality and independence is critical to the towerco business model and as such, BTS contracts should be open to all players in the market.

New build in the German market remains significant. Vodafone has stated that it needs to add 10,000 new sites over the next four years (using either its towerco or third parties), DFMG is expected to add 2,000 new sites in 2020 alone and Telxius has a BTS contract in place to add up to 2,400 new sites for Telefónica. 

In addition to new site rollout to meet 5G and urban densification requirements, significant work is underway to extend coverage into underserved areas. In November 2019, Germany’s three operators announced an initiative to jointly cover white spots (primarily in rural areas and along transport routes) which would otherwise be uneconomic to cover. Each operator will build 2,000 sites which will be made available for the other two players to use via passive sharing agreements. Vodafone and Deutsche Telekom have also teamed up to improve LTE coverage in rural areas and along traffic routes at so called “grey spots” – areas where LTE quality coverage is only available from a single operator. The two parties plan to implement active network sharing across 4,000 antenna sites using a Multi-Operator Core Network (MOCN) approach.

As the largest economy and telecoms market in Europe, Germany represents a highly attractive and profitable market for towercos with significant growth opportunities. 4G coverage commitments and additional capacity needs, 5G rollout, the potential entrance of a fourth MNO (1&1 Drillisch), industry obligations to address white and grey spots and an underpenetrated fibre landscape all present key opportunities for towercos in the market. The addition of up to 12,500 sites adds significant value and revenue generation potential to Telxius’ tower portfolio.

Telxius was formed back in 2016, when Telefónica announced the creation of its infrastructure subsidiary, initially transferring 11,000 Spanish towers and 31,000km of subsea cabling before shortly adding 328 Chilean, 849 Peruvian, 1,644 Brazilian and 2,350 German towers to the portfolio. In 2017, Telefónica sold a further 350 Argentinian sites to Telxius before announcing in September 2019 that it planned to accelerate the monetisation of its remaining tower portfolio. The company’s remaining sites in Spain, Peru and Chile (bar a handful which could not be transferred due to contractual reasons) were sold to Telxius for an undisclosed amount, whilst the operator announced the sale of 1,909 Brazilian towers to Telxius for R$641mn. The sale of Telefónica Deutschland’s 10,100 towers marks the latest deal in this accelerated monetisation strategy (see figure two).

In addition to having acquired over 29,000 towers from Telefónica (including the latest deal in Germany), Telxius has further grown its portfolio over the past four years, deploying over 1,000 new build sites for Telefónica and third parties.

The towerco’s site count currently stands at 30,400 sites (pending closure of the deal in Germany, see figure four), with 80% of Telxius existing sites located in Europe (Spain and Germany) and the balance across Latin America.

In addition to growing their portfolio through acquisitions and BTS, Telxius has focussed heavily on driving co-location growth and, since December 2016, the number of third party tenants on Telxius’ portfolio has increased from 4,443 to 6,850 (as of March 2020) taking the company’s tenancy ratio from 1.28x to 1.34x. For FY19, Telxius’ revenues stood at €842mn, with an OIBDA of €504mn (figure five).

Whilst Telxius’ current business has been confined to towers (and the provision of back-up power to towers in Spain) and subsea cabling, Telxius long term vision (as with an increasing number of global towercos) takes other forms of network infrastructure into consideration. Speaking to TowerXchange Telxius referenced their interest in fibre to the tower, small cells, DAS and edge computing, commenting on how capex constraints will continue to encourage MNOs to share more assets, thus presenting further opportunities for Telxius.

Telefónica has mobile operations in thirteen countries (although has agreed the sale of its Costa Rican operations to Millicom) and is understood to retain a portfolio of just over 29,000 sites, having completed a number of sale and leaseback transactions to both Telxius (figure three) and other towercos (figure six). Telefónica retains around 12,000 towers in markets in which Telxius doesn’t operate (namely Colombia, Ecuador, Mexico, Uruguay & Venezuela), as well as an estimated 8,900 towers in Germany, 2,000 towers in Brazil and 6,000 towers in Argentina. In Spain, Peru and Chile, Telefónica’s site count is thought to be minimal, with all towers that could be sold to Telxius, having been sold. In the UK, Telefónica has a 50% stake in Cornerstone, their towerco joint venture with Vodafone which the operator has previously said equates to approximately 7,000 towers.

In September 2019, Telefónica announced plans to accelerate the monetisation of its tower portfolio as part of its strategy focused on enhancing value for shareholders and improving return on capital. This announcement was further reinforced by the creation of Telefónica Infra in November 2019, a new business unit into which Telefónica’s infrastructure shareholdings would be transferred, including the company’s 50.01% stake in Telxius (Telefónica having previously sold a 40% stake in Telxius to KKR in 2017 and an effective 9.99% stake to Pontegadea in 2018). Speaking on the creation of Telefónica Infra, Telefónica commented on the goal to “highlight the value of a unique portfolio of assets, focusing on the development and monetization of towers, DAS, data centres - including EDGE-, greenfield fibre projects or submarine cables, among others”, adding that “Telefónica Infra will take an open approach to agreements and shareholder structures (majority or minority), and to find the best partners for each type of asset”.

In December 2019, Telefónica announced the sale of over 2,000 sites in Colombia and Ecuador to Phoenix Tower International bringing Telefónica’s total towers sold in 2019 to 6,000 sites. One can assume that Telefónica will be looking to sell further assets across its operations, with towers in its core markets of Brazil and Germany likely to attract the interest of Telxius should they come to market. In the UK, Telefónica’s towers are held in Cornerstone, a joint venture with Vodafone. A sale of Cornerstone, or a stake in Cornerstone is expected in the next 12 months, with banks reportedly having been appointed to oversee the process and several parties having expressed their interest in the asset.