On 12 November, CK Hutchison and Cellnex announced that they had reached a series of agreements whereby Cellnex would acquire 24,600 CK Hutchison towers across six European countries. The deal, for a total consideration of €10bn will involve Cellnex paying €8.6bn in cash and providing €1.4bn in new Cellnex shares (equivalent to a 5% stake in the company). With the transaction, Cellnex will enter three new markets – Austria, Sweden and Denmark – whilst strengthening its position in Italy, the UK and Ireland. The deal marks the largest tower transaction globally to date (outside of India) and cements Cellnex’ position as Europe’s largest towerco. TowerXchange examines the deal and the implications for the European market.
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The events leading up to the deal
In July 2019, CK Hutchison announced plans to carve out their European towers into a separate unit, CKH Networks. The news followed hot on the heels of Vodafone’s announcement that they too were carving their assets into a separate towerco, and shortly afterwards Orange also revealed tower carve out plans, starting with their French and Spanish operations. Plans for the monetisation of CK Hutchison’s towerco had been the subject of much speculation; would they follow an IPO route as Vodafone had laid out for Vantage Towers; would they pursue a sale of a minority stake as Telefónica has done with the sale of 49.99% in Telxius to KKR and Pontegadea [since this article was written, Telxius has sold their tower division to American Tower]; or would they look to divest their portfolio to an independent towerco. When Hutchison’s CEO was questioned back in July on whether the carve out was a pre-cursor to spin-off he answered a flat “no”, but fast forward 12 months and rumours about a potential sale to Cellnex had started to swirl.
The formation of CKH Networks was finalised by summer 2020 and in July, Cellnex finalised a €4bn share capital increase, speaking of M&A opportunities in the European market aggregating to around €11bn. In October Cellnex reached an €800mn deal with Iliad to acquire a 60% stake in Play’s 7,000 site tower portfolio in Poland, leaving c. €10bn of opportunities still out there. Cellnex’ advanced discussions with Hutchison regarding their towers became one of the industry’s worst kept secrets, leading Hutchison to confirm in their Q3 results that a deal was on the cards and could be reached imminently. On 12 November the deal was announced.
What is the structure of the deal?
Cellnex has reached a series of agreements with Hutchison across the six markets (with separate transactions for each market), with the deals expected to complete (following the obtaining of necessary approvals) on a staggered basis over the next 18 months [as of 11 January deals in Austria, Ireland and Sweden have closed]. Cellnex will pay €8.6bn in cash and issue €1.4bn in new shares (equating to a 5% stake in the company), coming to a total deal value of €10bn. The transactions also include agreements for the rollout of up to 5,520 sites over the next eight years, for an additional investment of €1.4bn by Cellnex.
Cellnex will pay cash at closing of the acquisitions of Sweden, Austria, Italy, Ireland and Denmark. In the UK, Cellnex will pay with cash and new Cellnex shares at closing of the deal. The cash component will be paid through existing cash reserves and available liquidity (Cellnex having completed a €4bn share capital increase earlier this year).
Cellnex and Hutchison will sign 15-year MLAs, extendable for a further 15-year period and subsequent periods of five years.
What assets are included in the transaction?
In the deal, Cellnex will acquire 8,900 sites in Italy, 1,150 sites in Ireland, 2,650 sites in Sweden, 1,400 in Denmark and 4,450 sites in Austria. In addition, Cellnex will acquire the “economic risks and rewards referenced in CKH’s interest in its passive infrastructure portfolio in the UK”. Hutchison’s UK towers are managed in by MBNL (their 50:50 joint venture with BT’s EE) which also manages co-locations on third party sites for its parent companies; MBNL will continue to operate following the deal.
How does the BTS component break down?
In many of Cellnex’ recent transactions, the company has agreed build-to-suit commitments in addition to the acquisition of existing towers, providing solid organic growth potential. In the Hutchison deal, the two parties have agreements in place for Cellnex to invest a further c. €1.4bn in rolling out 5,250 sites for Hutchison over the next eight years. This breaks down as 1,100 new sites in Italy, 600 in the UK, 100 in Ireland, 2,250 in Sweden, 500 in Denmark and 400 in Austria.
How does the deal impact Cellnex’ portfolio?
To say the deal is transformational is an understatement, adding 24,800 existing towers – an increase of 55% - to Cellnex’s tower portfolio which stood at 44,773 sites as of Q320 [Q3 figures exclude the 6,911 sites Cellnex is acquiring in Poland]. The deal also adds 5,250 sites – an increase of 60% to Cellnex’ BTS pipeline of 8,658 sites reported their Q320 results [figures excluding the Poland deal which itself includes a further BTS commitment of 4,979 sites].
With the transaction, Cellnex will enter three markets, Sweden, Denmark and Austria – markets where independent towercos are yet to get a foothold, and will gain a new anchor tenant across Italy, the UK and Ireland.
Estimated additional EBITDA will be around €970mn once all the assets have been acquired and new sites rolled out (including the company’s estimates on leases to third parties), free and recurring cash flow will grow by an estimated €620mn and group turnover will increase from €1.2bn to €3.8bn. Cellnex’ contracted sales backlog will increase by over 60% taking it to €86bn.
Figure 1: Cellnex’s pan European tower count and build-to-suit pipeline*
* Existing site count and BTS pipeline reflect Q320 numbers. Sites being acquired and additional BTS pipeline also include Play deal in Poland. In the UK Cellnex will acquire the economic risks and rewards referenced in CKH’s interest in MBNL which equates to the 6,000 sites shown here.
How does the deal affect the lay of the land in the six markets it covers?
Italy
Cellnex already had a sizeable presence in the Italian market having acquired towers from both Wind (at the time owned by Vimpelcom) and Iliad. Whilst Cellnex had been briefly enjoying the number 1 market position in Italy following the closure of the Iliad deal at the end of 2019, the announcement earlier in the same year by Vodafone and INWIT that they were to combine their tower portfolios meant that stint was short lived. The merger of Vodafone’s towers into INWIT was completed in March 2020 and with a newly combined portfolio of 22,100 towers, INWIT once again retained top spot.
The Hutchison deal will bring Cellnex’ portfolio to 21,086 sites and take their build to suit pipeline to 3,463 sites pitting them very much neck and neck with INWIT (which itself has a contracted BTS pipeline of 2,400 new sites). Each towerco has two anchor tenants, with the market share of INWIT’s anchor tenants (TIM and Vodafone) just slightly above that of Cellnex’s (Iliad and Wind Tre).
A new towerco competitor is set to enter the Italian market, with Phoenix Tower International having announced the acquisition of EI Towers’ Towertel and secured the rights to market and lease 1,600 broadcast sites owned by EI Towers. Whilst dwarfed in size by their larger peers, PTI has been successfully competing against much larger infrastructure players such as American Tower and SBA Communications in CALA and their nimble and flexible model will continue to challenge Cellnex and INWIT.
Beyond PTI, HighTel is the other towerco of note in the Italian market, after which there are a number of small scale ‘mom and pop’ towercos whose portfolios could make attractive acquisition targets for the larger players in the market.
Figure 2: Tower ownership in the Italian market
Ireland
Cellnex entered the Irish market following the acquisition of towerco, Cignal (Cignal having previously acquired the towers – and the land under third party towers – of state forestry company, Coillte back in 2015). The deal with CK Hutchison will provide an all-important anchor tenant to Cellnex’ operations, with Vantage Towers having Vodafone as anchor tenant and PTI having eir as their anchor tenant.
Ireland has a long tail of independent towercos active – some of which, such as Brookfield-backed WIG or Towercom (which acquired Eircom’s sites back in 2007) - may have been eyeing opportunities to scale-up in the Irish market. Deals by each of the operators in 2020 (eir selling to PTI, Vodafone creating Vantage Towers and more recently Hutchison selling to Cellnex), have all but cut off such opportunities. With a fragmented towerco ecosystem, TowerXchange anticipates that some of the country’s larger players may look to roll up their small counterparts.
Figure 3: Tower ownership in the Irish market
United Kingdom
The UK has always been an important market for Cellnex. The towerco entered the market in 2016 with the acquisition of Shere Group, Cellnex then signed an agreement with BT to manage and market 220 high towers for them and then achieved the much-wanted scale with the acquisition of Arqiva’s telecoms division and its 7,400 sites (as well as rights to market a further 900 Arqiva sites). With the exception of Wireless Infrastructure Group (with their 2,050 sites), Digital Colony’s Freshwave (with a portfolio of 142 macro towers) and a handful of smaller towercos, the rest of the UK’s towers are managed by two joint venture towercos, namely Cornerstone (a joint venture between Vodafone [Vodafone’s interest has since been transferred to Vantage Towers] and Telefónica) and MBNL (a joint venture between BT (EE) and 3 (Hutchison).
Cellnex’ deal with Hutchison gives Cellnex the economic risks and rewards referenced in CKH’s interest in MBNL – effectively adding 6,000 sites to the tower portfolio that Cellnex derives revenues from in the UK.
[Since this article was written Vodafone and Telefónica has announced the commercialisation of Cornerstone, with the two parties entering into long term MSAs with Cornerstone and Cornerstone established as the preferred supplier of new sites for both entities. Vodafone have also transferred their 50% interest in Cornerstone to Vantage Towers.]
Figure 4: Tower ownership in the UK market
Austria
The entrance of Cellnex into the Austrian market will mark a new dawn in the country, where independent towercos are yet to operate.
Deutsche Telekom owned Magenta Telekom has reportedly carved out its assets into Magenta Telekom Infra, although its plans for the unit are not yet known. In Germany, Deutsche Telekom’s towerco, Deutsche Funkturm has been operating commercially for a number of years, and this model has been replicated in the Netherlands with the formation of Telekom Infra. Both units are currently held under DT’s “GD Towers” unit and TowerXchange anticipates that their Austrian assets will also move here.
A1 (Telekom Austria) are yet to reveal concrete plans for their towers, although stated in their Q320 results that they were “working on development of alternatives that would allow us to reap more benefits from tower assets through a targeted management focus on internal efficiencies and higher tenancy ratios” implying the creation of a towerco business unit. In Mexico, América Móvil – Telekom Austria’s majority shareholder – has carved out their passive infrastructure into Telesites (which has listed shares on the Mexican stock exchange).
Cellnex will be well positioned to carry out new site build for both Magenta Telekom and A1, adding to their 400-site BTS programme for CK Hutchison. Should either operator consider a tower sale, one can expect Cellnex to be at the front of the queue as the only independent towerco currently operating in the market
Figure 5: Tower ownership in the Austrian market
Denmark
There are four MNOs in the Danish market which have pursued three different strategies when it comes to the management of their tower portfolios. Telenor and Telia share their networks through the JV infraco TT-Networks which was established in 2012 and involves both active and passive sharing; TDC have separated out their service and infrastructure divisions, with TDC Net now managing the operator’s infrastructure for fixed and mobile networks; and CK Hutchison have agreed the sale of their towers to Cellnex.
Cellnex’ strategy is unlikely to disrupt the network sharing venture between Telia and Telenor. Whilst the two players have begun to explore alternative strategies for their tower portfolios in other markets (forming Telia Towers in Norway, Sweden and Finland and forming Telenor Infra in Norway), the Danish joint venture appears here to stay (for now at least).
TDC has yet to hint at any further plans for TDC Net whose remit includes both fixed and mobile networks. Whether they decide to spin out their tower unit into a separate entity to potentially monetise (a strategy that Telstra has announced in Australia given the high appetite and valuations for towers) remains to be seen, but exposure to working with an independent towerco such as Cellnex could tempt them to consider such a model.
Figure 6: Tower ownership in the Danish market
Sweden
In Sweden, Cellnex will acquire 2,650 CK Hutchison sites in the country, with a portion of CK Hutchison’s sites being managed by their JV with Telenor, 3GIS. The Swedish market is characterised by a number of tower joint ventures between the operators (see figure 6), some of which are expected to be wound down as 3G is switched off in the country.
In Sweden, Telia has created Telia Towers, although whether it plans to monetise the unit remains to be seen; Telenor has created Telenor Infra in Norway and has stated that they plan to move forward with a similar strategy in other markets; Tele2 has hinted that they intend to do more in terms of sharing and separating out their infrastructure assets but has yet to reveal any concrete plans. Exposure to working with Cellnex in Sweden (and also Denmark for Telia and Telenor) may help guide some of their decision making going forward.
Figure 7: Joint ventures in the Swedish market
Figure 8: Tower ownership in the Swedish market
What’s next for Cellnex?
Pending closure of the Hutchison and Play deals, Cellnex total site count will jump to 84,404 sites, with this figure set to increase to over 103,000 once BTS commitments are realised in the coming years. Drawing comparisons with US peers Cellnex note that in the c. five years since their IPO they have amassed 103,000 sites; in the same five year time period post IPO their US peers had amassed just 35,000. Whilst Cellnex include BTS and sites yet to close in their figures, and their US counterparts tend to report closed sites only – Cellnex’s current site count of 52,893 which should reach 84,404 in 2021 when all the deals are closed, still positions them firmly ahead. Cellnex note that there is a historical correlation between the number of sites and share price of US towercos (figure 9) and Cellnex believes that they can follow a similar path.
Figure 9: Correlation between number of sites and share price of Cellnex and US peers
Image taken from Cellnex’ Hutchison deal presentation
So what is the runway for growth in the European market?
TowerXchange’s research suggests that are currently just under 707,000 towers in the European market. When the Hutchison and Play deals are closed, Cellnex will own around 12% of Europe’s towers, other independent towercos own a further 11% of Europe’s towers (pending closure of American Tower’s acquisition of Telxius). There exists the opportunity for Cellnex to rollup other independent towercos in the European market as we have seen them do with companies such as Cignal and Shere Group, thus presenting some incremental inorganic growth.
There are just over 305,000 towers captive on MNO balance sheets, equating to 43.2% of Europe’s total stock. Not all of these operators may want to sell, and certainly not all will have portfolios that Cellnex will want to buy but there is significant runway for growth. In terms of who may look to sell, Polkomtel in Poland has announced that it is considering a sale of its c. 7,000 tower unit, plus VEON has is reportedly reconsidering the sale of assets in Russia and the CIS after having cancelled a sale process a few years back.
On top of MNO owned towers and other independent towercos representing acquisition targets, so too are MNO-owned towercos. A number of European MNOs have created their own towerco units. In some instances, such as Vodafone’s formation of Vantage Towers or Orange’s formation of its towerco – operators have been clear that they are not looking to sell their towercos to a player such as Cellnex, but in other cases the carve out may precede a sale. Hutchison formed CK Hutchison Networks complete with a management team before agreeing a sale to Cellnex; Telxius had been operating for four years before it was sold to American Tower. Operators with their own towercos active in at least some of their markets include Deutsche Telekom, Telenor, Turkcell, Telia. Currently (pending closure of the Telxius sale) just over 155,000 (22%) of Europe’s towers are owned by operator-led towercos.
The final tranche of European towers are owned by JV infracos such as Cornerstone, MBNL, INWIT and a number of Scandinavian players. Cellnex has inherited interests in MBNL and 3GIS through their deals with Hutchison and could potentially take advantage of similar opportunites in other markets.
In their Q3 results, a number of European operators expected that we should expect announcements regarding tower strategy in their end of year results. Following this, more clarity will be obtained on where a future pipeline or inorganic growth could be. Whether Cellnex has the digestive capacity for further transactions at this exact moment in time remains to be seen, however when it comes to longer term M&A, there are wealth of opportunities still available in Europe.
On top of this, Cellnex will remain committed to organic growth in its tower business, driving co-locations, amendment revenue, securing further BTS contracts to add to its existing pipeline of 18,887 sites and exploring new service lines. In a recent interview with TowerXchange [ahead of their Hutchison deal], Cellnex’ CEO, Tobias Martinez said “The company will double its EBITDA in two years even if we were to stop M&A activity entirely and focus solely on our work orders and organic growth, delivering new BTS, decommissioning, technology upgrades, new metropolitan and central offices, fibre connectivity. This is why people buy shares, they know that we have this growth with the premium of any M&A activity on top of this”
The future certainly looks bright for Cellnex.
Figure 10: Cellnex’ history of deals in the European market
