American Tower has announced that it has reached a deal with Telxius to acquire their c. 31,000 tower division for a total of €7.7bn. The deal is transformational in Europe, increasing the American Tower’s footprint six-fold and positioning the company in the top 5 largest towercos active on the continent. In Latin America, the deal further strengthens American Tower’s position in four existing markets. For Telefónica, the deal lops a significant chunk off their debt and enables them to focus on other core objectives. TowerXchange examines the deal, the implications for both companies and the impact on both European and Latin American tower markets.
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On 13 January 2021, American Tower announced that it had reached a deal with Telxius Telecom (owned by Telefónica, KKR and Pontegadea) to acquire their 30,722-site tower division for €7.7bn (US$9.4bn). The portfolio, spanning Germany, Spain, Brazil, Peru, Chile and Argentina will bring significant scale and a new market to the company’s European operations, whilst complementing their existing portfolios across Latin America.
The deal is structured as two separate agreements, one covering Telxius’ European assets and the other covering their Latin American portfolio, and is expected to close in multiple tranches (once the respective regulatory approvals have been obtained) beginning in the second quarter of 2021.
In addition to the acquisition of existing sites, American Tower expects to invest $500mn in the rollout of a committed pipeline of 3,300 new sites in Germany and Brazil.
American Tower intends to finance the transaction in a manner consistent with its investment grade credit rating and has fully-committed bridge financing in place. The company anticipates temporarily increasing its net leverage above 5x, with a path towards deleveraging back to 3-5x target range over time. The transaction is anticipated to be immediately accretive to Consolidated AFFO per Share.
A closer look at the portfolio scale and financials
The portfolio of towers being acquired by American Tower consists of 30,772 sites which breaks down as 12,500 towers in Germany, 11,300 in Spain, 4,000 in Brazil and the balance in Peru, Chile and Argentina [based on historical figures disclosed by Telxius, TowerXchange estimate this to be 2,000 sites in Peru, 600 in Chile and 372 in Argentina].
In the German market, around 2,400 of their towers are ground based towers with the majority of the portfolio comprised of rooftop sites; in Spain, around 6,300 towers are ground based towers with around 5,000 rooftops. In Brazil, Telxius owns a portfolio with a predominantly urban profile, especially following the Q419 acquisition from Vivo of 1,909 sites, of which 82% are in major cities and 52% strategically located in São Paulo and Rio de Janeiro. Smaller portfolios across Peru, Chile and Argentina will nicely complement American Tower’s existing footprint in CALA.
Figure 1: Geographical breakdown of Telxius’ tower portfolio being acquired by American Tower*
The average tenancy ratio of the portfolio is 1.3x, with the tenancy ratio in Germany and Spain slightly below 1.3x, and the tenancy ratio is Latin America just above, leaving a long run-way for growth. Telefónica are the anchor tenant on each of the sites in the portfolio and based on pro forma year one expectations for existing sites, will contribute 88% of property revenue. American Tower expects the relative contributions from other operators to grow, with CEO Tom Bartlett commenting that a move of the portfolio into independent hands will facilitate dialogue with other operators. The majority of sites have sufficient structural capacity for additional tenants, with startup capex expected to be in the region of US$30mn. American Tower anticipates an organic tenant billings growth CAGR of c. 6% through to 2025 (aided by an expected very low churn rate).
American Tower expects the assets to generate approximately US$775mn in property revenue, around US$410mn in gross margin, and ~US$390 million in Adjusted EBITDA at current foreign exchange rates, in their first full year in its portfolio, pro forma for contributions from the committed build-to-suit pipeline.
In terms of new builds, American Tower will add 3,300 towers in Germany and Brazil. In their Q3 2020 results, Telxius spoke of a BTS pipeline of 2,400 sites in Germany and so one can expect that the 3,300 figure breaks down as roughly 2,400 in Germany and 900 in Brazil (dependent on how much of that German new build has been executed in the past quarter).
A transformational deal for American Tower in the European market
American Tower entered the European market back in 2012 with the acquisition of 2,013 sites from KPN. In 2016 the company then partnered up with Dutch infrastructure investor PGGM (forming ATC Europe) to enter the French market, acquiring FPS Towers and their 2,482 sites from Antin Infrastructure Partners. American Tower have subsequently transferred their German towers to ATC Europe. In 2020, ATC Europe acquired a small portfolio in Poland (just 26 sites) but in spite of the company’s ongoing M&A activity on a global front, American Tower had been seemingly quiet in Europe. Their French and German portfolios had exhibited just modest growth in recent years (with American Tower reporting ATC Europe to have 2,825 French towers and 2,221 German towers in their Q3 2020 results).
Whilst no deals had been signed, American Tower had been actively examining M&A opportunities across the continent but was yet to find a portfolio of scale that matched its investment thesis. Seller valuation expectations, regulatory concerns, growth challenges or concerns over the portfolio itself all meant that they walked away from deals. Whilst Cellnex had been on a major M&A drive across the continent, agreeing sale and leaseback transactions with operators including Iliad, Salt, Play, Sunrise, Bouygues, Orange, Nos and most recently CK Hutchison, and acquiring towercos including OMTEL, Cignal, Shere Group, Alticom and Arqiva, the continent’s other multi-country listed towerco had been comparatively quiet.
Whilst American Tower had been running a profitable tower business in Europe, the company knew the benefits that scale would bring them in Europe. With new sizeable competitors entering the market in the form of Vodafone’s Vantage Towers and Orange’s soon to be launched (and as yet unnamed) towerco, Deutsche Telekom expanding its Deutsche Funkturm model to additional markets and further operators considering the creation of their own towercos (along with CALA competitor Phoenix Tower making a play in the Europe with deals in France, Ireland and now Italy), never before had it been so important to find that opportunity to gain that much wanted scale. The deal with Telxius increases American Tower’s footprint six-fold (figure 2), and catapults American Tower into being one of the continent’s most significant players (figure 3).
Figure 2: American Tower’s European footprint pending closure of the Telxius deal and realisation of BTS commitments
Figure 3: Europe’s top 10 towercos (pending closures of recently announced deals)
Germany is Europe’s largest economy and largest mobile market and the deal with Telxius will not only double American Tower’s stock of ground-based towers, but also give them access to a portfolio of over 10,100 rooftop sites in attractive locations. Such locations had been notably absent from American Tower’s current portfolio in the country and will be of critical importance in enabling American Tower to provide operators with connectivity solutions in dense urban areas. 4G rollout is still ongoing in Germany, 5G rollout is in its early stage and new MVNO, 1&1 Drillisch (who obtained 5G spectrum) will present further growth opportunities. New build requirements are also significant in the German market, with American Tower securing commitments for the rollout of 2,400 sites for Telefónica. American Tower’s principal competitors in the German market are Deutsche Telekom’s Deutsche Funkturm (with a portfolio of 31,600 sites) and Vodafone’s Vantage Towers (with a portfolio of 19,100 sites). Whilst such entities are expected to manage most of the new builds for their parent companies, American Tower have ambitious plans in terms of securing co-locations from both Deutsche Telekom and Vodafone as they begin to market their highly attractive portfolio.
The acquisition of 11,300 sites in Spain marks the entrance of American Tower into a new market in Europe, a market where Telefónica are incumbents and market leaders. American Tower will once again be competing against Vantage Towers as well as Cellnex, who American Tower compete with in both France and Poland. Orange’s new towerco is set to launch imminently introducing a third sizeable tower competitor. American Tower has secured an attractive position in a country where no other opportunities to obtain such significant scale appear to remain.
With almost 30,000 towers and four countries in their European footprint, Cellnex is poised to take advantage of future growth opportunities in an attractive high investment grade region.
Figure 4: Tower ownership across American Tower’s European footprint
(a) Germany
(b) Spain
(c) France
(d) Poland
Bolstering American Tower’s position in CALA
American Tower enjoys a leading position across multiple CALA markets, including Mexico and Brazil, but this deal will further reinforce its role and enhance its portfolio, especially in major Brazilian cities. Plus, American Tower will acquire a pipeline of BTS projects in Brazil (approximately 900 sites).
Brazil is heating up as a battlefield among mid and large towercos to consolidate the market. In fact, three deals were sealed over the course of the past few weeks with Highline do Brasil acquiring Phoenix Tower do Brasil, IHS Towers sealing a deal with Skysites and now the American Tower-Telxius agreement.
This deal will bring American Tower’s Brazilian tower count well over 20,000, add some scale to its Argentinian presence (from 120 to nearly 500), double its portfolio in Peru, while providing a little boost to its Chilean footprint. All amid a relatively quiet time for CALA build-to-suit activities.
Lastly, while American Tower has always enjoyed a strong relationship with Telefónica across CALA, this will further strengthen their ties and create some additional opportunities. In fact, Telxius had managed to diversify its client base especially in Brazil, where in 2019 nearly 50% of its new builds have been commissioned by operators other than Vivo.
Increased diversification of American Tower’s international portfolio
American Tower has always sought to strike a balance between the high growth afforded by developing markets and the low risk and low volatility of more developed economies. With the deal, 20% of American Tower’s international revenue will come from Europe, with 60% of the company’s total revenue coming from developed markets.
An increased presence in Europe will also give American Tower enhanced access to the European capital markets, enabling balance sheet diversification.
Figure 5: American Tower property revenue by region pending closure of the Telxius deal and realisation of BTS commitments in the deal
Speaking on the deal, Tom Bartlett, American Tower’s Chief Executive Officer stated, “This transaction is transformational for our European business and will establish American Tower as one of the largest independent communications infrastructure providers in Europe. It is also complementary for our Latin American portfolio and positions us to drive strong long-term organic growth across both regions while augmenting our new build programs and enhancing our relationships with key tenants. We are excited to broaden our partnership with Telefónica by acquiring a high-quality, well-located portfolio of sites that will further diversify our global footprint and enhance our ability to help provide broadband connectivity for billions of people.”
What does the deal mean for Telefónica?
Across the 2000s, Telefónica amassed a significant amount of debt following a number of acquisitions and revenues taking a hit in the face of weak Latin American currencies. Telefónica aimed to take a significant chunk out of its debt pile with the sale of its UK O2 business to Hutchison (for an initial £9.25bn, with a further £1bn due upon certain targets being met), however when the move was blocked by the European Competition Commission, Telefónica was forced to pursue an alternative strategy. Enter, the formation of Telxius.
Created in 2016, over the course of the past 4-5 years Telefónica has transferred the vast majority of its assets in Spain, Germany, Brazil, Peru and Chile to Telxius, along with assets in Argentina. In 2017, Telefónica sold a 40% stake in Telxius to KKR for €1.275bn, before in 2018 selling an effective 9.99% stake to Pontegadea for €378.8mn– taking the first steps in crystallising the value of their tower assets. In November 2019, Telefónica announced a new five point plan involving a major restructuring of the business. As part of this plan, Telefónica created Telefónica Infra, which – with 50.01% of Telxius as its main asset - aimed to optimise the value of the company’s assets, focusing on the development and monetisation of towers and other forms of digital infrastructure.
Tower assets have continued to demand a significant premium globally with M&A activity in Europe and in Brazil heating up in the past 18 months. American Tower had been looking for an opportunity to gain scale in Europe and with Telefónica being a tier one player not only in Europe, but also across several Latin American markets in which American Tower operates, the Telxius portfolio represented a very attractive acquisition target. From Telefónica’s perspective, American Tower are their largest tower provider after Telxius and represent a trusted partner to which to sell their towers.
With a 50.01% stake in Telxius, the €7.7bn sale will provide Telefónica with a €3.5bn capital gain and once the transaction is complete, Telefónica Group’s net financial debt will be reduced by approximately €4.6bn, reducing their leverage ratio (Net Debt/OIBDAaL) by approximately 0.3x.
Speaking on the deal Telefónica President, José María Álvarez-Pallete said “this is a deal that makes strategic sense within our roadmap. American Tower was our second supplier after Telxius," adding "after this great operation we will continue to focus on our most ambitious objectives: the integration of O2 with Virgin in the United Kingdom, the purchase of Oi mobile in Brazil and the reduction of debt”
The landmark deal represents an excellent win-win situation for both companies, introduces an exciting new dynamic to the already thriving European market and further enhances American Tower’s leading position across the Americas – TowerXchange looks forward to seeing what is in store for 2021!
