A forthcoming sale of Telecom Italia towers will be the most significant such transaction in Europe in 2014. The acquirer will become the largest independent towerco in Italy. Italian operator WIND, a subsidiary of the Russian Vimpelcom, is also considering a tower sale. If both of these initiatives come to fruition, the coming 12 months will thus see either two competing independent towercos, each with a strong base of secure revenues, or, alternatively, a single towerco that will dominate the market and become a significant international force. Conor Plant of consultancy Hardiman Telecommunications Ltd. reviews the Italian vista and the prospects for success.
There is no surprise in the announced Italian tower sales. Capital requirements of LTE rollout have stimulated tower sales Europe-wide. Notable recent transactions include those of Bouygues in France, E-Plus in Germany and Telefonica in Spain. T-Mobile is planning the sale of Austrian towers. The UK and France feature vibrant independent sectors.
Simultaneous sale of two tower portfolios, as in prospect in Italy, is unusual. This is because simultaneous sales have a probable effect of depressing valuations. Set against this is the fact that Italian mobile usage is high as against European norms. Pressures on Italian operators to raise cash in order to fund deployment of LTE are correspondingly high.
There is considerable overlap of coverage by the various Italian operators. Tower sharing has to date has been implemented on 20% of sites only. Considered from a towerco perspective, this presents opportunity for consolidation and optimisation, thereby achieving efficient operation, economic deployment of capex and correspondingly lowered opex.
Tower portfolios are typically sold with contracted revenue for up to ten years post-sale. Base-line revenues are thus secured. At this time, opportunities for revenue increase present in that LTE cell sizes, for capacity reasons, are typically smaller than those of GSM and 3G. This results in increased demand for antenna and base station hosting. DTT deployments may also provide additional revenue opportunities.
All Italian MNOs have committed to rolling out LTE. TIM’s LTE currently covers 37% of the national population. This will be extended to 60% over the coming year. The requirement for LTE sites runs to 7,000. Vodafone and 3 Italia are also actively rolling out, and WIND will commence shortly. Replication of LTE rollout, in the sense of construction of similar sites by all operators, would be wasteful and inefficient. It is unlikely. It may be noted that the TIM portfolio, which runs to 10,000 towers, features a significant number of urban rooftop sites. These are in premium demand for LTE deployment. LTE, in urban implementations, requires small cell sizes and low-placed rooftop antennae.
The logic underpinning consolidation in the Italian tower sector is compelling. Nevertheless, it should be underlined that success is not assured. A proposed joint sale of towers by 3 Italia and WIND failed to find buyer in 2007. The promoters of the initiative - which encompassed 18,000 towers - held that market conditions were not conducive to achieving the desired price. This raises the matter of reasons why market conditions are indeed conducive to success at this time.
The opportunities in the Italian tower sector are clear. The current replication of tower coverage is inefficient. Operators need to liberate capital. Consolidation will bring clear opex efficiencies. Infrastructure sharing will accelerate rollout of LTE. Significant investor interest may be expected
It is to state the obvious that significant questions overhang the medium-term prospects of the Italian economy. Nevertheless, as a general matter of international TMT investing, return of financial stability and corresponding investor confidence is certainly evident. We have noted that Italian mobile usage is high by international comparison. The mobile sector, while not entirely invariant against underlying economic conditions, continued to perform during the downturn. It is also the case that the seven years since the unsuccessful initiative by 3 Italia and WIND have seen emergence of confidence and robust planning against LTE. As of 2007, LTE, while in prospect, had not yet been subjected to rigorous business analysis. Operators were still wary of possible repetition of the experiences of 3G rollout, when investment was made considerably in advance of demand. Demand for high speed data communications, as evidenced by the phenomenal growth of social websites and streaming applications, is now clearly in advance of investment. LTE will meet this demand.
A further positive factor is investor comfort with tower transactions in general and with business models and plans of independent tower operators in particular. While not unknown as of 2007, independent tower initiatives have been significantly proven in the intervening years. Towercos, as business propositions, have transited from being perceived as novel, and possibly interesting, to become, as of now, well-recognised as mainstream telecommunications initiatives, and amenable to analysis according to established KPIs.
The opportunities in the Italian tower sector are clear. The current replication of tower coverage is inefficient. Operators need to liberate capital. Consolidation will bring clear opex efficiencies. Infrastructure sharing will accelerate rollout of LTE. Significant investor interest may be expected.
