In a recent analysis, RBC Capital Markets assessed the potential benefits of a consolidation between Cellnex and Inwit. Cellnex underwent an IPO earlier this year and is now is listed on the Madrid stock exchange with a market cap of around €3.5bn (at time of writing) while Inwit’s IPO is expected to commence over the next few days with an initial expected stock price between €3.50 and €3.65. In this article, TowerXchange reports key data and projections as released by RBC and draws its own conclusions on the possible merger between the two entities.
The Italian tower industry moves towards site rationalisation
In its report, “What’s Inwit for cellnex”, RBC Capital Markets stated that a merger between Cellnex and Inwit “could generate substantial additional value beyond an IPO, while a cellnex-Inwit combination would be accretive by over 20% to FCF per share.” Much of the value creation comes from RBC’s estimate that “of Inwit’s 11,500 towers, over 5,000 overlap with Cellnex, providing substantial scope for site rationalisation, especially when combined with Inwit’s own organic growth plans.”
TI is still undergoing an expansion phase and an alliance between their towerco and Cellnex, whose anchor tenant in Italy is primarily Wind, would enable the two operators to share sites and optimise capital deployment. In fact, RBC noted that “during the IPO of Cellnex, they estimated that approximately 50% of the Wind tower network had a competing site, implying around 4-5,000 sites overlapped. Combined with site expansion plans across carriers, this could be as high as 7,000.”
A rationalisation plan with the aim to decommission competing sites and strengthen structures in key locations could provide substantial savings to the merged entity, especially in terms of reduced ground rents, which in Italy is estimated around €12,000/site per year.
How a combined entity would be beneficial for all parties
RBC’s analysis highlights the positive consequences to be derived from a potential merger of Cellnex and Inwit. They suggest a “trade sale of Inwit would be accretive to TI in almost all scenarios given a) cash element likely at a premium to stand alone trading multiples and b) equity retained in newco likely also trading at attractive multiples. This scenario could create over €600mn incremental value.”
RBC created a base case assuming that “Inwit is acquired at 18.0x EV/EBITDA with TI (and shareholders) accepting 50:50 mix of cash and equity. This would give TI (and shareholders, post an IPO) a 24.7% stake in NewCo and leave the newco with 4.5x net debt/EBITDA at the end of 2016E.”
“For cellnex investors an acquisition even at 18.0x EV/EBITDA (a merger with Inwit) would still be significantly accretive, over 20% by year four on our estimates.”
Conclusion
In a recent interview with the Financial Times, TI’s CEO, Marco Patuano stated that there were “several options on the table” for Inwit, including “a potential deal with a rival tower company such as Cellnex”. He went on stating that Inwit “could also be a good investment for companies outside of Europe as the first step into the regional tower market.”
We recommend you read RBC Capital Markets’ “What’s Inwit for cellnex” research note where the models and financial assumptions are explained in detail, but it is clear that there are compelling prospective synergies between Cellnex and Inwit, and that the latter’s IPO may be a precursor to subsequent M&A activity.
TowerXchange believes that the Italian market is likely to witness further consolidation initiated by both Inwit and Cellnex in the near future but whether via a merged entity or not, much will depend on the outcome of Inwit’s IPO and the Italian regulator’s inclination to allow a consolidated entity to own ~46% of Italy’s towers.
On the other hand, as per Patuano’s statement, Inwit could represent a solid investment for foreign entities looking at entering the European market but so far the likes of SBA Communications, Crown Castle and American Tower - beside its Germany investment and a conservative interest in the Wind portfolio - have shown little appetite for the region.
Recommended further reading, RBC Capital Markets research note “What’s Inwit for cellnex”
