TowerXchange have spoken to dozens of private equity, institutional and strategic investors keen to put capital to work within the emerging European telecom tower market. So what are your investment options in Europe? Investors in listed entities Cellnex and Inwit have to date enjoyed buoyant valuations – but that opens only passive investments restricted to date to Southern Europe. TowerXchange have identified 26 independent towercos in Europe, and many are highly investible, but most are well capitalised and few are seeking new equity partners. How about Europe’s ten joint venture infrastructure sharing companies? Not easy: few if any currently solicit third party investment. The starting point for many PE firms’ investment in towers are build to suit towercos who permit, build, own and operate towers in response to MNO search rings – but TowerXchange have found few such firms in Europe. A gap in the market perhaps…
A breakdown of the European telecom tower industry by tower ownership
TowerXchange have been studying the emerging European tower industry for almost a year now, and so far we have identified 39 telecom and broadcast towercos in Europe, including ten joint venture infracos, three operator-led towercos and 26 independent towercos. In total these 39 companies own or operate 158,911 towers; 73% of Europe’s ~600,000 towers. The remaining 441,000+ assets remain operator-captive. We breakdown the ownership of Europe’s towers in figure one.
From this simple analysis, you can see that the European tower market is far from fully penetrated. Why?
Two of the three primary motivations for tower divestitures in other markets are less prevalent in Europe: many of Europe’s MNOs don’t have the same need to raise capital as MNOs do in emerging markets, nor are they motivated to outsource the expansion of their tower networks to specialist third parties during periods of intense growth. However, the third motivation, the stabilisation of opex by outsourcing or divesting non-core assets and activities remains a motivation. Meanwhile the European tower market introduces a new motivation; the consolidation and decommissioning of overlapping tower networks; creating value by reducing operating costs (primarily land lease costs) and creating value by adding more tenants to remaining towers. This new decommissioning function means business models and balance sheets in the European tower market will differ substantially from the ‘old growth’ tower industry in markets like the U.S. and India.
Figure one: A breakdown of the ownership of Europe’s ~600,000 telecom cell sites
Defining ‘towercos’ and ‘infracos’
We define a towerco as a business whose raison d’etre is to construct, consolidate AND co-locate telecom towers – with or without a hybrid business model also including broadcast towers, IoT, heterogeneous and public safety network hosting. Note that there is a sub-category within this segment: independent towercos that are majority owned by parties other than MNOs, and operator captive towercos where most or all of the equity is retained by an MNO. There are three operator captive towercos in Europe: Deutsche Funkturm, Global Tower in Turkey and the Ukraine, and Inwit (which remains 60% owned by Telecom Italia).
Europe also has a number of joint venture infracos, typically carved out of two or more MNOs, whose raison d’etre is to manage, supplement and consolidate those assets, but who don’t market the sites for co-location as proactively as an independent towerco. Typically the tower assets remain on the partner MNOs’ balance sheets, but there are instances of this business model where the passive infrastructure has been transferred to the infraco (e.g. CTIL in the UK).
A simple who’s who of European towercos is presented in figure two.
TowerXchange include in our analysis of “JV infracos” only infrastructure sharing deals which were consolidated into joint venture newcos. Note that there have been several other infrastructure sharing deals in Europe where the assets apparently remained under the ownership and management of the MNOs concerned:
Austria (T-Mobile+ Hutchison 3G)
Belgium (Orange+KPN)
Czech Republic (Telefonica+T-Mobile)
Finland (TeliaSonera+DNA)
France (SFR+Bouygues)
Iceland (Vodafone+Nova)
The Netherlands (Tele2+T-Mobile)
Romania (Orange+Vodafone)
Russia (Vimpelcom+MTS)
Figure two: Who’s who in European towercos
Time for European MNOs to cash out
Another new motivation for European MNOs to divest towers is the relative favorable relative multiple arbitrage between MNO and towerco valuations. This has never been more pronounced than when called to attention by the valuations secured by the recent successful IPOs of Cellnex and Inwit. Whether MNO’s towers sit on their balance sheet, on the balance sheet of a captive towerco or a joint venture infraco, the potential valuation of European towers at IPO, or indeed to a strategic buyer, may be at an all time high. Is it time for European MNOs to cash in their chips whilst they’re ahead in the game of passive infrastructure? Indeed, is this a game European MNOs want to be playing any more when they could take their metaphorical winnings to the spectrum auction or customer experience improvement tables?
At TowerXchange, we tend to think that four tower transactions of scale (2,000+ towers) being sold and leased back is indicative that a tower market has achieved ‘launch velocity’. That benchmark was achieved with Cellnex’s acquisition of 7,377 towers from Wind Italy, following Cellnex’s previous acquisitions from Telefónica and Yoigo in Spain in 2014, FPS’s acquisition of 2,166 towers from Bougyes Telecom in France and American Tower’s acquisition of a portfolio of 2,031 towers in Germany – the latter two deals being announced in 2012. With a further 1,822 towers acquired in five smaller sale and leasebacks in the Netherlands (KPN to Protelindo, Shere Group and Open Tower Company) and Spain (the first phase of Telefónica to Cellnex), the blue touch-paper has been lit for tower sale and leasebacks in Europe.
The inauguration of Cellnex, already highly acquisitive when fully owned by Abertis, has created another prospective counterpart for tower divestitures in a market that had previously been stymied by U.S. towercos’ reluctance to close the gap to European MNOs’ valuation of their towers. Equipped with an acquisition warchest from a successful IPO, Cellnex’s investors have bought into a consolidation narrative that will extend the towerco’s acquisition spree. So while U.S. strategic investors may have preferred to deploy their capital elsewhere whilst Europe stood still, the pipeline of tower transactions is flowing now – whether American Tower, SBA Communications or even Crown Castle is interested to tap the European tower transaction pipeline remains to be seen.
Tower builders and tower consolidators needed
The European tower market, like any tower market, is not just about large scale sale and leasebacks.
There are some great tower builders in Europe. Some are pure builders, some blend small to medium sized acquisitions into the business model. There are some very solid, investible platforms in Europe – in fact, most are very happy with their capital structure, thank you very much, and looking for more assets of a similar ilk to buy. Indeed, TowerXchange has spoken to dozens of private equity firms, infrastructure funds and strategic investors with an appetite to invest in or acquire small to medium sized European towercos. There is more capital with appetite for European tower builders (and tower consolidators) than there are investable platforms.
Consider this; there are maybe 10-12 bona fide build to suit (BTS) towercos serving a European tower market of ~600,000 towers. There are a similar number serving a Brazilian tower market which is one twelfth that size. Wireless Estimator tracks 100 U.S. BTS towercos serving a market a quarter of the size of Europe.
Why so few towercos in Europe? One explanation I’ve heard is that Europe’s tower market is saturated – it’s a consolidation game not a growth game. Well, it isn’t saturated and it isn’t just a consolidation game. In general, Europe’s tower networks are more mature than some other continents; for example there are an average of 1,673 SIMs per tower in Europe compared to 2,597 in MENA, 4,670 in CALA and 4,717 in SSA. However, Europe has considerably less tenants per tower than the U.S. and Indian markets where tenancy ratios are close to two, and where there are 2,352 and 2,091 SIMs per tower respectively, albeit obviously around half that number per BTS. There is some consolidation to be undertaken in Europe – decommissioning represents a great opportunity for tower entrepreneurs in itself – but in every market there is a need for new towers, rooftops, microcells, DAS and small cells as infill and capacity as subscribers demand more and more data, and sooner or later migrate to 4G.
There is no shortage of tower building and tower decommissioning wisdom in Europe – some of the world’s most renowned turnkey infrastructure firms come out of Europe. But there hasn’t been the same appetite to move up the value chain from building towers for MNOs to building towers, retaining those assets and leasing them to MNOs. One reason for this lack of appetite is a lack of realised towerco exits; all I can say in response to that is that any towerco will be not be short of prospective counterparts to realise their exit strategy provided they build a portfolio of several hundred to a few thousand robust tower assets in unique locations, with structural capacity for multiple tenants, and demonstrate the market potential to lease up those towers. Whether the portfolio is assembled purely by building to suit, or as a product of a decent scale decommissioning opportunity where the towerco retains the consolidated towers, European towers are becoming a safer bet.
European MNOs: it’s time to cash in your tower chips.
European tower builders: it’s time to put your chips on the table, the towerco business is now be a safe bet in Europe.
Five critical considerations to maximise towerco valuations on exit
by Nicholas Van Slyck, a skilled entrepreneur whose Costa Rican towerco was sold to SBA Communications in 2010. Nicholas is now GM – Costa Rica at SBA
PAPER - Get the paperwork done right: it’s really important to have strong ground leases and good tenant agreements in place, especially if you plan on eventually selling the business.
ASSETS - Don’t cut corners on the construction: I have seen quite a few entrepreneurs opting for cheap solutions when it came to building sites. But in the long run, this strategy won’t pay off. Building robust, multi-carrier towers with plenty of capacity will position your business on the right track to be acquired at a fair price. If a buyer has to reinforce your towers, this will have a negative impact on your ROI.
PERMITS - Ensure your permits are in place: some towercos start building sites without the necessary permits in an attempt to speed up the process. But permits create immense value for your portfolio and, especially in a place like Costa Rica where sometimes as many as eight or nine permits are needed, you’d better get things right from day one.
RATES - Negotiate the right rental rates with tenants: I have seen some small towercos agreeing very low lease rates in an effort to gain business but again, this strategy won’t pay off and will affect the payout on exit. Aim for good, fair market rates with all your tenants.
GROWTH - Lease up: a good tower professional needs to keep an eye towards acquiring a second, a third and even a fourth tenant if possible. That’s where the real value is. If your plan is to build single tenant towers in rural areas with limited lease up potential, you might want to re-think your business model.
