Citi’s TMT team in New York and London is renowned for its work advising on global telecom infrastructure transactions, including FSS and MSS (Fixed and Mobile Satellite Services), fibre and data centres. However, the majority of their work has been on telecom and broadcasting towers, initially driven by the three U.S. publics’ consolidation of their domestic market in the early part of the millennium, later extending into LatAm, Africa, Asia and most recently Europe. Citi’s Gaurav (“Guri”) Bath leads their coverage of Global Telecom Infrastructure and has spent a lot of time in Europe recently so TowerXchange asked him to contrast the European tower market with those Citi has served, and continues to serve, in MEA.
TowerXchange: How would you characterise the maturity of the European tower industry?
Guri Bath, Director, TMT, Citi:
From an independent multi country tower operator perspective I would say that the industry is in its early stages. However, significant developments have taken place over the recent past with the emergence of a publicly listed Cellnex in Spain and Inwit in Italy.
Previously the European tower market was very localised within each country – TDF in France, Arqiva in the UK, EIT and Raiway in Italy et cetera – and the European market has evolved in a different fashion from US tower market. Many European towercos started as broadcast service providers and later expanded into telecom site hosting. Unlike the US towercos that generate 90+% of their revenues from telecom site hosting the Europeans still generate a significant portion of their revenue from the provision of broadcasting and other services. For example over 60% of TDF’s revenues come from broadcasting and media services, a slightly higher percentage for Arqiva and circa 37% for Cellnex.
From a telecom site hosting point of view, we’re seeing and expect to continue seeing more transaction activity in Europe especially with Cellnex having gone public with a stated intention to create a pan-European telecom site hosting business.
The public market’s reaction to the Cellnex and Inwit issuances has been very positive and their valuation levels should support transaction activity; as we speak Cellnex is trading at a 17.2x EBITDA multiple relative to U.S. towercos at 16.5-19.5x – so Cellnex, which is a tax payer, is close to the average of U.S. comps which are either REITs or have substantial NOLs.
Investor sentiment, needless to say is enhanced by the fact that until Cellnex there was almost no opportunity to invest in telecom infrastructure in Europe from a public market perspective and participate in the opportunity for inorganic growth across the continent.
For some time, the view of the investment community has been that European MNOs need to divest non core assets to deploy more capital into their networks. According to GSMA statistics, over recent years capex per subscriber has been around US$80-90 in the U.S., whereas Western Europe has lagged at US$40-50 per subscriber. Network capacity in Europe needs to keep up with the exponential growth in demand for data all of which bodes well for the telecom infrastructure sector in Europe.
TowerXchange: Could we see the volume of tower transactions pick up in Europe like we saw in Africa over the last 18 months?
Guri Bath, Director, TMT, Citi:
The prospects for deal flow vary by market. I would put the UK and France in a different bucket than the rest of Europe: Arqiva and TDF have been established a long time and, apart from a handful of interesting smaller independent towercos, the UK and France tower markets are relatively mature. Excluding those markets, it feels like early days for European towers, with MNOs still evaluating the impact of tower divestiture on their competitive position: European operators are still trying to get comfortable with the idea that their tower network may no longer be a strategic differentiator.
Appetite also varies by operator. Some who have done a number of tower transactions in other markets be it LatAm, Africa or even Europe, clearly see the advantage of divesting towers and could take a leading approach in Europe as well.
One of the factors that could impact the pace of transaction activity in some European markets is that the incumbent operator doesn’t necessarily need cash from tower monetisations to improve their capital structure. In addition, many of the European operators have access to long term unsecured debt at very attractive rates – so tower divestitures would have to be at a fairly high multiple to be a compelling option given the low cost of borrowing.
The Cellnex-Wind deal in Italy will be a benchmark: operators will see how that does over the next 12-24 months. That may provide the proof of concept for other MNOs in similar positions.
TowerXchange: How does the structure of the tower market, and the opportunity to create capital value, differ given the decommissioning and broadcast elements of the business in Europe?
Guri Bath, Director, TMT, Citi:
Investors in Europe’s big four towercos, Cellnex, TDF, Inwit and Arqiva, are cognisant that they provide a different risk profile and investment opportunity compared to a pureplay telecom towerco.
Existing towercos coming into Europe are more likely to favour a traditional telecom site hosting business model and will be less keen on broadcast infrastructure, which will likely remain in the hands of operators such as EIT, Raiway, Axion, Towercast, Towercom et cetera. The US publics will be inclined to sustain their focus on the pure play telecom site hosting business model – this is their core competency and it’s what their investors understand. The broadcast business is different in terms of uptime, headcount-heavy operations to actively manage assets, and it’s a more regulated market.
Traditional telecom site hosting companies might buy broadcast assets to enter a market – for example Cellnex made a small acquisition of broadcast assets to get into Italy prior to the Wind deal – but I don’t see that as basis of growth. I don’t foresee towercos trying to consolidate European broadcast infrastructure – it’s a different animal in each country, each with it’s own unique regulatory environment.
The significance of the decommissioning play also varies by market. Markets that have had third party tower operators like the UK and France have a lower decommissioning need than in Italy or Spain, for example, where there is more parallel infrastructure. Decommissioning gets priced into M&A through location by location analysis, and here the first entrant has an advantage as they can be more selective about what they buy based on how much intel they have. Once a towerco is on the ground, they quickly build their own databases.
The other difference is higher preponderance of rooftops in European markets, which enables unique business models. There are parties out there for whom a significant proportion of their success will come from actively looking to make the rooftop business look like the greenfield tower business based on the ability to add additional tenants.
TowerXchange: Are there enough prospective buyers of European towers for MNOs to feel they can get full value?
Guri Bath, Director, TMT, Citi:
I think there are enough buyers to create healthy competition for towers in Europe. Cellnex has changed the equation, Inwit may add more competition, the Americans have dipped their toes into the market, although internationally they remain more LatAm focused than Europe, and there are several private tower companies of scale with strong financial backers who are also likely to participate.
There are also a lot of infrastructure players active on the broadcast side of the market who are expanding their interest to bid for traditional telecom tower assets. For example, we’re running a process in the Middle East in which we are seeing strong interest from strategics, private equity, SWFs, and infrastructure funds.
TowerXchange: How do the challenges involved in getting a tower deal done in Europe compare to those in Africa?
Guri Bath, Director, TMT, Citi:
The European regulatory environment is more developed than in some emerging markets, so the parameters of documentation and approvals you need are fairly well defined. Ground leases and licenses are much simpler in Europe than in Africa.
But the challenges around how much detail MNOs have on their tower portfolio are still present in both markets. In most cases the assets are still not managed independently, so there’s the same challenge for the prospective acquirer to get the necessary site by site detail.
Europe presents a less complex operating environment, with the majority of towers on grid, which provides a degree of management comfort for the seller.
Finally, it generally takes less time to get a tower transaction from start to finish in Europe than in Africa or even LatAm, again thanks to the clarity around regulations and the relative ease of managing information.
TowerXchange: Changing topics to Africa - have Africa’s ‘Big Four’ towercos now reached scale? Have they bought most of the assets they want, South Africa notwithstanding?
Guri Bath, Director, TMT, Citi:
Africa’s ‘Big Four’ towercos have definitely reached scale – each is a viable independent towerco now. Based on TowerXchange’s last report IHS has over 20,000 towers, AMT over 10,000 and Eaton and Helios Towers Africa over 5,000 each. But I don’t think the level of tower transaction activity in Africa will slow down materially – there are still significant markets where MNOs have not yet divested towers. Given the performance and operational successes to date – some isolated glitches notwithstanding – MNOs have confidence in Africa’s towercos to deliver on SLAs and will continue to divest assets and to allocate build to suit programmes.
I expect tower transactions to continue from SSA’s other MNOs. In fact, TowerXchange did a great piece showing the markets that have and have not seen tower activity in Africa (Editor: see “Contrasting the appetite to divest towers among the top African and Middle Eastern MNOs”).
TowerXchange: Since 2012, we’ve seen tower transactions in Africa focusing on the assets of the so-called tier one operators: Airtel, Etisalat, Millicom, MTN and Orange. Is there much prospect for tier two operators to partner with towercos, albeit presumably on different terms?
Guri Bath, Director, TMT, Citi:
In markets where we’ve seen transactions with market leaders, it will be easier for tier two operators to find a towerco partner. It will remain difficult to monetise a tier two operator’s towers in markets where independent towercos have not yet emerged particularly given the availability of assets from the bigger MNOs; I think the opportunity to buy assets from tier one operators will remain the focus of Africa’s towercos in the near term.
TowerXchange: How does MENA fit into this ecosystem, a region which has just seen it’s first tower transaction in Egypt between Eaton and MobiNil. Are there a number of advisors and bidders in common, or is it effectively a distinct market with it’s own drivers and benchmarks?
Guri Bath, Director, TMT, Citi:
Even though the Egypt transaction was relatively small, we believe it is a harbinger of increased transaction activity in MEA and the opportunity for the creation of an independent tower business in MENA. The success of the first sizable transaction should drive others to consider divesting assets.
In terms of overlap with SSA, there is a significant amount of overlap in advisory work – it’s critical to use experienced advisors in markets where many tower processes have started, but few have concluded successfully. In terms of buyers, I’d say the initial interest probably comes from existing emerging and frontier market tower companies that have mandates which do not limit them geographically – some of the Asian towercos also have MENA in their sights. Given the availability of assets within their existing footprints developed market towercos may take longer to move into MENA, but there is still a large group of strategic buyers and financial investors very keen to invest in MENA towers.
As a lot of the economies in MENA are oil driven, there is a lot of US$ exposure or indeed the currency may be US$ linked, which helps buyers manage one of bigger risks to the tower business.
