It’s ironic that clarity on the future of Italy’s telecom and broadcast towers should be provided at meetings in Chicago rather than Rome or Milan, but it’s also appropriate given growing international investor interest in Italy’s towers. TowerXchange were invited to keynote the RBC Towers Investor conference in Chicago, and subsequently met with the CEOs of EI Towers, Rai Way, Inwit and the Head of Investor Relations at Cellnex. Respecting the confidentiality of those conversations, here are a few impressions we were left with.
EI Towers – Rai Way merger a distinct possibility in medium term
Whilst it won’t happen within the next 12 months, the consolidation of Italy’s two broadcast towercos, Mediaset’s EI Towers and Rai Way, seems a distinct possibility within a 12-24 month timeframe. In an era of infrastructure sharing, there is simply no need for parallel broadcast infrastructure. An estimated 60% of EI Towers and Rai Way’s sites are in overlapping locations.
Those who follow tower industry news will be aware that EI Towers’ initial interest in acquiring Rai Way earlier in 2015 was met with a distinctly negative response by government stakeholders. Whilst Rai Way is an autonomous business with it’s own decision making authority, when it comes to M&A, the State remains a critical stakeholder. Therefore there are two key hurdles which must be overcome to facilitate consolidation. First, government stakeholders must either fully buy-in to consolidation, or relax a regulation that requires that broadcast towercos should remain at least 51% state controlled. Secondly anti-trust acceptance is required that broadcast towers are a “natural monopoly” run most efficiently by a single provider.
Another issue to be resolved will be the shareholding to be retained by Italy’s leading broadcasters Mediaset and RAI – each broadcaster retaining 15% equity with the balance being floated on the public markets was one structure suggested.
Both EI Towers and Rai Way are already listed entities, and each company owns a similar sized 2,300 broadcast tower network. Rai Way operates at an EBITDA margin just above 50%, EI Towers just below. Their business models differ in that EI Towers manage passive infrastructure only, whereas Rai Way also manages active equipment for their broadcast clients.
Italy’s broadcast towers are increasingly being promoted for co-location by telecom tenants as their high coverage levels (over 99% for Rai Way, 96% for EI Towers) mean that co-location on their sites can extend telecom coverage beyond what could be economically achieved alone. Rai Way report that 8% of their 2,300 towers deliver 80% of coverage, ~200 deliver the next 10%, meaning ~2,000 towers are required to provide the last 10% of coverage – illustrating the geographical disbursal of broadcast towers. Meanwhile the hilltop sites, height and structural capacity of broadcast towers makes them attractive potential hub sites for MNOs’ microwave networks.
Rai Way and EI Towers have both diversified their revenue streams to sell co-locations to telecom clients, albeit with contrasting approaches. Since Q4 2014 Rai Way have dedicated resources to leasing up their existing towers, and report having MNO tenants on ~700 of their sites, as well as towerco’s usual “non-traditional MNO” tenants: emergency services and fixed wireless access operators. In contrast EI Towers’ TowerTel has acquired 700 telecom towers with an aggregate EV of up to €55mn, ~300 of which have been added through several small acquisitions in the last year (for an example, read TowerXchange’s interview with Tecnorad later in this edition). Mobile clients represented 8.5% of EI Towers’ core revenues in FY14 (compared to 84.9% from broadcast).
The broadcast tower segment in Italy could be seen as a test case for the rest of Europe. The potential to create efficiencies through consolidation, and to create new revenues through diversification into telecoms, may be demonstrated by EI Towers and Rai Way in the coming two years.
Share price performance of Italy’s four towercos in the last year
Who will acquire Inwit?
Inwit’s CEO Oscar Cicchetti made for an eloquent and knowledgeable representative in Chicago. With a successful IPO behind them, Inwit’s Board of Directors are ready to relinquish control of the towerco, and the process to sell at least two thirds of TIM’s remaining 60% stake in Inwit is well under way.
Inwit has 11,519 towers and a tenancy ratio of 1.55. TIM are obviously the anchor tenant, with Vodafone co-locating on many of the sites.
The current share price of Inwit, plus the premium necessary to close a deal, may price it beyond the reach of all but the most enthusiastic prospective acquirers – unconfirmed reports cite Cellnex, together with F2i, EI Towers and American Tower as bidders for Inwit. F2i is Italy’s leading infrastructure fund, whose investments include a majority stake in fibreco MetroWeb. They were rumored to have bid on the Wind tower sale process from which Cellnex ultimately emerged victorious. While the price of Inwit may be high, the company has no debt, giving prospective acquirers an opportunity to minimise the increase in their own leverage.
TIM’s contract with Inwit, which is based on an ‘all you can eat’ flat fee regardless of how many sites are used and what equipment is on those sites, will probably need to be renegotiated by any future prospective acquirer. On the positive side, Inwit’s agreement with TIM also includes a commitment for the operator to add 2,500 further tenancies, and a programme to reduce costs through the decommissioning of several hundred sites overlapping with the network of Inwit’s other major tenant, Vodafone Italy.
Are any of Italy’s remaining operator-captive towers acquirable?
Vodafone Italy has an estimated 11,400 towers. While they have shared a large number of sites with TIM / Inwit, Vodafone has historically been reluctant to divest tower assets, preferring to retain them on their balance sheet or hold them close in operator-captive ventures such as CTIL in the UK or NetShare in Ireland. A tower portfolio more likely to come to market in Italy might be Hutchison / 3 Group’s 7,000 towers, which could be released as a product of the Wind-Hutchison merger. Wind has also retained around 2,600 towers after selling the majority to Cellnex.
Who owns Italy’s 47,517 telecom and broadcast towers?
The current scale and potential opportunities within Italy’s tower and small cell markets
TowerXchange estimate there are around 42,917 macro telecom towers in Italy in addition to the 4,600 towers built for broadcast.
Coverage is more or less complete, and there is significant parallel infrastructure in Italy – decommissioning may outstrip an annual macro site growth rate of around 1% in the coming years. Decommissioning is value accretive for Italy’s towercos – with tenants consolidated onto the most attractive / robust of two overlapping towers, the capital deployed to remove or relocate a tower and to liquidate the remaining lease is quickly recovered by the savings on that lease. As long as CTOs can be comforted that there will be no interruption in service, the full benefits of decommissioning can be realised.
there is significant parallel infrastructure in Italy – decommissioning may outstrip an annual macro site growth rate of around 1% in the coming years
Experts suggest that each MNO might need around 20,000 base stations mounted on macro sites to achieve full coverage and adequate capacity in Italy. As Italy consolidates from a four MNO to a three MNO mobile market, and as independent towercos acquire a the majority of towers and make them available for co-location, the goal could be to drive Italy as close as possible to a market of 30,000 towers with a tenancy ratio of two. In the near term decommissioning programmes target hundreds not thousands of towers, but if Italy’s restrictive EMI laws change, then decommissioning could accelerate.
The fiberisation of Italy remains incomplete, but there seems to be a mixed appetite from Italy’s towercos to deploy capital into fibre – some foresee return on capital invested being slower than when investing in towers, others are attracted by the opportunity of FTTT to increase available bandwidth at their towers while enabling new wholesale broadband service offerings. Less capitally intensive investment in small cells and IoT infrastructure may be more appealing in the near term. With an estimated ten small cell sites required for every macro site for 5G, there will be an opportunity for the country’s towercos to play a critical role in the creation of a heterogeneous, high performance, shared network for Italy.
Italy’s ‘middle market’ towercos
Over 2,000 Italian broadcast and telecom towers, representing around 5% of the total stock of towers in the country, remain in the hands of local turnkey infrastructure firms and private landlords. However, the majority of the bona fide Italian ‘middle market towercos’ – independent developers who build a portfolio dozens or hundreds of towers with a view to driving to scale or future divestiture – have already been acquired.
Cellnex acquired TowerCo for €96.4mn in May 2014 and EI Towers closed the acquisition of Tecnorad’s 134 tower portfolio for €17mn in Summer 2015. EI Towers acquired seven small towercos in 2014 and is currently in the process of rolling up almost 200 further sites, mainly telecom sites, across 14 smaller acquisitions – the fragmented nature of their rollup being illustrative that Italy’s remaining independent towers are largely held in small portfolios of less than 20 towers each.
