By Laura Dinnewell, Head of EMEA, TowerXchange
NEWS UPDATE
On 10 February 2016, Telefónica announced the creation of Telxius a new global company which will bring together a selection of the group’s infrastructure assets. A number of newly created companies (including Wireless Towers) are scheduled to be integrated into Telxius over the coming months.
Alberto Horcajo, former CFO of Telefónica Brasil, has been announced as Telxius’ new CEO. In a press release it was stated that the formation of Telxius is as part of a strategy to optimise Telefónica’s asset portfolio, taking a more specialised and focused approach. The group plans to increase the number of services they provide to other operators, improving their return on capital invested and is looking at taking advantage of further growth opportunities in the sector, including the possibility of incorporating third party assets.
The initial infrastructure assets to be incorporated into Telxius include their 11,000 Spanish towers plus 4,000 from other countries (understood to initially consist of towers in Brazil, Peru and Chile) and will also include the group’s international network of 31,000km of fibre optic cable.
During Telefónica’s March 2016 investors conference call, Ángel Vilá, Chief Strategy and Finance Officer said "(Telxius) company will start with an initial contribution of mobile towers from the Telefónica portfolio of mobile towers, around 15,000 towers; and the submarine cable systems that we have around Latin America. The number of towers that we are contributing initially are not, of course, the whole portfolio of towers from Telefónica. That would probably...be contributed or brought down into the infrastructure vehicle later on, as well as potentially consolidating towers or infrastructures from other third parties. With this vehicle we’ll have clear levers of growth. One would be the classical of colocation in towers. We continue to build towers across our footprint, that would be a second lever of growth. We will also be able to consolidate infrastructure from third parties. And fourth lever would be the continued contribution obviously at arm’s length of Telefónica-owned infrastructure into the vehicle.
And with respect to the proceeds or the use of funds or financially what we’re aiming at with this transaction, we will be able to strengthen our balance sheet, and part of that can be used for debt reduction also. We plan to release funds in order to invest in other areas of growth that are available, that are in front of us. And third, and clearly, we are trying to optimize the return on the capital employed that we have in this type of infrastructure," concluded Vilá.
END OF UPDATE
Speculation surrounding an IPO or sale of Telefónica towers has been rife since CFO, Angel Vila hinted at the strategy in his Q3 2015 investor presentation, with media outlets rushing to suggest a sale of 60,000 assets could be imminent. All eyes have been on the Spanish giant as the industry anticipated one of the most significant tower transactions that Europe has seen to date. Telefónica subsequently confirmed the wheels are now in motion to carve out their 11,000 Spanish towers into a newly created entity – originally named Wireless Towers, but renamed Telxius, signifying a major game changer for the European tower market.
What is Telefonica’s official stance on the news?
In a call with TowerXchange, Telefónica confirmed the creation of two new entities in Spain – Submarine Telecom (which will incorporate their subsea cable infrastructure) and Wireless Towers - which will incorporate the 11,000 telecom towers the company owns in Spain.
Whilst speculation surrounding a valuation of their newly created Spanish infrastructure businesses varies widely from €5bn to €13bn, Telefónica have cited Telecom Italia’s carve out of Inwit in Italy and America Movil’s carve out of Telesites in Mexico as key benchmarks. As to whether the carve out at Telefónica will result in an IPO or sale, the company is keeping an open mind and we will have to wait and see how this plays out.
Why would Telefonica consider a sale or IPO of their Spanish assets?
With revenues continuing to decline in Spain and currency devaluations hitting its Latin American businesses hard, Telefónica needs to raise cash and reduce leverage. Currently €50bn in debt, the sale of Telefónica ‘s O2 business in the UK to Hutchison Group for £10.3bn (€13.5bn) was hoped to go some of the way to tackling this, but with the deal being held up by the regulator and growing concerns that the transaction may not be approved, monetisation of its infrastructure assets represents an alternative strategy that is now being pursued in parallel.
What history do Telefónica have of selling their towers?
In Europe, Telefónica have sold towers in both Spain and Germany. In Germany this was in the form of an asset transfer of 7,700 sites (mostly rooftops and sites at overlapping locations to their E-Plus acquisition) to Deutsche Funkturm for an undisclosed amount in 2015; In Spain it was two sale and leaseback deals to Cellnex, the first in 2012 selling 500 towers for just over US$49mn the second in 2014 selling 4,277 towers (including a tranche from TeliaSonera subsidiary Yoigo) for US$419.6mn, both times at an average of just over US$98k per tower. In Central and Latin America, Telefónica have completed a further 11 sale and leaseback deals divesting 9,076 towers in Brazil, Chile, Mexico and Colombia (see table one).
What does this tell us about the potential valuation of their 11,500 towers?
Taking Telefónica’s average price per tower achieved in their two Spanish transactions of US$98,115 would value their 11,500 towers at US$1.13bn. Industry insiders however have commented that Telefónica are unlikely to be happy at the price they got from their two Spanish tower sales to Cellnex and so would likely be looking for a much higher valuation. Taking the average value a European tower has sold at to date of US$125,504 would produce a valuation of US$1.44bn.
Would an IPO or sale be more likely?
Telefónica have publically stated that they are remaining open minded about the monetisation of their carved out towers. Their referencing of the IPOs of Inwit, Cellnex and Telesites as key motivators in carving out their towers does however suggest an IPO is very much at the forefront of executives’ minds. The two stage process adopted by Inwit whereby they first publically list to obtain an initial tranche of capital and boost valuations and then subsequently release further equity through a sale to a towerco could well be an attractive model for Telefónica to follow and could become a standard in European MNO tower divestitures.
What do previous carve outs and IPOs of towercos tell us about the market?
Whilst there are too many variables and unknowns to speculate as to the valuation that Telefónica’s newly created Telxius could achieve at IPO, there are several key factors that one must take into account when drawing upon lessons from previous public listings in the market.
The listing of a 66% stake in Cellnex, Abertis Telecom’s infrastructure business, saw shares surge 12% on the first day of trading, valuing it at €3.5bn (US$3.8mn). The IPO of a 40% stake in Inwit (Telecom Italia’s infrastructure unit) the following month, saw shares rise more than 9% on its trading debut on the Milan stock exchange, giving the company a market cap of around €2.4bn, and raising a gross €875.3mn (US$956.7mn) for Telecom Italia in the process. Inwit has 11,519 towers on the balance sheet, whilst Cellnex have 15,140, yet differences in their market cap at their trading debuts is largely be attributed to (amongst other factors) Cellnex’ proven track record in the acquisition and management of third party towers. Similar to Inwit, the newly created Telxius does not come with this experience and whilst multiple tenants do exist on Telefónica’s towers, it is likely in many cases to be the result of swaps rather than commercial leases, and it is not clear whether internal chargebacks are charged at cost plus or at commercial lease rates.
Looking across the Atlantic to Mexico, the recent carve out of America Movil’s 12,555 towers into new infrastructure business Telesites may serve as a cautionary tale considering the fall of its stock (from Mex$13.38 to approximately Mex$11.00 during the third week of January) since its listing on 21 December.
Its target price and overall financial goals for 2016 have been considered bold by analysts, especially if compared with its listed competitors such as SBA Communications and American Tower. However, it is definitely too early to comment on Telesites’ performance and Telefónica might still use the carve-out and following IPO as a benchmark to avoid pitfalls.
Carving out a Spanish Telxius gives Telefónica a couple of quarters to novate leases, tidy up asset registers, and establish the trading performance of a stand alone tower business based on which investors can make a sound judgment on the economic value of any proposed sale or IPO.
What impact does the creation of Telxius have on the European towerco landscape?
With 107,994 of Europe’s 600,000 towers (or 18%) sitting in the hands of independent or operator led towercos, Telefónica’s deal in Spain alone would shift this two percentage points, but it is rather the tone that it sets for the rest of the industry that will have the biggest impact. Adding to Vimpelcom’s move to sell 10,400 towers in Russia (along with rumours circulating of further divestments in the CIS) plus rumours gathering momentum from Orange, Turkcell, MTS, Megafon and even potentially Vodafone looking at tower transactions we are starting to see a marked shift in MNO attitudes towards ownership of their passive infrastructure. Acting as a catalyst for future tower transactions, Telefónica’s carve out has major implications for European towercos.
The formation of a new operator-led towerco would create sizeable competition in a European market where the fledgling tower industry is yet to reach scale. A potential sale of assets could entice some of the major American towercos to make a move in the European market; American Tower who are sitting on 2,031 towers in Germany have expressed an interest in the upcoming Inwit transaction but have otherwise been relatively conservative about supplementing their European footprint. Such a sizeable transaction, coupled with further divestments on the cards could entice American Tower and their competitors to look more seriously at the European market. A potential sale could also pose an opportunity for a mid-tier European towerco (with the right financial backing) to make the next step up and break into a new market; with Cellnex currently the only towerco with a sizeable portfolio in more than just one country such competition is viewed positively by those seeking a healthy and dynamic market (although Cellnex are sure to be near the front of the queue when it comes to submitting a bid for Telefónica’s Spanish towers).
Could we see Telefónica following this strategy in other markets?
Regarding the carve out of infrastructure assets in other markets, the company is keeping closed lips but industry widely expects the Spanish market to just be a starting point. Sources close to Telefónica in Germany suggest they have 10,000-12,000 towers remaining following the transfer of 7,700 sites to Deutsche Telecom in 2015 making this the next most exciting market for a potential Telefónica carve out.
Having sold 9,076 towers to date in CALA, few have been retained in the critical markets of Brazil, Mexico and Chile, with an estimated 5-10,000 towers remaining across the three countries. Estimations suggest tower counts around 4,000 per country in Peru, Argentina, Colombia and Venezuela with a further 5,000 in Central America. Whilst the portfolios do not reach the scale of those in Spain and Germany, the tower market is better established in CALA and valuations on a per tower basis are generally higher than in Europe (albeit not so dissimilar when calaculated as multiples of EBITDA or TCF), so they still represenet significant opportunities to raise capital and reduce Telefonica’s debt.
Estimated breakdown of Telefónica’s tower portfolio
How many towers does Telefónica retain and where?
Telefónica has sold 21,553 towers to date, raising just under US$2bn at an average of US$162,536 per tower. TowerXchange estimate there are approximately 55,800 towers left on Telefónica’s balance sheet.
Telefónica’s largest retained portfolio of towers in Germany, where we estimate they have 12-13,000 towers subsequent to the transfer of 7,700 sites to Deutsche Funkturm - mostly overlapping rooftop sites from the E-Plus consolidation. Telefónica has also sold an undisclosed proportion of 4,277 Telefónica+Yoigo Spanish towers to Cellnex, leaving them with the 11,500 towers rolled into Wireless Towers. Telefónica O2’s ~9,000 UK towers sit on the CTIL balance sheet, a joint venture infraco with Vodafone. Extracting those towers may be complex, but the UK tower market may be restructured in the light of an O2-Hutchison 3 merger, if approved.
TowerXchange estimate that Telefónica has around 22,800 towers left in CALA: ~5,000 each in Argentina and Colombia, around 9,600 across Peru, Chile and Venezuela, ~800 in Ecuador, and perhaps a thousand towers retained for strategic reasons or for swaps in Brazil and Mexico, after the sale of the majority of towers in those countries. Telefónica has around 400 towers left in Central America.
