The German tower market is becoming the subject of speculation with the carve out of Telefónica’s Spanish towers sparking rumours that Telefónica’s German business may follow suit; whilst market leader, Deutsche Telekom has reportedly opened discussions on a part listing of its German portfolio. Meanwhile, could American Tower be soliciting third party investment into its German business? We speak to Jonathan Dann, Managing Director of Telecom Research at RBC Capital Markets to better understand the landscape in the German tower industry and discuss how the market looks set to evolve.
TowerXchange: Please give a short introduction to yourself and the work that you do at RBC.
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
I have been a telecom and related industries analyst for 20 years and with RBC for the last two years. I work with a team of five covering European and Emerging Market Telecoms, Towers and Satellite operators.
Tower companies are relatively new in European equity markets. Currently, the market is particularly focused on looking at how the listed operators expand beyond their current Spanish/Italian roots. M&A permutations and also future tower spin offs take up the majority of investor interest; while the organic side of the tower story has tended to take a back seat.
TowerXchange: Please can you tell us a little about the German telecom market, who are the main operators and what is their market share?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
There are three mobile network operators in Germany, following consolidation in 2014 of Telefónica Deutschland and KPN’s E+; Telefónica Deutschland, Deutsche Telekom and Vodafone. There are also a large number of MVNOs, with each of the main mobile operators also owning and selling via a variety of sub-brands. Each of the operators has c30% subscriber market share (figure one). The operators are all backed by strong and large internationally diversified parents, although the balance sheets of some are stretched compared with historic levels making potential tower spin-offs or sales attractive.
Figure one: Subscriber market share in Germany
TowerXchange: At the end of 2014, Telefonica Deutschland bought E-Plus, how did this affect both Telefonica and the German mobile market and could we see any further consolidation? Is there any possibility of a new market entrant?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
The merger created a strong third operator with around 39,000 mobile sites in use, compared with peers Deutsche Telekom and Vodafone who are using around 25-26,000 sites each. One of the remedies was for a certain number of towers (around 8,000) and some high frequency spectrum to be held back for five years for a potential new fourth entrant. Currently, it seems unlikely that a new entrant will emerge. Telefónica Deutschland has recently announced plans to transfer 7,700 tower sites (mainly rooftops) to Deutsche Telekom which will be managed under a newly created subsidiary, Omega Towers.
TowerXchange: How many towers do each of the operators own and which other companies possess portfolios of towers in Germany? What percentage of these towers are ground based versus rooftop and how does this compare to other European markets?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
Currently on our estimates, Deutsche Telekom and Vodafone use 25-27,000 tower sites and own approximately 8,000 and 4,000 macro towers, respectively (table one). Telefónica Deutschland owns around 2,000 macro sites and currently uses 32,000 (adjusting for the 7,700 transferred to Deutsche Telekom). Telefónica Deutschland has plans to continue to decommission to a “Golden Grid” of 25,000 sites over the coming years. Beyond the MNOs, American Tower owns 2,031 tower sites acquired from E+/KPN in 2012.
Germany is rare, in that around 75-80% of sites are rooftops and only 20-25% ground based towers compared to most European countries where two thirds of sites are typically ground based towers and only a third are rooftops.
TowerXchange: What indication do you have of tenancy ratios on German sites?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
Tenancy ratios appear to be low at just over 1.1x, but this is also due to high proportion of single tenancy rooftops.
On our estimates the “lease up” ratio on towers is 1.3x which is still low by European standards and very low by US standards.
Table one: Tower ownership in the German market
TowerXchange: Telefonica recently transferred 7,700 sites to Deutsche Telekom, what do you know about the details of the transaction and what are the implications of any decommissioning?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
The 7,700 sites transferred appear to be mostly rooftops, with no financial compensation paid. Telefónica Deutschland will be vacating the sites over time whilst Deutsche Telekom will be taking over any ground lease obligations as well risks around decommissioning, or retention. We estimate that typical ground leases are in the €4,000-€5,000 per year range making the costs relatively modest.
TowerXchange: Apart from the sale and leaseback of 2,031 E-Plus towers to American Tower Germany in 2012 and the aforementioned transfer of the Telefonica towers (acquired from E-Plus) to Deutsche Telekom have there been any other transactions of note in the German market?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
Deutsche Telekom sold its broadcast transmission towers “T-Systems Media & Broadcast” to TDF in 2007 for €850mn. The bulk of this business (now Media Broadcast Group) was sold to Freenet for €295mn (around 12x EBITDA) in March 2016.
TowerXchange: Speculation is rife regarding the Telefónica tower portfolio following the carve out of their Spanish towers into new infrastructure business Telxius – what do you estimate their portfolio in Germany to be worth?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
In Germany, we estimate Telefónica Deutschland owns around 2,000 towers as well using a further 12,000 rooftop sites that they own. The remainder of its network sits on American Tower towers (2,031) and third party rooftops (including the 7,700 transferred to Deutsche Telekom).
We estimate that Telefónica Deutschland’s 2,000 towers would be worth at least the €400mn based on the transaction between American Tower and E+/KPN in 2012 and more likely higher given recent transactions and the potential for competitive tension between Telxius (Telefónica’s towerco) and American Tower to reach scale in Germany. Additionally, the owned rooftops could have value depending on the structure of the sale-leaseback offered by Telefónica Deutschland.
TowerXchange: What other activity could we expect to see in the German tower market beyond a potential carve out of Telefónica towers?
Jonathan Dann, Managing Director, Telecom Research, RBC Capital Markets:
Deutsche Telekom has discussed a part listing of its German tower portfolio. With around 7,000 owned towers and as a market leader they could potentially accelerate lease up rates on their portfolio. One caveat is ground leases in Germany appear to be in the €4,000-€5,000 per annum range, limiting the financial benefits for second tenants of co-locating.
Jonathan Dann will be hosting a roundtable breakout focusing on the German tower market at the TowerXchange Meetup Europe, taking place at the Business Design Centre, London on April 12-13. Among 200 other participants at the Meetup are senior representatives of Deutsche Telecom, Telefónica, Deutsche Funkturm and American Tower Germany. Click here for further information and to register.
