Hamstrung rooftop co-locations and potential tower monetisations in the German market

The German tower industry, whilst considered a relatively stable, low growth market, has started to see a spate of activity that could alter dynamics in the country with a potential monetisation of one tower portfolio, a carve out of another and new investment raised for a third. At the 2016 TowerXchange Meetup Europe, key actors in the country met to examine the substance behind such speculations, whilst discussing growth opportunities in the market and the challenges presented by the country’s proportionally high number of rooftop sites.

Germany has three mobile network operators following Telefónica’s acquisition of E+ in 2014. Telefónica now boasts the largest market share sitting just under 38%, Deutsche Telekom has just under 36% and Vodafone just under 27% (figure one), the remainder of the market is accounted for by a number of MVNOs.

Each of the operators retain their assets with Deutsche Telekom’s subsidiary Deutsche Funkturm managing their portfolio of 27,000 sites and their subsidiary Omega Towers owning the 7,700 sites transferred from Telefónica following the E+ acquisition (predominantly rooftops, of which approximately 50% are expected to be decommissioned). The fourth owner of towers in the German market is independent towerco American Tower, which owns a portfolio of 2,031 towers in the country (table one). [Editor’s note: Since the Meetup it has been announced that Telefónica has sold their 2,350 ground-based towers to subsidiary, Telxius].

There is an established culture of infrastructure sharing between each of the operators, with all three using third party towers and leasing space on their towers to third parties. It is estimated that Deutsche Funkturm have approximately three times as many tenants on their sites than the number of third party sites they use.

Taking into account the use of third party assets, Deutsche Telekom and Vodafone’s networks make use of approximately 25-27,000 sites each, whereas Telefónica’s are estimated to use close to 39,000. Telefónica is on the record as saying they plan to consolidate their network to a golden grid of a similar size to the other two operators and when asked whether 25-27,000 sites represented the optimum size or whether increased data usage would necessitate more - feeling amongst the table was that 30-32,000 sites would be the theoretical maximum that operators would need.

As discussed in our recent German market analysis (see “Tower transactions, carve outs and IPOs in the German tower market”), the German market is characterised by an unusually high proportion of rooftop sites - Of the estimated 70,000 sites in the country, 77% are thought to be rooftops (table one and figure two).

Deutsche Funkturm’s portfolio contains 8,000 ground based towers (of which 500 are high towers) and Vodafone has ~4,000 ground based towers. Telefónica Deutschland has recently sold their 2,350 ground based towers to their infraco Telxius and as such the operator’s portfolio is thought to be solely comprised of rooftop sites (~12,000 sites). American Tower’s portfolio, akin to that of Telxius, is solely comprised of macrostructures.

Participants at the roundtable saw little demand for new macrostructures to be built. What’s more, participants felt that the number of tenancies on structures would remain relatively constant. The entrance of new entities such as Sigfox help contribute to increasing tenancies but using smaller antennae, such companies usually demanded lower lease rates and so were not comparable with MNO tenants. With broadcasters also existing as a tenant on some of the higher structures, unless there was a new evolution with terrestrial TV it was thought that some of the taller concrete towers could be at risk of decommissioning in the future due to loss in revenues.

The network rollout in rural areas for the more recently auctioned 700MHz band is still ongoing and will present some opportunity for growth for the next 12 months, similarly there is a need for new build along railways and highways. Looking at urban sites, whilst the number of tenancies was not expected to increase, there continues to be changes in equipment being hung on sites as operators continue to rollout 4G.

Perhaps one of the biggest topics of conversation at the table related to the limited co-location potential on Germany’s rooftop masts with the vast majority being single tenant sites. Tenancy ratios on Deutsche Funkturm’s ground based towers sit around 2.5, whilst the average tenancy ratio on their rooftop sites is around just 1.1;  American Tower Germany, whose portfolio is comprised solely of ground based towers, has an estimated average tenancy ratio of 1.8 - much higher than that of the resident operators with rooftops in their portfolios.

Whilst regulations surround electromagnetic radiation to some extent limit the co-location potential of rooftop masts in populated areas, the real hurdle is the additional rental payments demanded by landlords. The majority of building owners are aware of the extra revenue that can be generated by additional tenancies and as such, look to levy extra lease payments from the mast owner. Such a strategy compromises the business case surrounding co-location and has hampered the development of effective rooftop infrastructure sharing in the country. It was commented that the hard negotiations of rooftop owners have led mast owners threatening to cancel their leases in order to avoid escalating costs.

It was commented by participants that whilst operators had seen infrastructure sharing on rooftop masts as a strong potential business opportunity in earlier days, the rooftop model doesn’t work in the German market. American Tower with their portfolio of ground-based towers is unlikely to make any move into the rooftop sector given the economics that the operators are seeing, and similarly it is not expected that Telefónica Deutschland’s rooftop sites will be transferred to Telxius.

It had been publically announced earlier in 2016 that Deutsche Telekom was looking into a potential monetisation of their infrastructure business, Deutsche Funkturm. Whilst it is early days in the discussions and not something the company is able to publically comment on, the founding idea of Deutsche Funkturm was that the assets would eventually be sold. With the company keeping most of their operations in house (with a large payroll to support this) - the assets are thought to have been well managed and maintained, with robust management processes effectively developed. With ongoing broadband expansion and requirements for fibre rollout, monetisation of Deutsche Funkturm would provide working capital to Deutsche Telekom to support this and with no debt, such a monetisation would also provide an attractive €multi-million dividend for shareholders.

Since the Meetup, Telefónica Deutschland has sold their 2,350 ground based towers to infraco Telxius. The move follows in the footsteps of their Spanish, Brazilian, Peruvian and Chilean subsidiaries with over 16,000 sites now having being sold to the entity. Whilst Telefónica’s plans for Telxius have yet to be announced, it has been reported that an early July IPO on the Madrid Stock Exchange could be on the cards. Given the expected news that the European Commission will block Hutchison’s takeover of Telefónica’s O2 in the UK, monetisation of their assets is looking increasingly likely. Should an additional stake in Telxius be offered in a strategic sale (akin to Telecom Italia’s two stage divestment of equity in INWIT), one can expect interest from a number of parties.

It was posed that the coming to market of either Deutsche Telekom or Telefónica towers could be an ideal opportunity for American Tower to expand their footprint in the market - suggesting that it would be the optimal time for American Tower to decide whether they were going to “double down or quit” in Europe. As to whether the Telefónica or Deutsche Funkturm portfolios were complementary to that of American Tower’s, it was assumed that they most likely would be largely additive, enhancing the potential value of such an acquisition.

It is known across the industry that investors including Blackrock have been approached regarding a potential 10-20% stake in an international towerco with a presence in Germany. As the only independent towerco with a footprint in the German market, one can easily deduce that this is American Tower looking to raise capital - as to whether this is to fund a potential acquisition in the market it remains to be seen.

Concurrent with their global strategy, it was not expected that Vodafone would look to sell their assets or acquire those of third parties, however it was suggested that it may make sense for Deutsche Funkturm to absorb Telefónica towers, should a strategic sale be offered.

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The evolution of Telefonica’s Telxius