The second day of the TowerXchange Meetup Europe took a closer look at the motivations behind tower carve outs and sales by operators and asked where else we may see tower portfolios changing hands through M&A. Joining the panel were Alexander Chub, President of Russian Towers who are closely monitoring any towers coming to market in Russia and the CIS; Colin Shea, Strategy Director of CETIN, who was was heavily involved in the company’s carve out from O2 Czech Republic; and Colin Cunningham, Managing Director of Irish towerco Cignal which came into existence in 2015 following the acquisition of the communication assets of the State forestry company, Coillte.
The tower transaction pipeline
Alexander Chub commented that the infrastructure market in Russia was undergoing a period of fundamental transformation. Three out of the four operators in the country are looking at monetisation of their towers, albeit through two different strategies with VimpelCom and Tele2 looking into a sale and leaseback deal structure and MegaFon having carved out their assets into infraco First Tower Company, for which they will reportedly seek a strategic buyer (Editor’s note: MTS subsequently announced that they would rent space on 5,500 of their towers – around half their portfolio – through new entity MTS Towers, although there has been no indication that they would consider selling those assets). Professional towercos, such as Russian Towers, are playing an important role, firstly in constructing new sites on behalf of the operators to assist in 4G rollout, and secondly by participating in large transactions when the operators decide to monetise.
Across the CIS, Chub also anticipated a transformation of market structure and whilst he forecasted that 2017 would be the year that we would see major movements in the region, he also anticipated that 2016 would see at least one key development in the market. Questioned on whether Russian Towers would likely be participating in such a process should one arise Alexander Chub mentioned that Russia’s neighbouring markets were a priority for the company and would be a key discussion point at their upcoming board meeting, with the company considering opportunities in the region very seriously.
In the Balkans and CEE, where CETIN are interested in opportunities, Colin Shea commented that they had observed a lot of network sharing agreements from the leading MNOs but felt there wasn’t much appetite for tower disposals, adding that most of the tower divestitures that we have seen in Europe to date have been from companies who needed to re-engineer their balance sheet – operators in his region weren’t under the same financial pressure.
Cignal’s home market, Ireland, has to date only seen one operator tower sale, with a relatively modest divestment of 340 sites from a cash strapped Eircom back in 2007. At present, Colin Cunningham thought it looked unlikely that there would be any imminent sales from operators but these would certainly be the transactions that Ireland’s numerous towercos would be watching for closely.
Financial motivations for well capitalised operators
Whilst Europe’s operators may not be as cash-strapped as some of their international counterparts, we are still seeing some of the more financially stable operators considering monetisation of their passive infrastructure, with Deutsche Telekom, for example, examining a part listing of their tower business. We questioned the panellists on the potential drivers behind why well capitalised MNOs, both in Europe and overseas would look to list or sell their towers.
In the US market, where operators only own 18% of the country’s towers, it was observed that divestitures had primarily been driven by tax reasons, with towers being reorganised into REITs (Real Estate Investment Trusts).
In Europe, it was proposed that moves such as that of Deutsche Telekom may be less about raising cash and more about value actualisation - making the value of their assets a bit more explicit to try and support their overall market capitalisation.
A second motivation is the improvement of debt ratios and thus the credit rating of the company, with credit ratings under pressure for almost all operators. Undertaking a sale and leaseback transaction is a means of extracting cash which can be used to undertake share buybacks or to reinvest in the business, without raising straight debt or impacting on the company’s debt ratio. The treatment of a sale and leaseback from a ratings perspective is more favourable today under current IFRS than it is for debt. Whilst this exists as a motivator for operators today, it was noted that if the IFRS changes being mooted are implemented this could significantly impact the business case.
The rationale behind O2 Czech Republic’s carve out of CETIN
Having been acquired by local private investor PPF, O2 Czech Republic didn’t need cash but their carve out of their infrastructure assets into separate entity, CETIN has been hailed as resounding success for both O2 and CETIN. Strategy Director Colin Shea explained the motivations behind the move which was fundamentally for three key reasons. The first was in regards to the focussing of the business - the retail and network sides of the business have different priorities and different investment horizons. As separate entities, decision making can be optimised for each side of the business. The second reason was in regards to regulation; regulation was impacting on the retail business heavily but by separating out the two businesses, most of the regulation now applies solely to CETIN, enabling O2 to more freely make decisions on pricing and services. With CETIN not active in the retail sector, fulfilment of the company’s regulatory obligations is now easier. The final motivation was financial, with the separation increasing the company’s financial flexibility by revaluing their assets and altering the debt.
The whole process of separation was realised in less than a year, whereas attempts by operators to make similar (although not such total) separations in other countries have taken much longer. The most challenging element was the complete separation of the IT systems of the two businesses but the two entities now operate as two completely separated businesses, linked only by their common shareholder, PPF. The move has been well received by both the regulator and the market and the number of inbound enquiries that CETIN is receiving from other operators is suggestive of others considering such a move.
Questioned as to whether the incorporation of other infrastructure assets including 38,000km of optic cable led to an undervaluation of the tower component of the business, Colin Shea commented that it was difficult to determine as PPF was the sole owner of both businesses. With network sharing presenting a threat to a pureplay tower company however, the decision to create an infraco rather than a towerco was a key strategic decision in order to ensure the long term future of the company.
To learn more about CETIN, read “Carving out O2 Czech Republic’s infrastructure business”.
M&A to expand towerco geographic footprint
As discussed earlier in the panel, each of the towercos would have an appetite for international expansion - Russian towers into the CIS, CETIN into the Balkans and CEE, and Cignal, with pan-European infrastructure fund InfraVia as shareholders, have a mandate to examine other markets on the continent.
Pan-European operator tower portfolios coming to market would represent the most attractive opportunity to enter new geographies but at present transactions are very much undertaken country by country rather than group level. As soon as an operator makes a decision to monetise towers across multiple markets at a group level, it will present a real opportunity for towercos to extend their footprint and may also trigger pan-European consolidation between towercos.
Asked to whether they would consider the acquisition of smaller tower portfolios outside of the Czech Republic, Colin Shea commented that it very much depended on the assets. Whilst they would consider small transactions, if it was a portfolio which came with substantial operational complexity it would probably need to be a more sizeable deal to make the acquisition worth it.
In terms of whether we would see the consolidation of smaller towercos it was anticipated that this would start to happen. In Ireland, where there are eight private towercos and three state-owned players, some of the smaller towercos are coming under pressure from MNO consolidation. In particular, when faced with the complexities created by MNO consolidation, the state owned entities which have grown organically over the years have begun to look at handing over their assets to professional companies equipped to deal with the market restructuring. The sale of State forestry company sites to Cignal was the first of such transactions but we could potentially see more both in Ireland and other European markets. As competition and complexity increases and with tower valuations at an all time high (buoyed by the IPOs of Cellnex and Inwit), panellists thought it likely that even towercos who were not forced to sell may consider a strategic exit.
