On 19 December 2016 American Tower announced the acquisition of French FPS Towers for €697mn. The deal has held the attention of the European tower market since the summer, when Antin Infrastructure Partners announced their intention to find a buyer for the entrepreneurial towerco. In this editorial we will review what both FPS and American Tower bring to the table, discuss some of the dynamics which influenced the bidding process, and share some exclusive comment from American Tower as to their thoughts on the deal.
In October 2016, it was believed that as many as ten bidders were competing for FPS Towers, including Cellnex, Europe’s leading home-grown towerco who have been on something of a buying spree in Europe recently, and 3i, investors in the UK’s Wireless Infrastructure Group (WIG), whose intention was to create a new model of European towerco platform. Although the remaining bidders were not named, it is believed that other US towercos and infrastructure investors made up the majority of the interested parties and that in the final rounds the bidding was between 3i/WIG, Cellnex and eventual winners American Tower. We’re keen to delve a little deeper into the events which ran up to this deal, and speculate about what this might mean for all the parties involved.
Who are FPS and what was on offer?
FPS Towers was formed in 2012 by Antin Infrastructure Partners to acquire and manage 2,051 towers acquired from Bouygues Telecom. Since then, their ambitious growth strategy led to the acquisition of Loxel, a rooftop management organisation, in 2015, the lease up and growth of their core portfolio to 2,482 towers, supplemented by an innovative programme focused on securing hundreds of public and municipal structures used in telecom networks.
FPS Towers was established to animate a French tower market dominated by broadcast tower giant TDF, and they have certainly disrupted the market in several ways, by gaining toeholds in alternative site typologies across France.
FPS’ management team focused on securing hundreds of public and municipal structures used in telecom networks. FPS have been able to secure these sites under a contractual term like a concession under which they can attain a 30 year renewable lease, with rights very close to those of a site owner. Some of these public sites have to be tenaciously and painstakingly acquired one by one, others can be found aggregated in deals like one FPS reached in December 2015 with highways operator APRR to secure 300 sites.
By acquiring rooftop aggregator LOXEL in 2015, FPS were able to offer up front payments to secure 20-30 year rooftop leases, and make them available for co-location. This model has the potential to unlock huge potential in the French market, however, as LOXEL’s offering centres around brokering, rather than control or management of rooftop sites, the extent to which these contracts could transfer into a source of recurring revenue will have been a key factor in valuing this segment of the portfolio.
What is the breakdown of the high sites used by the French telecom industry? And who owns them?
FPS positioned themselves as a towerco with a foothold in both the rooftop and alternate site markets, enabling them to form win-win-win partnerships with their customers and landlords.
In the midst of the FPS Towers sale process, Bouygues Telecom are believed to have brought to market ‘a couple of thousand’ rooftops. Bouygues’ established relationship with Cellnex (who have acquired 500 of their macro towers in 2016 for a total of €147mn), and TDF’s need to maintain the upper hand in the French market means these assets are highly desirable. The fact they represent a chance to acquire MNO rooftops, as opposed to FPS’ brokering offering, may have diminished the perceived value of this part of FPS’ portfolio, while offering bidders an alternate means of achieving scale in France.
How does the acquisition fit with American Tower’s European strategy?
In 2012, American Tower acquired 2,031 towers from KPN (now E-Plus) in Germany for €393mn, increasing that number to 2,197 towers in the country over four years. When compared to American Tower’s activity in the other markets where they own assets, their investments in Europe seemed remarkably small, given they invested around US$1.2bn in acquiring 6,450 towers in Africa, US$1.2bn in 42,581 towers in India and $8.9bn in 36,668 towers in Latin America during this time period, while only growing their European portfolio by 166 towers. During this time Cellnex deployed just shy of €1.8bn to acquire 13,861 towers in Europe across five countries.
Number of towers acquired by American Tower since 2012
In October 2016, after four years of minimal M&A activity in Europe, American Tower announced the formation of a joint venture with Dutch pension fund PGGM to form ‘ATC Europe’ with a focus on pursuing telecommunications real estate investment opportunities in Europe. At the time there was some speculation as to whether this indicated a readiness to engage more deeply with the growing European tower market, or a desire to dilute ATC’s exposure to the slow moving German tower market. As it happens, it didn’t take long for ATC Europe to show their hand, acquiring possibly one of the most coveted assets on the continent in a competitive process.
The deal
Although speculation that the deal value could reach €1bn was rife, American Tower’s price of €697mn seems more in line with other recent European valuations.
French newspaper Les Echos reported in August that FPS was projecting a turnover of €70mn and EBITDA of €45mn for 2016, and ATC’s own report on the French market puts FPS’ Year One revenues at ~€60mn with a gross margin of ~80%, bringing their EBITDA to a similar €48mn for 2017. This would place their valuation at around 14.5-15.4x EBITDA, perhaps not as high as some recent optimistic valuations might have guessed, but certainly a solid result given that FPS Towers’ owners Antin Infrastructure deployed just €205mn to acquire the core portfolio only four years ago.
Tower sales and valuations in France since 2012
Why did American Tower succeed in such a contested sale?
Of the ten bidders for the FPS towers, American Tower have succeeded in acquiring this popular French asset and seem to have achieved a reasonable valuation. Of the other bidders we know to have been involved in the process, Cellnex were probably one of the favourites, having a toe hold in the French market already, and having rolled up two smaller European towercos already in the last 12 months in Shere Group and Protelindo NV.
On closer inspection, however, it would seem that FPS’ EBITDA multiple can be interpreted several ways, and that a substantial amount of capital expenditure will need to be made over the next three years to support FPS’ rapid growth plans. As some sources suggest that FPS’ EBITDA may be closer to €36mn, this would imply a multiple of 20.5x, which is substantially above the regional average.
As Cellnex’s leverage is approaching their target level, an investment in FPS, which is likely to be EBITDA-capex negative for the next three years, would have left them with very little wiggle room should a larger opportunity arise. As Jonathan Dann, Managing Director at RBC states: ‘Current forecasts for FPS are that annual FCF contribution from France would have been negative for Cellnex if it was the acquirer, before becoming a substantial contributor beyond 2020. This would have severely reduced Cellnex’s ability to invest over the next two/three years.’
And of course there are several opportunities on the horizon which could prove very attractive indeed, including the Bouygues rooftops in France, Arqiva in the UK, Telxius in Spain and Germany, Global Tower in Turkey, Ukraine and Cyprus and Deutsche Funkturm in Germany. With some extremely significant portfolios in the pipeline, it would seem sensible for Cellnex to keep their powder dry for the time being.
ATC Europe, on the other hand, has access to cheap capital and a partner in PGGM who is eager to invest in long term growth. The FPS acquisition fits nicely into their European narrative of stable cash flows from mature Northern European markets, and a good return on investment story could play out in France with a much admired asset, which cements American Tower as a European player to be reckoned with.
Viewpoint from Jonathan Dann, Managing Director, RBC
How does this compare to earlier (European) deals?
Recently, European tower portfolios have changed hands at 15-17x EV/EBITDA; however, these have been low growth and hence low capex/sales assets, implying <20x EV/OFCF (EBITDA-capex) for CPI type growth rates.
FPS is in a class of its own, it is expected to have a substantial capex program designed to grow its customer base (occupied towers) materially by 2020 with revenues and EBITDA growing by multiples - i.e. the buyer is paying <10x EV/EBITDA in 2020, but current FCF is negative.
For FPS, American Tower represent a vastly experienced counterparty with access to the expertise and cheap capital they need to realise their rapid growth plans. ATC’s operations in Germany and joint venture with PGGM show they know the European market well and are committed to growth in the region - something which sets them apart from other US towercos, who have expressed an interest in European assets for some time, but as yet have not dipped their toes in the water.
What does this mean for European towers?
If we had doubts about American Tower’s intentions towards the European market before, they’re allayed now. With this acquisition, American Tower is laying the foundation for a strong European portfolio and presenting a clear challenge to both Cellnex and other international towercos with an eye on the European market: American Tower mean business. In a European market with 45 towercos and just 13% of European towers in independent hands, there remains huge scope for consolidation, acquisition and asset transfer.
The transaction is a good news story for European towers. Irrespective of which EBITDA number you believe, what it boils down to is the fact that Antin put €205mn on the table just under five years ago, and turned it into almost €700mn by reading the market and empowering a savvy and entrepreneurial team. That team added value by leasing up the towers, such that value per tower increased over 250% in less than five years, from €111,346 to €280,821, an impressive return on investment which speaks volumes about the investibility of European towers right now. The achievement is also testament to the FPS management team, a group of smart and creative professionals who made no secret of the fact they’d been to the US, seen how successful the model was and emulated it in the European market. It’s no wonder the asset appealed to US buyers, who found the playbook accessible and easy to read.
Cellnex’s unchallenged sweep across Europe has come to an end; American Tower has stepped up to the plate and swung for the fences, but the great news is that serious competition to build a pan-continental portfolio will boost value for both smaller towercos and MNOs who have been biding their time and deciding whether to divest their assets. Europe’s tower market shows no signs of slowing in 2017.
Exclusive comment from American Tower
TowerXchange: Why France, why FPS, and why now?
American Tower:
This was an attractive acquisition for us for a number of reasons. France is a wireless market with less 4G coverage than many other European markets—just 25%. Because the regulator has mandated that all mobile network operators reach 98% 4G coverage by 2024, we believe this will help catalyze network investments going forward. Coupled with the recent 700 MHz spectrum auction and significantly growing mobile data usage, we expect considerable growth in revenues on the FPS tower assets.
Furthermore, FPS has been a very well managed independent tower operator since its inception, with long-term tenant lease contracts, a high quality asset base from a structural and location perspective, and excellent relationships with the mobile network operators.
We believe we have an excellent opportunity to combine ATC’s proven expertise in owning, operating and investing in telecommunications assets with FPS’ deep knowledge of the local market and PGGM’s financial support to continue to grow this business in France over the long term. The valuation for the asset in light of all of these factors was attractive.
TowerXchange: Does this deal exemplify a slightly different investment criteria for ATC in partnership with PGGM in Europe?
American Tower:
No, we are utilizing the same investment evaluation process that we have used for years, with the same risk-adjusted hurdle rates. In addition, the transaction extends our partnership with PGGM and demonstrates the joint venture’s ability to find, evaluate and acquire what we believe will be high-growth assets in Europe by combining PGGM’s deep knowledge of the continent with ATC’s extensive history of acquiring and operating tower assets globally.
TowerXchange: While the core assets in the FPS portfolio were 2,400 macro sites, the company are renowned for their interest in exploiting alternate site typologies, from rooftops to electricity transmission towers - do you see these alternate site typologies remaining part of the vision going forward?
American Tower:
This was another part of the appeal of the transaction, in addition to the high quality nature of the tower portfolio. The FPS management team has done an excellent job of unlocking value in the French telecommunications real estate space, and part of that has been, and we believe will continue to be, offerings that are complementary to the core tower business.
We expect to continue evaluating these types of alternative technologies and pursue them to the extent they offer compelling returns that meet our requirements as part of our overall value proposition to our French carrier customers.
TowerXchange: Does American Tower, in partnership with PGGM, have appetite for further acquisitions in Europe?
American Tower:
Yes, we welcome the opportunity to build on our partnership with PGGM and will continue to evaluate additional investment opportunities in Europe and around the world, utilizing our proven investment evaluation methodology and acting only if the opportunities meet our risk-adjusted return hurdle requirements.
FPS Towers Chairman Frederic Zimer will be joining Cellnex, INWIT, WIG, CTIL and Russian Towers on the CXO panel at the TowerXchange Meetup Europe on 4-5 April 2017 at the Business Design Centre, London. Visit https://meetup.towerxchange.com/event/39048e27-74eb-4f9f-aecf-eaddb76894ef/summary for more information.
