On September 20, Telefonica announced their intention to raise up to €1.5bn from the listing of 40% of their infrastructure subsidiary, Telxius, With the indicative price range for each share set between €12 and €15, this puts Telxius’ entire market capitalisation between €3bn and €3.75bn.
The past 12 months have been an eventful period for Spanish operator, Telefónica. After reaching an agreement with Hutchison in March last year to sell their UK O2 business to help alleviate debt, the merger was blocked by the European Commission and their “plan B” of raising capital from the monetisation of their towers and subsea cabling sprung into action. Following the formation of Telefónica’s infrastructure business, Telxius, in February 2016, originally incorporating the operator’s ~11,000 Spanish towers and 31,000km of subsea cabling, further towers from the Chilean, Peruvian, Brazilian and now German businesses have been sold to the unit. On 28 April 2016 it was reported that Telefónica had appointed banks to prepare Telxius for an IPO and the company appeared to be moving rapidly, however concerns over market instability following the Brexit vote in June led to plans being delayed until Q4 2016.
Increasing financial pressures on Telefónica
Telefónica have been coming under increasing financial pressure with weak Latin American currencies and the performance of their opcos in the region hitting the company’s revenues hard. The operator has amassed a significant amount of debt following a number of acquisitions across Europe and Latin America, including an €8.6bn takeover of German rival E-Plus and the acquisition of Brazilian broadband provider GVT for $9bn (€7.9bn), resulting in almost doubling of the company’s debt over a ten-year period. Telefónica’s most recent financial results show debts of €52.56bn.
The rise and fall of Hutchison’s takeover of Telefónica’s O2 UK business
In March 2015, Telefónica reached an agreement with Hong Kong’s Hutchison Whampoa for the sale of Telefónica’s O2 for an initial £9.25bn with an additional payment of £1bn once the cumulative cash flow of the combined company in the UK reached an agreed threshold. The deal was hoped to go some of the way towards reducing Telefónica’s debt burden. However, in the face of concerns about reduced competition in the UK mobile market, the merger was blocked by the European Commission Competition Commission.
With the collapse of the takeover so goes the opportunity to knock £10.25bn (€13.1bn) off Telefónica’s €50.2bn debt. In February, the company announced a €2.9bn early retirement plan to help cut its employment costs but further measures are required to bring the debt back under control. Ever since CFO Angel Vila hinted at a potential tower sale during his Q3 2015 investor presentation, monetisation of Telefónica’s passive infrastructure has been viewed as one of the key steps that the operator would inevitably take - it just seemed a question of when.
Tower monetisations show their worth
With the carve out and IPO of a 40% stake in Telecom Italia’s INWIT raising €875.3mn for the business, and on the other side of the Atlantic, the carve out and IPO of America Movil’s Telesites raising North of €2bn for the the Mexican operator – a precedent has been set. Telecom Italia have since moved to monetise their tower business further with an additional stake in the business being fought over by Italian broadcaster EI Towers and towerco Cellnex in conjunction with infrastructure fund F2i (although talks have slowed). The towerco business model is becoming increasingly popular as operators observe the >12-18x EBITDA multiples publically listed towercos currently trade at (versus the typical 3-4x EBITDA of MNOs). Turkey’s Turkcell has been the latest operator to follow suit, announcing on 28 April that it has initiated the IPO process for its infrastructure business Global Tower. In Germany, Deutsche Telekom has also expressed an interest in investigating a potential IPO of their infraco, Deutsche Funkturm.
What do we know about Telxius’s assets and Telefónica’s plans for the unit?
The first infrastructure assets to be carved into the business were ~11,000 Spanish towers and 31,000km of subsea cabling. On 24 March Movistar Chile (Telefónica’s opco in the country) agreed the sale of 328 towers to Telxius for CLP7.85bn (€10.4mn). This was followed a week later by the Telefónica Peru’s sale of 849 towers to the unit and Telefónica Brasil’s sale of 1,655 towers for BRL760mn (€192.6mn). On 21 April, Telefónica Deutschland announced the sale of 2,350 towers to the infraco for €587mn (the rest of the German opco’s sites, an estimated ~12,000 rooftops have not been transferred to Telxius). These transactions bring Telxius’ total tower count to 16,154 (figure one) with the company also managing a network of over 65,000km of submarine fibre optic cables, of which ~31,000km are owned.
Telxius reports pro forma FY15 revenues of €600mn, with 60% attributed to the submarine cabling components of their business and 40% to towers. Of that 40% from towers, 15% comes from their Latin American towers and 85% from their European towers (figure two). Calculating the average revenue per tower we arrive at the figure of just under €17k per site - in line with the revenues reported by leading European independent towerco, Cellnex.
Figure one: Telxius’ portfolio of 16,154 towers
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 was 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.
In April, TMTfinance reported that Telefónica had hired Goldman Sachs and JP Morgan to join UBS in running the IPO process. An early July listing on the Madrid Stock Exchange was mooted however the market uncertainty created by the Brexit vote in June caused timelines to slow, resulting in the announcement on September 20 that Telefonica planned to list up to 40% of Telxius on October 3 at a price of €12-€15 per share, valuing the infrastructure unit at around €3.38bn as a midpoint. This valuation may be lower than Telefonica had initially hoped, but reflects investor caution for the relatively untested submarine cable assets, compared to the highly desirable wireless towers.
Figure two: breakdown of Telxius revenue
What could Telxius be worth?
In regards to what valuation Telxius hopes to achieve at IPO, although initial press speculation suggested that they were targeting a range of €4-6bn, the indicative price rage for each share has been set at €12-€15, which would put Telxius’ entire market capitalisation between €3bn-€3.75bn, bringing it in line with Cellnex; a more mature towerco of similar scale valued at €3.34bn (at time of writing).
Table one: Telefónica asset sales to Telxius
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, we have generally seen it can take a full year for a new carve-out towerco to genuinely start thinking and behaving like an independent towerco. 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 2016-2020 have been considered bold by analysts, especially if compared with its listed competitors such as SBA Communications and American Tower. TowerXchange would be inclined to reserve judgement on Telesites; co-location growth may not reach the aggressive targets set out in Telesites’ IPO, but the towerco’s close relationship with Telcel has enabled them to build over 2,000 new towers in their first year.
Telefonica’s plan to offer up to 40% of Telxius is in line with the 40% of INWIT which Telecom Italia listed in 2015. Although plans for the sale of a further stake in INWIT have slowed, indications of a further strategic sale created fierce competition between EI Towers, Cellnex and other interested parties (with American Tower believed to have been involved in early bidding stages). For Telefonica, leaving the door ajar to sell a future stake in Telxius to a strategic investor could certainly be attractive and so an IPO followed by a later strategic sale may be an option that Telefónica would consider.
Within the European market (where 85% of Telxius revenues from towers are generated), Cellnex represents the only sizeable independent towerco with a presence in multiple markets. A portfolio such as that of Telxius would offer an attractive opportunity for not only for Cellnex to extend its strong hold but it would also present an opportunity for a well capitalised European towerco to reach scale or an international player to mark their entry to the European market. Given the presence of a number of major international players at the recent TowerXchange Meetup Europe, we feel there would be no shortage of interested parties!
Figure three: Timeline of the creation of Telxius
What towers did Telefonica choose not to incorporate into Telxius?
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 32,200 sites left on Telefónica’s balance sheet, excluding those already transferred to Telxius.
Telefónica retains around 12,000 rooftop sites in Germany, but landlords make it difficult to co-locate rooftop sites in Germany, meaning a transfer to Telxius would not have significantly impacted the value of the infrastructure business.
Telefónica O2’s UK towers now sit on the CTIL balance sheet, a joint venture infraco with Vodafone. Managed as an integrated portfolio, with significant decommissioning continuing and RANsharing being overlaid, extraction of the O2 towers would have been a complex task, and would be rendered moot if Telefónica persevered with their plans to divest O2; if not to Hutch then perhaps to a new entrant regulators would find less objectionable, such as Liberty Global.
Telefónica tower transactions to date
So if UK and further German assets weren’t going to add much value to Telxius, what else could have? Telefónica has ~5,000 towers in Argentina, where an independent tower market is just starting to emerge. However, even though Argentina’s new government is making significant progress in opening the market to international investment, it may be too soon to test the resolve of the European and U.S. pension funds who will ultimately buy Telxius stock; Argentina remains a bit too frontiersy to fit with the narrative of de-risked, long term recurring telecom infra revenues. However, we don’t think Telefónica has injected all their Peruvian and Chilean towers into Telxius, nor any of their towers in Colombia, Venezuela, Ecuador and Central America, nor the few Telefónica has left in Mexico. The Telxius balance sheet could have been swelled by ~15,000 additional CALA towers prior to IPO. It wasn’t going to be the 60,000 tower giant speculated earlier this year, but Telxius could have been much bigger had they included more of their CALA assets in the mix, and many analysts feel they have missed an opportunity to both monetise these assets and to create a towerco with significantly more value than its European competitors. However, the story is far from written, and with the IPO still to take place, huge potential for the sale of a further stake to strategic investors and a favourable climate for the acquisition of both Telefonica and third party assets, TowerXchange is watching with interest!
TowerXchange is a research firm and community host for the global tower industry, publishing the quarterly TowerXchange journal and organising a series of invitation-only Meetups for the top 250 tower industry professionals on each continent.
2016-2017 Meetup dates
TowerXchange Meetup Africa & Middle East, 19-20 October 2016, Sandton Convention Centre, Johannesburg
TowerXchange Meetup Asia, 13-14 December 2016, Marina Bay Sands, Singapore
TowerXchange Meetup Europe, 4-5 April 2017, Business Design Centre, London
TowerXchange Meetup Americas, 7-8 June 2017, Boca Raton Resort & Club, Florida
