The opening salvos have been exchanged in the battle for leadership of the French tower market. TDF entered into an agreement to acquire competitive broadcast infrastructure provider ITAS TIM, and their 420 towers, for a reported €100mn. While TDF currently has market leadership, with 20% of France’s ground based telecom towers, pan-European tower giant Cellnex countered by agreeing the acquisition of an initial 230 towers from Bouygues Telecom at a 13.8x adjusted EV/EBITDA valuation. With teasers out for the sale of FPS Towers and their 2,482 towers, let battle commence for the French tower market!
France is one of Europe’s most investible tower markets, and the sale of the pivotal FPS Towers portfolio will be critical to the shape of the market in the next five years.
The aggressive market entry of Iliad’s Free Mobile in 2012 has shaken up incumbent MNOs Orange, SFR and Bouygues Telecom, driving down tariffs and ARPU amidst the huge capital expense of spectrum and network densification for 4G. Bouygues Telecom has divested the majority of their towers, with the sale of a further tranche of towers announced and another to follow, while Free Mobile will have to leverage co-location even more, having relied upon a soon-to-be-terminated roaming agreement with Orange to accelerate time to market.
Two healthy tower companies, TDF and FPS, have proved the business model works in France, and there are synergies between telecom and broadcast infrastructure, IoT and small cells – there are further prospective revenue streams for towercos beyond the macro tower network.
There is a good culture of infrastructure sharing in France, where many network planners seem inclined to buy rather than build towers. There are a total of 62,794 points of service spread across 47,347 telecom structures, including ground based towers, rooftops and other structures, giving a prevailing tenancy ratio of 1.33. However, the tenancy ratio on ground based towers is around 1.5, and even higher on sites proactively marketed for co-location: France’s oldest towerco, broadcast-telecom hybrid TDF has a tenancy ratio of 1.8 on their 4,865 telecom towers, while FPS forecasts reaching a tenancy ratio of 2.0 on their historical portfolio by the end of 2017.
While there are around 4,700 further co-locations between MNOs (exemplified by the 1.26 tenancy ratio on the 500 towers Cellnex is negotiating to buy from Bouygues Telecom), it is not uncommon for the regulator to have to intercede to facilitate inter-operator tower sharing, as was the case in a recent dispute between SFR and Free Mobile. Other MNO tower sharing relationships seem more comfortable, for example in 2014 Bouygues and SFR were in deep talks about creating a joint venture company to operate 11,500 mobile sites in rural areas, eliminating 7,000 overlapping sites – although the partnership between the MNOs attracted complaints from Orange.
The receding threat of RANsharing boosts the value of French towers
RANsharing can be highly value destructive for towercos – it can significantly reduce lease up potential as multiple MNOs can simply share a single antenna.
The value of assets in the French tower market is particularly sensitive to the governance of RANsharing, given the propensity of French MNOs to enter such partnerships. The 4G RANsharing partnership between Bouygues Telecom and SFR is due to end in late 2018. Free Mobile has few of their own towers as a function of a roaming agreement with Orange which had been due to run through 2020, but which will now be phased out from 2017.
While the French regulator ARCEP has proposed a gradual termination of all roaming agreements in metropolitan France, don’t discount the potential for RANsharing to become a factor in rural networks, even after the expiration of current agreements.
Orange’s network was rolled out first and, at the time, they owned TDF so there was no overlap. When SFR later rolled out, they used the Orange and TDF sites where possible and built little parallel infrastructure. And when Bouygues Telecom rolled out five years later, they took a similar approach, so there was minimal overlap between sites. With Free needing ~10,000 additional sites quickly as a result of the curtailment of their roaming agreement, their fastest time to market will be to use existing sites. With Orange, SFR and Bouygues all needing to expand their networks to meet coverage obligations, there are plenty of drivers to fuel co-location growth (albeit with low new tower growth) for ten years in the French tower market.
Who owns what?
Thanks to the comprehensive databases of ANFR, and TowerXchange’s relationships with FPS Towers and TDF, we have an unusually large amount of data on who owns what in the French tower market.
TowerXchange believe there are 24,847 ground based towers and similar structures used in the French telecom network. 58% of those towers remain MNO-captive; 30% are shared among three towercos (TDF with 4,865, FPS Towers with 2,482, and Cellnex are in the process of acquiring 230 from Bouygues); 12% are owned by other third parties such as municipalities. A further 7,500 other structures host one or more MNOs’ points of presence, such as local authority and transport structures, water towers and churches.
Rooftops play an important role in France’s mobile network topography; telecom equipment is installed on around 15,000 rooftops. Only 3% of those current rooftop sites are provided by TDF and FPS, however, TDF has secured commercial agreements to make available a further 2,985 rooftop sites, while FPS Towers has secured the rights to 20,000 rooftop sites thanks to their acquisition of LOXEL.
Would consolidation from four to three MNOs be a good thing for French towercos?
Most commentators feel that consolidation from four to three MNOs would stimulate network investment as the tariff war in France has come at the expense of network capex.
After Altice, the majority owners of SFR, had failed in an effort to buy Bouygues Telelecom in 2015, market leaders Orange and Bouygues recently came back from the brink of consolidation, only to declare that “the possibility of consolidation is now ruled out for the long term.” In order for the complex deal to secure approval from French competitive authorities, Bouygues would have been required to divest several strategic assets – potentially including towers – to Free Mobile and SFR. Thus the collapse of the consolidation negotiations was probably a pre-requisite to Bouygues’ tower sale to Cellnex, and to the monetisation of FPS.
France-telecom-industry-breakdown
Who will bid for FPS Towers?
JP Morgan has put out a teaser for the sale of FPS Towers. Press reports suggest a valuation of around €1bn is sought.
FPS was founded in 2012 when Antin Infrastructure agreed the acquisition of 2,166 towers from Bouygues Telecom for €185mn. Bouygues initially retained 15% equity in the venture, but sold that to back to FPS in 2015. FPS has added value by leasing up the towers, and by acquiring the aforementioned LOXEL, giving them access to 20,000 rooftop sites.
The auction of FPS Towers is expected to be fiercely competitive.
One company likely to bid is incumbent French tower market leader TDF. When TDF refinanced in March 2015, valuing the company at €3.8bn, the new shareholders (Brookfield, APG, PSP, Arcus Infrastructure and Credit Agricole subsidiary Predica) injected €2.2bn in equity into the business. TDF turned over €735mn in FY15, with adjusted EBITDA of €381mn, good for a 52% margin.
Founded in 1975 from the breakup of the French State owned broadcaster, TDF is a hybrid broadcast and telecom towerco, deriving 41% of their revenues from telecom. TDF will have a total of just under 11,000 sites across telecom and broadcast when they close the acquisition of ITAS TIM. TDF has hived off a number of international broadcast assets to focus on their domestic market. TDF may be motivated to acquire FPS as a defensive measure against advancing multi-country European tower giant Cellnex.
Cellnex is clearly positioning themselves for a run at FPS Towers. The company were quick to herald their €80mn acquisition of 230 towers from Bouygues Telecom (with a further 270 potentially to follow) as the beginning of a 20 year collaboration between the two companies. Bouygues is the anchor tenant on most of the FPS Towers, and one cannot escape the thought that Cellnex’s acquisition of 1% of France’s towers, per the announced Bouygues deal, is only the first step on a road to achieving a double digit market share. With an acquisition budget bolstered by a successful IPO and a €3.8bn market cap, and with the prospective acquisition of INWIT in the balance as Telecom Italia wavers, Cellnex has accelerated its push into Northern Europe.
Cellnex currently has over 16,100 sites, and closed Q116 with revenue of €165mn (+41%) and EBITDA of €63mn (+26%).
Who are the other potential bidders for FPS? Prospective bidders from the United Kingdom now face a forex premium thanks to Brexit – our prediction; they’ll bid but they can be outbid. American Tower continues to kick the tyres of the European tower market, but they’ve been underwhelmed by slow growth in Germany – our prediction, they’ll bid but will have the discipline to walk away when the opportunity ceases to meet their investment thesis. Digital Bridge recently evaluated an investment opportunity in France and, alongside SBA Communications, could be dark horses. Strategic buyers won’t be the only bidders; there are a host of infrastructure funds with an appetite for European towers.
TDF consolidates leadership of French broadcast tower market
In FY15, TDF still derived the majority of its revenue (48%) from TV and radio (versus 41% from telecom). As at March 2015, TDF had 1,677 operational infrastructure assets serving as TV broadcast sites, and 1,259 as radio sites. The 420 tower portfolio TDF has agreed to acquire from ITAS TIM is primarily a broadcast infrastructure business, with a small proportion of their ~€45mn annual revenues derived from telecom co-location clients. ITAS-TIM had been a disruptive influence on the broadcast tower market, having rolled up another broadcast towerco OneCast, and offered an aggressive price point.
If the TDF-ITAS TIM deal closes, NRJ Group’s Towercast, which has around 550 sites, will remain as TDF’s sole competitor in French broadcast towers.
While new market entrant Cellnex is an accomplished broadcast tower operator in their home market of Spain, TDF’s leadership of the French broadcast tower market looks difficult to rival, especially with Towercast remaining their only competition.
Why the FPS portfolio is pivotal
If TDF acquires FPS, they would have a very strong position in the French telecom AND broadcast tower markets – only a large scale sale and leaseback by SFR or Orange, and neither seems imminent, would represent an opportunity for another towerco to approach their scale.
If Cellnex, American Tower, Digital Bridge, SBA Communications or some other new market entrant were to acquire FPS Towers, then TDF would have a serious competitor of significant scale.
With Free Mobile and 4G overlay tenancies up for grabs in France, with MNO consolidation seeming less imminent, and with the threat of RANsharing receding at least for now, it’s a good time for FPS to be bringing their towers to market – competition for this pivotal portfolio will be fierce!
It’s not just about towers: the investibility of rooftops and public infrastructure in Europe
There are few ground based towers in Europe’s urban environments. Network planners have to piece together coverage using rooftop sites, public structures, churches, billboards and water towers (there are telecom antennae on 3,000 water towers in rural and suburban Frances alone!), increasingly supplemented by small cells leveraging street furniture.
While 24,847 of France’s cell sites are located on telecom towers, 48% of the network is hosted on other sites, owned by landlords who are not telecom real estate professionals.
Innovative European towercos like FPS are developing solutions to acquire ownership or long term rights of use for this new typology of sites and in doing so are broadening their product mix to better meet the needs of European MNOs.
FPS are aggregating occupied rooftop sites, offering up front payments to secure 20-30 year leases, then professionalising the management of those sites while making them available for co-location. Tenancies ratios on France’s rooftops are currently in the 1.1-1.3 range, but demand for urban capacity, combined with a lack of sites, could mean that over the coming five years tenancy ratios rise above two on professionally (i.e. independently) managed rooftop sites.
FPS management has launched another innovative programme focused on securing hundreds of public and municipal structures used in telecom networks. There is 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 m, others can be found aggregated in deals like one FPS reached in December 2015 with highways operator APRR to secure 300 sites.
Innovative European towercos are not only towercos, although towers remain the core business. Companies like FPS are a towerco, a roofco and a siteco – enabling them to form deep, long term win-win-win partnerships with their customers and landlords.
