More than the sum of its parts

As the first mobile towerco in Italy, TowerTel has had to deal with the arrival of two of the biggest European towercos in its market. We spoke to Carlo Ramella, Chairman at TowerTel, about how the company was formed, their growth through acquisition of ‘mom and pop’ tower portfolios and their vision for the future of both TowerTel and the Italian telecoms market.

TowerXchange: Can you introduce EI Towers, your history and the company’s evolution to date? How many towers do you own?

EI Towers is quite a new company, the combination of two assets. The first comes from a listed towerco in Milan, DMT, which was the first company to develop the tower business in Italy. It was founded by Alessandro Falciai and started to acquire sites in 2003. Between 2003 and 2012 DMT managed to grow, thanks to acquisitions, up to 1,500 sites, a mix of telecom and broadcast sites, before merging with the broadcast towers of Mediaset to create EI Towers. Technically speaking it was actually a reverse merger, as a consequence the carved out part of Mediaset was listed by this transaction.

So to summarise our evolution; DMT was founded in  2003 with zero sites, and built its portfolio to 1,500 sites by 2012, of which 1,300 were broadcast and 200 were mobile sites. Mediaset contributed about 1,000 broadcast sites to the mix, meaning that  when the two companies came together to form EI Towers, the company had a portfolio of 2,500 sites. The merged company has two different approaches to the two different segments in which they operate. We maintained the former operating company (called TowerTel) in the mobile sector and started to develop this company by acquiring the small ‘mom and pop’ portfolios from a starting point of around 2,300 broadcast sites.

Since the combination of assets and splitting out of business units, EI Towers comprises around 580 people, for the most part dedicated to the broadcast service business (so mostly working for Mediaset Group and Cairo Group, the new main shareholder of top Italian newspaper “Il corriere della sera”). In the broadcast part of the business we offer a full service agreement, so we manage not only the tower but a wide range of services such as maintenance of equipment, planning the network, coding of the signal – we have 100% control of the broadcast service management for the broadcasters.

TowerTel, on the other hand, is mainly a real estate company. It’s a very lean company, just ten people are involved, and all of the activity related to maintenance is outsourced to managed service providers.

Since our formation, we have acquired a large number of small mobile tower portfolios, so today we manage 1,000 mobile sites from a starting point in 2012 of just 200. The number of broadcast sites we have access to remains unchanged but we’ve added new base stations to broadcast towers on 650 sites. So all in all, the mobile business now has 1650 sites available.

At the moment the mobile sector is seeing a lot of organic growth and the broadcast business is a more static sector but two years ago we reached an agreement with the third national player, Cairo Group, who in 2015 launched the winning tender offer for an unallocated broadcast channel and from 2017 will take advantage of of a full service agreement with EI Towers. This will add around €15/16mn in additional revenues, making our estimated revenue for 2018 around €136mn euros.

TowerXchange: The Italian tower market has exploded over the last two years, with two new and significant towercos on the scene (namely Cellnex and INWIT) - how does TowerTel view these changes and what keeps you unique?

We are basically different in terms of our equity story. TowerTel is the sole independent player in the country, meaning we do not have a master agreement with any of the four operators in the country. The tenancy ratio of TowerTel is about 1.8 tenants per site, which indicates our independence. We manage a niche market of 1,650 sites with an independent approach. We focus largely on tower sites due to the fact we can leverage a higher number of clients compared to on rooftops in the cities. The taller the tower, the higher number of tenancies we can achieve.

Cellnex and INWIT are national players as they control around 7,000 and 11,500 towers respectively. In this respect we are much more flexible, particularly in respect to INWIT, as we’re independent whereas INWIT is controlled by TIM. Mediaset is absolutely independent from any operator. INWIT has to share the view of their strategy with their major shareholder and TIM has an important power to decide who to host on INWIT’s towers. Cellnex has a master agreement with WIND and has some terms and conditions with WIND to be respected. In terms of growth, we have been the sole buyer of these ‘Mom and Pop’ towers since 2003; we’ve gained an expertise in understanding these small portfolios, we can extract the real value from them. Cellnex and INWIT tried to enter into this sector but found it too time consuming for them to educate an internal team of people to do this. It’s nice that we are the sole buyer in this sector, we can buy for 6-9x EBITDA and as we trade at 12x there’s a mathematical equity creation. We have covered a lot of the market and estimate we have another two years of activity in acquiring these portfolios ahead.

TowerXchange: Can you give us a little background on the operator situation in Italy? As Iliad enter the market, what is your opinion on how their network will be set up?

We have four MNOs in Italy; Vodafone, TIM, Wind and Three. Vodafone and TIM have deployed their networks in terms of sites and still control these networks. Wind has divested to Cellnex and Three controls their entire network. Recent news is the merger between Three and Wind and the entry of Iliad into the sector. What are the consequences for us? I would say positive. As soon as Wind and Three announced the merger we were worried as the merger would have exposed us to a risk of €2.5-3mn if there had been one operator fewer in the market. The entry of Iliad implies (with the agreement of the European Competition Authorities) that Three/WIND will pass 5,000 sites plus some frequencies to Iliad. Three/WIND had perceived they would have a problem with the European Authorities and made a deal with Iliad in a preemptive basis. Iliad can select which of the 5000 they want in order to start their operation as their initial offering will rely on roaming.

It’s early days but the good news is that Iliad have 5,000 sites so they won’t rely on competitors for roaming. We won’t see a sale of those tower assets in less than 18-24 months as they bed in, but those towers may come to market further down the line.

TowerXchange: Italy has stringent regulations around active equipment. How does this impact towercos operating in the country and your tenancy ratios?

This has an impact in particular in urban areas as it’s about the number of hours where the population is exposed to certain emission levels. For sites which are far from the population the regulations are less stringent and so this is why we’re focusing on rural areas. In Cellnex and INWIT’s portfolios about 50% of sites are urban sites and may host a second operator but having three tenants is hard. In these areas, for example, there may be a problem in adding 5G technology to the sites as the existing technology uses up all the electromagnetic space on those sites.

TowerXchange: With European attention turning to the potential of rooftops and alternative topologies to densify networks, what are TowerTel’s plans for the evolution of your portfolio?

In order to potentiate the current rooftops, MNOs are trying to deploy a new network of small cells. For us it’s much more difficult to enter this market, you have to be closer to the CTO point of view of the mobile carrier. INWIT are in the best position for this as TIM has to deploy and reinforce their rooftop coverage. We are much more cautious, we are still at the door for the small cells, studying the difference between indoor and outdoor; indoor is more customised as you can select a single project, for example, a shopping centre. Outdoor needs a strong partnership with an operator and local authorities which is hard to do without the guarantee of hosting someone.

Another consideration is also the size of the market. Indoor site numbers aren’t as big as has been discussed. In Italy there aren’t all that many big malls with lots of shops, most people still buy in the centre of the city where you’re talking about outdoor cells. It’s quite easy to contact owners of malls but outdoors it’s difficult as you have to agree with owner of the building and also the city council.

In this respect I’d like to emphasise that rather than focus heavily on small cells we’ve recently acquired a company, Nettrotter, with an eye towards IoT. It’s slightly different from the tower business, we offer a very low bandwidth channel to the potential client that may take advantage of business specific devices (relevant for IoT many businesses) that do not need battery charge for several years. We want to capture the first clients entering this sector, for example in the application of intelligent metering whereby water companies monitor levels of water along the network or in healthcare or control logistics around Europe.

TowerXchange: The broadcast industry is creating significantly less revenue and growth than mobile at the moment and digitalisation will affect this further, how do you feel about the way EI Towers’ business is split?

We don’t see this as risk in the long run. In Italy we have three platforms; the DTT, satellite and fibre platforms with the government having stimulated a big investment in the fibre platform. We manage DTT;  linear TV reaches 99% of the population with free content available. In the future we believe the basic content of the TV will still pass through our network; news, talk shows, reality TV etcetera, and will guarantee the existence of the network we manage and host.

We believe that the other platforms are dedicated to on-demand content; you need to pay not only for the content but to have the connection in the first place, so it’s a different proposition to DTT broadcasting.

We’ve also formed a new company, EI Towers Radio, to position ourselves as a full range service provider for the FM radio industry. We pass the current hosting business from €7mn and have started a small M&A campaign in this area and plan to capture around 100 sites to corner this market. We are positioning ourselves for the benefit of this new entity and the other part of the market.

TowerXchange: With towercos increasingly looking at multi-country operations, what are TowerTel’s plans for future growth?

Our goals in the short to medium term remain acquisition of the small ‘Mom and Pop’ companies, because of the discrepancy in the acquisition multiple and we can apply our management strategies to these assets. With expansion abroad, the synergies on an international scale are very limited. It’s hard to see immediate synergy in a network where we’re not present. We’re much more cautious on the multiple to be paid for assets abroad; we can consolidate in a market only if there’s a real opportunity.

TowerXchange: You were reportedly interested in bidding for INWIT when they considered bringing the towers to market. Can you tell us what made them appeal to you?

INWIT would have been a great opportunity for an industrial operator that is present in the territory, not only as due to the number of sites but also their relationships with local authorities and maintenance operators etcetera. INWIT represented an opportunity for us as we could operate in a very efficient way, increasing the top line with new deployment and gaining efficiencies on the cost side. We saw potential in combining the two networks; whilst obtaining savings from decommissioning parallel sites is challenging, we felt confident we would be able to extract value from this in Italy.

Unless the major transactions in Italy disappear for the time being we’ve decided to invest in ourselves developing buyback shares, we’d like to buy back 5% of the company.