Gamekeeper turned hunter: how INWIT are providing a blueprint for tower carve outs

TowerXchange catch up with Oscar Cicchetti, CEO of INWIT, to question him about how INWIT was created, how the company is valued and what their plans are for the future. What emerged was a picture of solid growth, clear vision and an appetite to be ahead of the curve in terms of preparing their network for 5G rollout.

TowerXchange: Please introduce INWIT to our readers: what was the decision making process behind forming the company? 

Mobile network operators are separating out their tower businesses and the number of towers managed by towercos continues to increase all over the world: the main reasons behind this trend are focus and total cost of ownership.

Focus, because MNOs need to concentrate on core activities to improve their competitiveness. How they manage spectrum, network architecture and technologies and improving customer relations is more important than the ownership of towers, inverters, batteries and cooling systems. I like the analogy of a car and a driver – infrastructure is the car used by everyone, but the difference is in how MNOs drive it!

Total cost of ownership reduction is key for all the MNOs and telcos because they have to continue to invest in networks to deliver ultrabroadband and deal with competitive pressure and growing difficulties in so called “data monetisation”. The only way to deal with this is sharing whatever is not directly related to their competitive edge and tower sharing and outsourcing is perceived as a valid way to save capex and opex.

Bearing that in mind, it’s not surprising that TIM, in line with this trend, decided to carve out and sell a minority share of its tower asset.

TowerXchange: What process did you go through to get from operator-owned assets to IPO? 

TIM’s decision was based on the drivers I’ve already mentioned: a more focused organisation to manage the infrastructure business, an release of capital from the sale and a higher visibility of the tower asset on the TIM balance sheet.

I do believe that all those objectives have been achieved: the IPO has been successful (TIM obtained roughly €900mn for 40% of the INWIT shares, with a demand that was higher than eight times the offer); INWIT is recognised as a relevant asset on the TIM balance sheet (mid-teens EV/EBITDA multiple which compares with the mid-single-digit typical of the telco space) and, more importantly, the business focus is delivering better than expected results.

A few months after the IPO, TIM decided to look for potential buyers for the majority stake but this process didn’t come to a conclusion. Without entering in decisions that belong to the shareholders, I want to highlight that the value of the asset was not fully evident. As a matter of fact, the business acceleration methods which are allowing us to have “low teens” growth were not yet known and factored in the price, as well as many additional opportunities like the potential electromagnetic threshold increase or the upside that could come from the consolidation in the Italian tower market.

TowerXchange: Over a year on from your IPO you’ve created a valuable asset and become a key player in the Italian market - what are the key values and unique selling points which have led to INWIT’s success? 

I see four key value drivers in our equity story: quality of the asset, visibility on revenues, protection against inflation/deflation and new businesses opportunities.

The market recognises that we have a very high quality asset. When it comes to towers it’s hard to set qualitative benchmarks, but the tenancy ratio is often a proof of how much the customers value the assets over others. And our tenancy ratio is 1.7x, the highest in Italy. It’s also worth mentioning that over 60% of our sites have access to fibre backhaul which is a relevant value in the Italian market.

INWIT has long term contracts with high quality customers; in our client portfolio we have all the Italian mobile operators, all of whom have long term contracts. In particular with TIM, which accounts for about 80% to our revenues, we have a 24 year contract.

Moreover, the passive infrastructure business is not only characterised by high visibility on the revenues and high barriers to entry, but also by a full protection against inflation and interest rates: the revenues we receive are linked to inflation. And we even trade on this, because the majority of the revenues are 100% linked to CPI, while the costs are “only” 75% linked. This means that every percentage point of inflation increase translates into more than a percentage point in terms of both EBITDA and net income.

Also in terms of interest rates we are neutral, because our debt is completely subscribed at fixed rate.

Last and absolutely not least: new business, which means small cells and backhaul, that will be the main source of the growth in a medium/long term perspective.

TowerXchange: Can you give us a little color on the Italian market in general? How has telecoms and network coverage developed there?

In Italy we have more than 45,000 towers with a low tenancy ratio compared to other countries (for the overall market the tenancy ratio is below 1.5x). This means there’s room for efficiencies, particularly when the regulations on electromagnetic load are updated.

All the towers have been built up by the MNOs under pressure to cover the most populated areas and this created a significant overlap and room for optimisation.

On the other hand the growth of data volumes and performances and the consequent deployment of the new mobile technologies will demand a densification of the Radio Access Nodes.

All in all, towercos can play a pivotal role in managing the decommissioning and in offering traditional as well as innovative build to suit towers to the MNOs.

Let me just remark that decommissioning is a positive world in this space, because it implies the same amount of antennas with a lower volume of towers, which will mean a similar amount of revenue and lower amount of opex.

TowerXchange: With the merger between Hutchison and Wind, how do you see the tower market changing in future? 

The merger of Hutchison and Wind should translate into an another portfolio of towers that could come into the towerco space, if they confirm their willingness to sell some of their towers. Obviously we’ll try to have an active role in this. We’re interested in buying this asset and benefiting from the synergies between the two portfolios of towers.

In terms of timing, I assume that in the short term, the combined entity will be initially focus on merging the two networks and the two customer bases and then will potentially look for a sale and leaseback transaction.

TowerXchange: In a market with three ambitious towercos, how do you see INWIT developing? What are your plans and goals for growth? 

First of all, let me highlight that our organic plan foresees a “low teens” EBITDA growth. And this is a relevant perspective, considering we will maintain the typical low risk profile of our industry. This result does not consider any in-organic option, which will provide further upside to our planned growth.

Roughly half of the “low teens” growth comes from the so-called “risk-free actions” like escalators on revenues, contracted tenancy increases and contracted efficiencies derived from dismantling sites.

Moreover we will benefit of the wave of investment we have already committed to at the beginning of the year and which we increased in June, taking into account the commercial results and a new plan from our main customer.

To go into more detail: we decided to double the number of new sites (from 250 to 500), to accelerate the small cells plan (from 1,000 to 4,000 remote units) and to enter into the backhauling market, which will be an additional revenue stream for us.

It’s worth mentioning we adopted a strict policy to get a “double digit return” for each euro we invest in growing the business.

TowerXchange: There’s a lot of talk of 5G and ‘futureproofing’ networks at the moment, what are INWIT’s plans in this regard? 

4G has been the first “data native” mobile data network and its deployment is supporting the growth of mobile internet everywhere. 5G is a new deep transformation that has been conceived as a radical improvement of the performances in terms of throughput (10 Gbit/sec compared with the 100 Mbit/sec of 4G), latency (1 millisecond compared to the current 15/20 millisecond) and number of connections (billions instead of millions).

From an industrial standpoint the expected performance should trigger different use cases (virtual reality, fixed mobile substitution, connected cars, Internet of Things, et cetera)

5G will require several challenging technological improvements (i.e. intensive MIMO and carrier aggregation, active and beam forming antennas, cloud RAN), new and relevant spectrum resources (beyond 3 GHz) and a completely different network topology (inluding the intensive use of small cells).

Small cells, which are an important network component in the 4G environment, will play a crucial role in the 5G framework in order to handle the very high frequencies that will be used and to deliver the low latency required in some use cases.

All the network architects currently think that the amount of small cells required in a fully deployed 5G architecture will be ten times the number of the traditional macro cells. In the Italian market this translate into a demand of roughly 600,000 tenants.

The growth of these small cells is just taking off now and creates a very concrete business opportunity for the towercos.

Each MNO will deploy and use its own small cells but we do believe that a relevant portion will be shared among operators and managed by neutral hosts. In order to capture both needs, we offer a turnkey solution for exclusive LTE small cells and Distributed Antenna Systems to be shared between operators.

Finally, if you consider that we own roughly 11,000 macro towers and there is a potential for 600,000 small cell tenants, even capturing a small percentage of this market could be a great upside for us.