A change of heart: Turkcell postpones Global Tower IPO at the last moment

The latest plot twist in Europe’s tower saga is the eleventh hour postponement of the Global Tower IPO by Turkey’s leading MNO, Turkcell. Citing market uncertainty caused by the US elections and cyber attacks, Turkcell announced the postponement of the listing of their carve out towerco Global Tower, which had been planned for October 27^th. “Having considered the potential impacts of the upcoming United States presidential election and the FED’s expected interest rate decision on the financial markets as well as cyberattacks, and in agreement with its major shareholder Turkcell, Global Tower has postponed its initial listing on Borsa Istanbul planned for October 27 until the markets become more reliable and stable,” the company said in a statement.

Founded in 2006 by Turkcell, Turkey’s largest mobile network operator, Global Tower manages 7,994 towers in Turkey, 1,181 towers in Ukraine under subsidiary UKR Tower, plus a further 800 towers in Belarus and Northern Cyprus. Of the Turkish towers under management, around half of them are owned outright by Global Tower and the other half are owned by Turkcell and either leased or managed by Global Tower, indicating that the status and value of the portfolio in Turkey is variable – with some towers available for co-location and others simply managed for Turkcell by Global Tower.

Despite Turkish MNOs traditionally being keen to hang on to their infrastructure as a competitive differentiator, Turkcell clearly sees potential in their Global Tower asset. As the towers are already carved out and managed as a separate entity, with many supporting multiple tenants and already generating revenues estimated to be around TRY$200mn (around US$60mn) and an EBITDA of around TRY100mn (US$30mn), the asset is already market-ready.

In April 2015, Turkcell appointed a new CEO, Kaan Terzioglu, whose background working for Cisco and in the US and Europe is believed to make him more inclined towards outsourcing and lighter operations across the organisation. Turkcell also announced in June 2016 its plans to refocus away from declining Turkish revenue and to grow international revenues from 7% of total revenue to almost 40% by expanding into North Africa, Eastern Europe, the Middle East and Central Asia. There’s no doubt that the capital which might have been raised from a Global Tower IPO would be significant in supporting this international expansion.

Unstable political and economic environment

 Recep Tayyip Erdogan was sworn in as Turkish president in August 2014, following a highly successful 12 years as premier, during which the Turkish economy tripled in dollar terms. However, Turkey is a parliamentary republic and the presidency is a largely ceremonial role, so many believe Mr Erdogan is seeking to change the constitution to create an executive presidency.

On 15 July 2016, an attempted coup was carried out by members of the Turkish armed forces, during which over 300 people were killed. The coup was unsuccessful and Ergodan’s regime responded by making mass arrests, estimated in the region of 40,000 detainees, across the country. Theories abound about the cause of the coup and the motivations behind it and the ensuing government action.

Ratings agency Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to Ba1 with a ‘stable’ outlook in September 2016 — placing the country’s credit rating in junk territory and saying it expects that the deterioration in Turkey’s credit rating to continue over the next two to three years.

But it’s not just domestic political instability in Turkey causing alarm. The ongoing uncertainty around the US elections, Brexit causing instability in Europe, increasing tensions between Russia and the West, and the migrant crisis in Syria, which has affected Turkey more heavily than any European country, are all unbalancing markets and economies, both on a local and global level.

However, while political and economic uncertainty may have contributed to the decision to postpone, there were no significant events in the weeks prior to the postponement which could alone be blamed for a sudden change of heart.

Valuation and IPO confidence

Turkcell planned to list 25% of Global Tower, which is a fairly small commitment compared to the percentages listed by Cellnex, INWIT and proposed by Telxius over the last 18 months. The price range was believed to have been set at TRY 3.82-4.46 per share. With 345mn shares coming to market and limited net debt, this suggested an EV of TRY 1,318 to 1,539mn, around US$400-500mn. TowerXchange sources suggested revenue per tower of TRY44,000 (around US$14,000). Based on an assumption that only 3,393 Global Tower-owned Turkish and 1,181 Ukrainian towers were revenue generating, this suggests a 12-15x EV/EBITDA multiple.

Following the success of the Cellnex and INWIT IPOs in 2015, interest in raising funds through the IPO of tower assets has gained a large amount of interest in the tower industry. However, unlike Cellnex, whose business revolves around maximising tenancies and profits, operator captive towercos such as Global Tower have additional hurdles to overcome to demonstrate their value in the market. Questions abound around operators’ ability to deliver the ‘best of both worlds’ and reserve space for their parent company and anchor tenant, safeguard their competitive position, while also extracting the maximum potential value from leasing up the tower network.

It seems likely that, if Turkcell were expecting to achieve Cellnex-like multiples of 16/17x EBITDA from the IPO, then the reality of a potentially significantly lower valuation may well have given them cause to reconsider the move, particularly as TowerXchange have heard rumours that a trade sale was discussed over the summer and rejected in favour of the IPO.

In addition to the above factors, a decade-long disagreement among Turkcell’s shareholders looks like it may be resolved soon, which could disrupt the decision making process of Global Tower’s parent company. A disagreement between Russian tycoon Mikhail Fridman’s Alpha Group, and Cukurova, owned by Turkcell founder Mehmet Emin Karamehmet which could result in Fridman’s Alpha Group (which currently owns a 13.2% stake) acquiring Cukurova’s 13.8% stake by 28 November 2016. Such uncertainty among shareholders has already hampered Turkcell’s development and prevented the payment of certain dividends, it may well be that this is a contributory factor in the postponement of their satellite tower business.

TowerXchange believes that the Global Tower IPO is very much ‘postponed’ as opposed to ‘cancelled’ and that Turkcell still have a desire to monetise this valuable asset to support their plans for international expansion. It may be that their disappointment in the IPO valuation encourages Turkcell to reassess the benefits of a trade sale, perhaps to a strategic partner who can support their growing network needs overseas as well as domestically. On the other hand, they may well choose to wait until the markets are a little more settled, as Global Tower represents a portfolio of towers with a strong anchor tenant, good growth opportunities and a successful ten year track record.

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TowerXchange: Can you shed any light on the decision to postpone the Global Tower IPO?

We had received a satisfactory demand from the international institutional investors which motivated us further about our tower business. Especially large-sized long-only investors who showed interest in investing in Global Tower have confirmed our trust in the fundamentals of our business. Overall, the level of interest from U.K., Europe and Turkey was comparatively higher than that of the States.

Our understanding is that the cyber-attacks have negatively impacted our process, limiting access to the Internet. Thus, we have decided to postpone the IPO for now. We have planned to relaunch the process once the markets become more stable and reliable. In that regard, we will wait until after the US presidential elections and FED interest rate decision, both of which have an impact on the global financial markets.

TowerXchange: Would Turkcell consider a trade sale of Global Tower under the right circumstances?

With a view to a more focused management of Global Tower, and to transforming it into a regional tower company, the first planned step was its initial public offering, now postponed to 2017. Investor interest in Global Tower during its IPO process has strengthened our confidence in our tower business model.