Portugal has had a rough ride over the past decade, hit particularly hard by the global downturn at the end of the 2000s and unable to stabilise growth since then, mobile revenues aren’t as strong as elsewhere in Europe. Operators in the country have been clever in packaging up triple play services to maximise revenues, but where does this leave their appetite for managing their networks and does their growth elsewhere necessitate freeing up capital elsewhere?
The Portuguese economy
Portugal is a western European market with a relatively small population of 10.3mn. Particularly hard hit by the crash of the late 2000s, Portugal was bailed out by the EU and the IMF in 2011 to the tune of €78bn. Despite growth over nine consecutive quarters to Q2 2016, Portugal remains under close observation by the European Commission as the country is in the centre of what the Financial Times has dubbed a ‘perfect storm of meagre economic growth, falling investment, low competitiveness, persistent fiscal deficits and an undercapitalised banking sector that owns too much of the nation’s sky-high public debt.’
Portugal’s government is currently led by Antonio Costa’s Socialist party, in an alliance formed in December 2015 with Communist, Green and Left Bloc parties. The former mayor of Lisbon came to tenuous power on an anti-austerity ticket and promised to pay down debts in a ‘sustainable way’ after the centre-right bloc of the previous Prime Minster, Pedro Passos, lost the absolute majority it had enjoyed since 2011. This anti-austerity rhetoric has unnerved Portuguese business and international investors alike, as the prospect of a second Portuguese bailout looms large on the horizon.
Parallels with Greece and jitters in the European market fueled by the UK’s Brexit vote and upcoming German parliamentary elections mean Europe and the IMF’s appetite for these anti-austerity measures will be extremely low and any knocks to the economy may well tip the country over the edge. Tellingly, in a recent IMF report, the authors claimed that not one single Portuguese economist agreed with the statement that “Currently, with the program completed, the public debt is sustainable”.
The next few months will be critical for the Portuguese economy and the financial markets will watch the Europe and the IMF for an indication of how they intend to deal with this turbulent market.
Figure one: MNO market share of Portugal’s 15mn subscribers
The Portuguese telecom sector
Mobile penetration in Portugal stands at 161%, with 16.6mn connections in the country. There are three mobile operators in the country – MEO (Portugal Telecom), NOS and Vodafone, who control 44.1%, 32% and 22.4% of the market respectively. In April 2016, two MVNOs were also launched into the market, Cabovisão and Onitelecom, neither of whom have captured more than 0.1% of the market to date according to data released by ANACOM, Portugal’s telecoms regulator.
In Q2 2016 there were around 5.8mn users of mobile broadband (45.6% of sim cards in use) in the country, an increase of 1.8% on Q1 2016 and of 2.1% on Q2 2015. This is thought to be linked to the higher penetration of smartphones in the market and an increase in bundled phone and internet offerings from Portugal’s mobile network operators.
Portugal is also seeing the lowest ever numbers of pre-paid plans among retail customers, at just 49.1%, a fall of 4% from Q2 2015 and the lowest number since records began.
The bad news for Portugal’s mobile network operators, however, is that revenues from retail customers are declining quite dramatically. According to Portuguese telecoms regulator, ANACOM, monthly ARPU has dropped by 6.6% from H1 2015 to H1 2016 and total revenues are down 7.6%, from €733mn to €678mn. This may be a sign of the deepening economic crisis in Portugal, or of competitive pricing strategies as operators fight for market share in a changeable market, but with network coverage no longer a competitive factor, it may be that maintaining infrastructure is becoming an increasingly unpalatable cost for network owners.
Figure two: Declining revenues from Portugal’s mobile users
fugure-two-declining-revenues Portugal’s MNOs
MEO: MEO is a part of Portugal Telecom (PT), a multi-play media company which was sold by Brazilian Oi to Altice for 7.4bn in Q2 2015. With 44.1% of the mobile market, MEO is the leading mobile network operator in Portugal. PT is also the leading player in fixed broadband and number one triple play operator in Portugal, as well as one of the biggest pay-TV players. Altice’s plans on acquisition focused around growth through operational excellence and a highly focused management approach, which included ‘simplification of operating practices’ and ‘efficiency savings in network spend’. While it’s early days for the new acquisition, Altice has carved out their target of €100mn opex savings in the first 12-18 months and is now aiming to reduce opex by a further €100mn across the organization. With revenue down 3.5% YoY in Q1 2016 (vs. -8.7% in Q4 2015), regaining this ground and investing in fibre rollout must be a continuing priority. Altice may well see an advantage in transferring towers off their balance sheet to reduce opex and release funds for more pressing business needs.
Vodafone: Portugal’s second biggest operator controls 32% of the market. As part of the global Vodafone group, Vodafone Portugal has been able to offer innovative solutions to the market, such as VoLTE, however they have lost 2% market share 2015-2016 and are seeing revenues in the country decline.
NOS: The smallest Portuguese operator is also the fastest growing, swiping 2.8% of market share from MEO (-0.7%), Vodafone (-2%) and MVNOs over the last year. It is owned by Isabel dos Santos, daughter of the Angolan president and Portuguese conglomerate Sonae, who made a failed bid for Portugal Telecom in December 2014, ahead of its eventual sale to Altice, in an attempt to keep the asset in Portuguese hands. Fierce competition in the market has enabled NOS to grab more market share, increasing their stake to 22.4% of the market. With net profit in Q1 2016 up 5% to €24.4mn, the group has surprised analysts, who forecast an average estimate of €21m in a Reuters poll.
Mobile tower ownership in Portugal
How many towers are there in Portugal?
TowerXchange understands there to be 6,800 towers in Portugal, with a further 4,700 sites in use across different topographies (rooftops, street poles, utilities etc). With no known bilateral sharing agreements in place, colocation is organised on an ad-hoc basis and the tenancy ratio across the country is close to one (the only exception to this being indoor DAS projects, where one operator provides the infrastructure and shares with the other two).
MEO have the largest tower portfolio with 3,000 traditional structures, Vodafone owns approximately 2,500 and NOS about 1,300. In addition, there are around 350 broadcast towers run by state-owned Radiotelevisão Portuguesa, although TowerXchange are not aware of any current colocation agreements with Portugal’s three MNOs.
Could we see towers coming to market?
Might any of Portugal’s towers come to market? Southern Europe has experienced a high level of tower activity over the past two years, with sale and leasebacks, towerco consolidation and carve outs generating a huge amount of interest.
TowerXchange believes that Portugal would be a good market for a European towerco to enter, with three successful MNOs, good 4G/LTE coverage and very few existing colocations representing some significant potential for cost saving. With so much uncertainty around the economy and mobile revenues declining, we believe it would be a logical step for an operator to release capital from the region and stabilise their opex over an extended period.
With the biggest tower portfolio, declining revenues and ambitious cost saving targets, Altice-owned Portugal Telecom would seem like the most likely candidate to sell their towers. Indeed, in 2014 Portugal Telecom instructed Barclays to investigate this option, at the time to shore up the finances of PT’s Brazilian owner Oi. Although the tower sale did not go through (Oi opting to sell PT in its entirety to Altice), major players including Abertis Telecom (now Cellnex), American Tower and KKR & Co were rumoured to have been very interested in the assets, and the work done on the asset register at the time would certainly make it easier to bring the towers to market soon.
For a towerco interested in the Portuguese market, acquiring the most extensive tower portfolio in a market where data usage is driving the growth of 4G and 5G would be a smart move – if the price is right. Given that Vodafone prefer to retain their assets, Portugal Telecom could make clear gains from being first movers in this market.
Who could buy?
Cellnex, with an extensive portfolio in Spain and Italy already, would be the obvious choice, although their digestive capacity could be pushed to the limit if they are successful in acquiring the FPS towers on the back of their Shere and Bouygues deals. MNO-led towercos Telxius and INWIT have yet commit to acquisitions outside their original tower portfolios, but if they intend to demonstrate growth, Portugal may be a familiar and manageable target for a step into new territories.
American Tower’s new joint venture, ATC Europe, may well be looking for new opportunities on the continent, and a straightforward SLB scenario would play to ATC’s strengths as an experienced towerco with a wealth of experience.
Finally US towercos and investors, in particular Digital Bridge and SBA, are believed to have an interest in Europe and may well be interested in a small portfolio which allows them to capture a previously under served market.
