Cellnex closes third deal with Bouygues after missing out on FPS towers

The French tower market is hotting up, with TDF, American Tower and now Cellnex all acquiring significant tower portfolios in the country. As the news of Cellnex’s latest deal with Bouygues breaks, TowerXchange unpicks what this means for French towers, and assesses what the impact will be on growth for three French towercos.

In 2016, Cellnex acquired 500 towers from Bougyues, in two tranches (230 and 270 towers each time). This third deal is split into two phases: the first is for 1,800 existing and operational sites for €500mn. Cellnex states that this portfolio is for ‘urban’ sites, which TowerXchange believes consists primarily of rooftop sites. The second part of the deal provides for the construction of 1,200 new towers 2017-2022, in a deal worth €354mn.

This acquisition falls into line with Cellnex’s ambitions to become a market leader in Europe, not just for macro towers but smart urban infrastructure in readiness for the roll-out of 5G technology, with Cellnex CEO Tobias Martinez stating that the deal  “positions Cellnex in France as an infrastructure operator with an attractive size and coverage to accompany the current and future roll-out of technologies and equipment for mobile broadband access providers —particularly 5G.”

The current tower market in France is a great example of what makes the European tower market so exciting. Whereas in regions such as Africa or Asia, tower markets are formed by the sale and leaseback of significant portfolios of towers from mobile network operators, and the number of towers an infrastructure owner manages in each country is one of the main indicators of scale. In Europe, the market is much more subtle, with value creation through decommissioning as much as through new build, and more alternate site typologies in portfolios, with the impending roll out of 5G is allowing towercos to gain advantages which hitherto would not have been available.

Indeed, one cannot necessarily make a like for like comparison on the Cellnex/Bouygues relationship with other tower transactions elsewhere in the world. While Cellnex state this is a straightforward deal, the contractual needs around the deal will have been different for two reasons: one, the portfolio consists primarily of rooftop sites which, by their very nature, consist as a series of contracts between the structure owner and the landlord (although it should be said this is nothing new for the tower industry). What is new is that Cellnex has used a tailor-made Master Service Agreement (MSA) for an initial period of 15 years, which can be used thereafter. This MSA is in readiness for new accounting standards, specifically IFRS 16 Leases, which will eliminate the distinction between operational and financial leases.

To date Bouygues have sold 4,466 existing towers (plus a contract for an additional 1,200 proposed towers), over the last five years in four transactions. These towers have enabled two of the biggest players in Europe to claim a sizeable stake in France’s telecoms infrastructure.

Bouygues, the third ranked operator in the highly competitive French market, have managed to leverage strategic relationships, Iliad’s need for additional tenancies and European trends to increase the average value of their existing infrastructure from €100,400 per tower in 2012 to €291,250 in 2016/17, an increase of almost 300%. In addition they have credible towercos queueing up to invest in their future infrastructure roll out and have secured anchor tenancy agreements for the next 15 years with their partners. Beleaguered European MNOs looking to streamline in order to gain market share and free up capital to invest in new rollouts should take note.

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, implying that there is still scope for a reasonable amount of new build activity to be undertaken in France.

One issue which may have driven up the cost of these growth towers is the budding competition in the French market between American Tower, who announced the acquisition of FPS Towers in December, and Cellnex.

A question arises around whether, when they acquired FPS Towers which had Bouygues Telecom as anchor tenant, American Tower had counted on building and managing some of Bouygues’ new towers over the next five years. Certainly, a 1,200 build contract is a rare breed in Europe, where new build is much scarcer than in other parts of the world. If Cellnex’s recent announcement means they have one of France’s most important growth opportunities tied up over the next five years, it will be interesting to see how American Tower and TDF respond, and where new growth can be found.

France is one of Europe’s most investible tower markets, and 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. While Bouygues Telecom has now divested the majority of their towers, 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.

There are now three towercos of scale, with portfolios of 2,000+ towers in France and given the synergies between telecom and broadcast infrastructure, IoT and small cells, there are further prospective revenue streams for towercos beyond the macro tower network. It will be interesting to see how these players, two of whom have significant international presence, respond to the opportunities for growth in the market, through three key channels of new build, increasing tenancy ratios and densifying urban networks through small cells and DAS.

Cellnex’s acquisiton on Commscon in Italy was designed specifically to bring on board the kind of skills needed for the latter, and although American tower have not been particularly dynamic in Europe as yet, their global expertise will surely come in useful in the French market as need arises. With TDF’s investors helping to make headway into improving the towerco’s client relationships and gains made in managing rooftops across the country, there remain significant gains to be made in France and it’s not yet clear who will benefit most from them.

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TowerXchange: Congratulations on your third deal with Bouygues, what was your main motivation for this third (and significantly bigger) deal? 

We have three segmental categories in our market development strategy for every market we enter into.

The first step is an introduction in a country where we identify small opportunities, relatively speaking, so typically a couple of hundred towers, which allows us to get a direct relationship with the customers and identify new opportunities for growth.

Scale is the second stage – which is clearly the step we have now taken in France - aiming to feed growth by integrating new sites that allow us to gain a certain dimension and critical mass, resulting in an increased attractiveness and competitiveness for our customers, as our scope and reach in terms of coverage improves and become denser.

Lastly, the third stage is where we have a nationwide footprint where we can consolidate and further develop our partnerships and cooperation programmes with our clients.

So the aim of this deal was to confirm our will to become a significant player in the French telecoms market, supporting the quick deployment of infrastructures and equipment that is able to cope with the growing wireless data flow and demand that 4G and the upcoming 5G technologies will require. 5G, especially, will mean a kind of “quantum leap” in terms of data traffic.

TowerXchange: With 3,500 towers in the French market you’ve achieved good scale in a short period of time, what are you plans for growth in France?

The first action is to align expectations with what we deliver. So to show that we are able to beat ours and the market’s expectations of integrating a relevant portfolio in size, like the 1,800 sites, which are already deployed and will be incorporated in our portfolio over the next 24 months. And to work closely with the Bouygues Telecom team in order to design and execute the deployment strategy for the 1,200 new sites to be added through 2021.

These are the fundamentals to be achieved in order to show that we are an attractive value generator for our customers, the MNOs, and thus stepwise increase our organic growth measured in terms of PoP’s and customer ratios. The higher and the more diversified from a customer point of view, the better. Obviously the denser your network, the higher the likelihood will be that you find opportunities to capture synergies from any potential acquisition prospect that may arise.

TowerXchange: Is the agreement with Bouygues for a straightforward acquisition of towers or a management with license to lease-type deal?

This is a straightforward acquisition of towers and sites. So they will become an asset within the Cellnex’s balance sheet. What we have agreed with Bouygues Telecom is on a tailor-made Master Service Agreement for an initial period of 15 years, that can be renewed thereafter. An MSA represents a new paradigm in the tower industry, which is ready to face the upcoming implementation of new accounting standards.

TowerXchange: It seems like rooftop sites are critical in the French market at the moment - do you see this as a trend across all of Europe?

What we can certainly say is that rooftop antennas will remain as key element of the telecom infrastructure industry. There is space for rationalisation and decommissioning as we can identify overlaps among deployed networks by the different MNOs. But decommissioning means efficiency; as well as a better use of the installed capacity and the ability to deploy new sites in areas featured by being “white spaces”.

Macrocells installed on rooftops with enhanced FO backhaul will remain a key point in the value chain while securing adequate coverage and connectitity to and with a denser network of small cells and DAS systems. This is a common trend, yes.

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