What is a European tower worth?

At the recent TowerXchange Meetup Europe 2017 event, held in London in April, senior executives from the towerco and investor communities took part in a panel to discuss what European towers are worth. During the course of the discussion it became clear that there is no one answer and the position of the valuer is as relevant as that of the asset being valued. From tax to market perception, we heard from leading experts David Porte, Vice President of International at SBA Communications, David Bernal, Head of Business Development at Cellnex, Alexandre Lucas, Executive Director at Goldman Sachs, Christopher Ehrke, a Partner at Arcus Infrastructure Partners and Jonathan Dann, Managing Director at RBC.

Most investors in towers cover the telecoms space and are used to publically listed companies on the scale of Orange of Deutsche Telecom, albeit companies which are often struggling with debt and downgrades. Whilst European towercos like Cellnex have achieved impressive scale in a short space of time, in comparison, public towercos are much smaller and the markets view them very positively, hoping they will grow further.

Participants stated that the current European publicly traded experience is very similar to the US market 10-15 years ago, in terms of how investors view the tower sector. There is a belief that more towers is better, and the market seems to be trading off raw tower numbers rather than return. The question the panel wanted to see answered was how soon the European market would evolve to become more like the US, where towercos have reached critical mass and are judged more on their returns. The participants agreed that this kind of analysis, on an asset basis, is much more accurate than tower multiples, taking into account underlying cash flow, inflation linkage, the marketability of the portfolio and longer term market potential.

The importance of contracts should not be overlooked either, with some of the panel stating that towercos on the public markets in Europe are currently very undervalued as they don’t take into account the ‘gold plated’ contracts in place for 20 or 30 years with all-or-nothing renewal clauses, making them a quasi-debt in terms of value. A run-off analysis of the value of towercos identify values much higher than current share prices.

The panel flagged up two main problems when marketing towercos to investors: one being perceived industry risk - the misconception that macro sites will be defunct and decommissioned with the advent of small cells. The other is that tower assets are so different it’s impossible to benchmark, even revenue per site can be affected by second tenants, ground rent or the terms of a sale and leaseback deal.

There is also a decrease in the number of pureplay towercos in both Europe and the rest of the world, meaning not every tower dollar is equal. In some cases in Africa, a large minority of revenue earned is through power provision, which is a different offering entirely, so valuing a company just from cash flow is not possible. The panel spoke about how every revenue stream should be valued differently, taking into account rooftops, greenfield, DAS and in-building solutions as well as factors such as electromagnetic issues, the state of the real estate market and the client relationship. Understanding what each of these elements is worth is very complex.

In addition, valuations need to be made not just on today’s conditions but in understanding where the market is going and what the client will need. TDF in France is a great example of this as they offer telecoms, broadcast, radio, FTTH and media services, which are all very different businesses. In terms of potential value of assets, the ability to connect it with fibre and capacity for hosting 5G is also important.

Another important factor discussed by the panel is in-market scale. In the US three players control 95% of the tower market, whereas in Europe no single player has more than 25-30% of the towers in any given market.

One of the things the panel felt strongly about was a focus on EBITDA during valuations, with some participants going as far as to say that it’s a ‘terrible’ metric for use in valuing towercos. One of the major differences the panel had seen between different countries is the taxation, with many companies ignoring the tax issue. The experts on the panel felt that the impact of taxation on towercos is very underplayed and is an ongoing concern, particularly in relations to IFRS 16 regulations which could mean paying twice the amount of tax as a real estate lease might be 12% and on services it might be closer to 25% (see ‘A fundamental change in how tower leases are represented on MNO balance sheets’ in TowerXchange issue 19 for more information in IFRS 16).

Lastly the groups addressed foreign exchange rates, which can inflate or depress the value of an asset enormously, particularly in emerging markets. Emerging assets must be capable of showing real euro and dollar growth in order to judge their value.