A new dawn for Sunrise

With the news that Switzerland may be the next country to play host to a tower deal, TowerXchange examines key market dynamics and statistics and explores how a deal might play out. With a renownedly stable and successful economy, the Swiss mobile market will no doubt be a target for those seeking steady returns, but what are the drivers behind this sale and what’s on offer?

Thus far as a trend, the most recent European sale and leasebacks tend to have been conducted by the third MNO player in a market, (whereas market leaders have often chosen  to carve out their own towers into a captive towerco – see INWIT, Telxius, Global Tower). In markets where ARPUs are dropping and operators are under pressure to capture market share through fibre rollout, triple/quadruple play offerings or cost differentials, it makes sense for these players to shed their opex-heavy infrastructure and focus on gaining on the market incumbents.

As these European tower assets are integrated into towercos’ portfolios and the business case is proven, we predict that the market will see an increase in SLB activity, particularly from second and third place operators who are hoping to secure market growth.

Swisscom

As the market leader, Swisscom offers quad-play services to Swiss customers as well as various other services in IT consulting, healthcare, venture capital, film and cinema and online marketplaces. Claiming its roots as far back as 1852, Swisscom was floated on the stock exchange in 1998 and launched into television broadcasting in 2007. Since 2009, Swisscom has been expanding the fibre-optic network in Switzerland as well. With a strong grip on their leadership position, and solid infrastructure still in place, Swisscom makes it a hard task for any other player to challenge their position.

Sunrise

Launched in 1998, Sunrise is the second largest mobile network operator in Switzerland by a narrow margin ahead of third placed Salt. Facing high levels of debt, the company undertook an IPO in early 2015, and, while financial performance has improved over the last few years, the company is still under pressure from declining subscriber numbers and revenues. In 2015 they reported a 4.8% year on year drop in annual revenue, which they attributed to the weakening Swiss franc, structural declines in the pre-paid and fixed voice markets and customer migration to ‘Freedom’ plans, which separate voice fees and device costs. The company lost CHF113mn (€106.2mn) in 2015 compared to CHF115mn (€108.1mn) in 2014, although the number was impacted by the company’s IPO and debt refinancing in Q1 2015.

Salt

Formerly Orange Switzerland, Salt was acquired in February 2015 by NJJ Capital for €2.3bn. NJJ Capital is a holding company owned by Xavier Niel, whose opco brand Iliad operates the disruptive Free Mobile in France and is just rolling out in Italy. Niel says NJJ has been working on ‘re-engineering’ Salt from the ground up since it made the acquisition, including bringing in new CEO Andreas Schönenberger in March 2016. Niel’s track record of providing highly competitive, infrastructure-light mobile services elsewhere in Europe may well be a threat to the other two operators in the market, and makes Salt a strong potential tenant for an incoming towerco.

Mobile penetration is on a par with the European average at 132% while mobile data use among consumers has increased rapidly in line with the growth of LTE. This increase in mobile data services is helping to offset declining ARPU and lower traffic in the SMS segment as consumers switch to a range of OTT messaging services. The Swiss regulator OFCOM has encouraged operators to collaborate on a shared LTE network, so reducing investment costs, while all MNOs have launched commercial LTE services, and have extended LTE-A technologies to increase data throughput. Swisscom has partnered with Ericsson to prepare for commercial 5G to be launched over the next three years, and the other operators are believed to be actively assessing this opportunity.

TowerXchange estimates that there are around 8,500 macro towers in Switzerland: around 5,000 owned by Swisscom, 2,000 by Sunrise and 1,500 by Salt. In addition, Swiss rail operator SBB has built and run in excess of 650 points of presence along the Swiss railway network.

Swisscom claim to have invested around 1.75bn CHF (€1.64bn) in network expansion in the past few years, renovating or installing 200-300 masts and modernising their fixed network in 300 communities each year.

Sunrise are bringing their towers to market, with a large percentage of their 2,000 towers offered as part of the deal. Sunrise has stated that there’s no certainty of a sale, but that they are investigating their options in order to focus on ‘strategic network management, network development and the delivery of new technologies’ as well as potentially supporting a faster deleveraging of the company.

In 2014, Salt and Sunrise were reportedly mooting a collaboration around network sharing in order to increase efficiencies and allow them to compete more effectively with Swisscom. To our knowledge this plan did not come to fruition, but is a demonstration of the two operator’s willingness to share infrastructure in order to reduce costs and take a run at increased market share.

The Swiss market could be compared in size and type to the Netherlands, with a stable economy, three MNOs and a strong market leader in fibre rollout driving network densification and upgrades. However, in the Netherlands, it was market leader KPN who first divested their towers (to Open Tower, Shere Group and Protelindo, the latter of which were acquired by Cellnex in 2016), creating a very credible anchor tenant for towercos in the country, and opening up the most extensive Dutch network to the competing MNOs who could benefit from better network coverage.

In the Swiss market, however, Swisscom has such a large hold on the market, and significantly more extensive infrastructure than the other players, meaning their potential as tenants is not as reliable as many towercos would want in order to lease up their towers. Salt, on the other hand, may follow the model of Iliad’s other opcos in France and Italy, and keep infrastructure as light as possible, relying heavily on colocations to achieve coverage and could represent an enthusiastic client for a Swiss towerco.

Interest in the Sunrise towers is unlikely to be as keen as recent tower sales in the French or Dutch markets, for example, as the market has to be created and the landscape for additional tenancies on a smaller portfolio of towers is not entirely clear. However, given the stability of the Swiss market, the longevity of all three mobile operators in the country and Iliad’s aggressive growth strategies, there may well be an interest in establishing a towerco presence in Switzerland.

Cellnex are an obvious candidate for any European tower portfolio at the moment, although their strategy to test a market, learn about it and then consolidate may be tricky in Switzerland, where additional portfolios could be hard to come by after the Sunrise deal. On the other hand, their small cell expertise and readiness to support 5G/IoT rollout could be well received in a market like Switzerland, and a foothold in the market will allow them to establish the relationships they need to develop the other parts of the business.

ATC Europe are also looking acquisitive and may well be interested in adding a tower portfolio which sits geographically neatly between their existing operations in Germany and France.

American players SBA and Digital Bridge, both of whom were rumoured to have had an interest in the FPS Towers process in France, may well be interested in investing in a solid European market, if the Sunrise towers can deliver enough lease up potential.

TowerXchange believes it’s unlikely that the towers will interest an investor without the resources and infrastructure of an existing portfolio in place already, similarly, this is not an opportunity which will entice a towerco to enter the European market for the first time. Although perhaps 3i, who were involved in bidding for FPS in France up until the final stages may well be in a position to leverage the expertise in UK-based Wireless Infrastructure Group to realise their ambition of a Europe-wide towerco consortium.

With the IFRS 16 Lease international accounting standards change coming at the end of 2018, which will bring to an end the opportunity for MNOs to raise cheap capital or reduce debt through off balance sheet tower sales, Sunrise may not be the last European MNO to consider monetising their towers