Broadcast towers: profiting from adjacency

In 2016 and 2017 we have seen an acceleration in the number of broadcast assets coming to market in Europe. Once seen as more complicated and less dynamic than telecoms towers, increasingly towercos and investors are reviewing their strategy on broadcast towers and becoming more open to adding this adjacent asset class to their portfolios. TowerXchange takes a look at how these portfolios have grown, the current opportunities in the market and who is investing in European broadcast towers.

Broadcast towers have a much longer and more varied history that telecoms towers. Radio broadcasting began around 100 years ago, and by the 1950s most governments in Europe had established (and owned) a radio network.

In the 1960s and 70s some of the world’s largest towers were built across Europe, to allow radio and television transmission to millions of homes across the continent. Towers such as the 646m Warsaw radio mast in Poland, the Ostankino Tower in Moscow, Russia and the Emley Moor mast in the UK are testament to governmental commitment to getting broadcast signal to every home across the country.

By the 1990s, broadcast networks covered almost 100% of European populations, and many of the publicly owned towers were privatised in huge deals.

By fortunate coincidence, as European operators began to build their networks, many of the national broadcast towers were being privatised and looking for alternative revenue streams. Although the higher frequencies used in telecoms communications meant base station networks needed to be denser, there was a clear synergy with the high broadcast towers, which were already optimally positioned and had power and access routes in place.

In a recent interview with TowerXchange Nicolas Ott, Arqiva’s Telecoms Managing Director, explained why there’s such an extensive crossover between broadcast and telecom towers, explaining that it’s a three layer answer, incorporating infrastructure, sourcing and skills.

“In terms of infrastructure, if you look at a broadcast tower it’s always a relevant structure for MNOs. These broadcast towers are so big and strong, adding a few antennas for MNOs is  easy. The majority of our broadcast towers have antennae for MNOs as well. There’s no need to duplicate assets and investment with these towers.

In terms of sourcing, for both telcos and TV we outsource a lot to third party suppliers for maintenance and other ‘easy’ work, although we do keep the sophisticated stuff in house. We use the same suppliers for all parts of the business, so when we issue a tender we can propose a bigger scope, which means the bidder can offer us a more competitive price and service. The same applies for electricity as we buy electricity on our sites for both our MNO and broadcast customers, and by combining we get a better service and price, so our customers all benefit.

When it comes to skills, we keep the most value-add functions in house. When someone wants to put an antenna on a mast you need to do fairly technical drawings, we do a lot of that in house as we have to be sure it’s done well and you need huge project management capabilities.”

For European infrastructure owners, these synergies allow them to maximise their assets. With both telecom and broadcast tenants signing long term contracts with quality covenants at a time when demand for infrastructure investment is high, there is increasing interest in these adjacent asset classes.

Over the last 18 months a handful of broadcast assets have come to market and have had very different fortunes in terms of outcome. Certainly, it seems that the larger independent towercos are becoming more comfortable with the idea of owning broadcast assets, despite a reluctance to consider them initially, which means we now see companies such as American Tower buying up small broadcast portfolios which they would not have considered before.

American Tower/WDR Westdeutscher Rundfunk (WDR)

Announced in late 2016 in the German press, American Tower acquired 186 transmission towers from German radio broadcaster Westdeutscher Rundfunk (WDR). Although the purchase price is undisclosed, American Tower quarterly reports reveal that their Q1 2016 purchases totalled $79.8mn for 433 towers in Germany, Nigeria, the US and Brazil, so we estimate that the German towers may have cost in the region of €35-50mn.

TDF/ITAS/Towercom

Until 2016 there were three broadcast towercos in France - TDF, ITAS and Towercom. In 2016, TDF acquired ITAS for a reported €100mn, rolling their 420 towers into the TDF portfolio. In September 2017 French media group NRJ announced its intention to sell broadcast towerco Towercast, declaring that Towercast isn’t a ‘fit’ with NRJ’s core business. It’s believed NRJ hopes to raise up to €300mn from the sale.

Towercast owns around 500 towers across France, with a focus on DTT and FM transmission. NRJ has been close to a sale before, most notably in 2014 when the process was whittled down to two bidders and the sale was believed to be a ‘done deal’, only to fall at the final hurdle, reportedly on price.

Last year, Towercast generated sales of €55 million and EBITDA of €27 million, but Baudecroux believes revenue could grow by as much as 20-25% by acquiring a more diverse client base across both broadcast and telecoms.

The figure of ‘at least’ €300mn reflects NRJ’s ambitions to raise 11-13x Towercast’s EBITDA of €27mn, which would not seem an unrealistic goal, given recent valuations in communications infrastructure. However, Towercast’s revenues were down by 12.8% and operating income down 24% last year, much of which was related to the French government’s decision to sell the 700MHz spectrum band to telecom companies, resulting in the loss of two multiplexes and creating a sharp drop in profit. Although Towercast received compensation of €18.2mn, it seems that re-grouping and driving the business in a new direction is not something for which NRJ has the appetite, and this need for a new strategy may well knock on to the valuation of the business.

Axion

In 2016 Spanish broadcaster Axion was sold by Antin Infrastructure to AMP Capital. Axion operates 584 broadcast towers in Southern Spain, with some telecom colocation.

Alticom/Cellnex 

In 2017, Cellnex acquired Alticom and its 30 high towers in the Netherlands for €133mn.  For Cellnex this was not simply a broadcast play, but an acquisition designed to bring in house the skills and expertise needed to create new network architectures which will provide the low latency critical for 5G rollout.

Arqiva 

After failing to reach an agreement with strategic buyers despite getting close to a deal with a consortium led by Brookfield, Arqiva announced an IPO in October 2017, which was then cancelled two weeks later. The short turnaround time suggests that Arqiva quickly identified a mismatch between their own expectations and those of the markets, and the towerco’s next move is as yet unknown.

The markets’ excitement about telecom towers and small cells has been offset by uncertainty about the debt pile and the longevity of Arqiva’s broadcast core, which accounted for 47% of revenues in the year to June, compared to just 33% of Cellnex’s revenues for FY 2016. Commentators have been speculating about the longevity of Digital Television Transmission (DTT), which itself replaced analogue transmission in 2014, although Arqiva has refuted these comments, saying ‘hybrid platforms’ such as Now TV will maintain the relevance of digital broadcasting.

In terms of telecom infrastructure, Arqiva own roughly 25% of the UK’s macro tower sites. Arqiva services all of the four MNOs and has around 8,600 active towers for these mobile operators. Their tenancy ratio is around 2.5x. Although they have 8,600 active towers, the total portfolio consists of over 16,500 towers (the remaining ~8,000 towers are not active due to MNO rollout plans, rural locations where demand is low or deployment complexities as many of them are not dedicated telecoms infrastructure, such as electricity pylons)

The company has long term and secure contracts with both MBNL (an infrastructure sharing joint venture between EE/BT and 3) and CTIL (a similar joint venture between Vodafone and O2) and grew the M2M and telecoms business unit by 6.4% in FY2015-16.

It’s worth noting that just about every major (and proven) tower investor in the world has been connected with Arqiva over the course of 2017. There’s no shortage of appetite for what remains an attractive asset, just a valuation gap. Arqiva either needs to improve the confidence of their potential investors or to recalibrate their valuation. For more information read https://www.towerxchange.com/data/News/documents/b1qxwqyd82xkww/

Digita

Finnish broadcaster Digita’s network of 556 towers covers 99.9% of the Finnish population and has offered colocation opportunities to Finnish MNOs for several years. Their more recent diversification into IoT and data centres appears to be a savvy move, given the valuation Alticom achieved through a similar move into adjacent verticals. Several heavyweight investors have already been linked with the asset, with a formal sales process believed to be about to begin in Q417.

Broadcast valuations

There appears to be much less transparency around the valuations of broadcast towercos than there is around telecom assets, and it’s clear that there’s often a gap between broadcas towerco expectations and what the market is prepared to pay. There’s also often more to a broadcast towerco deal than meets the eye; as towercos move into 5G infrastructure, they need to think about offering tenants a full service, and often the value in these broadcast companies is in skillsets and expertise as much as physical assets.

“Valuations for broadcast assets have not typically reached the levels seen in the mobile tower segment. As such, whilst not all assets will necessarily be attractive in the long run, it may be possible identify and create value around specific broadcast assets.” Says Brian Burns, Telecoms Strategy Director at PWC

“At a European level, the sub-700MHz spectrum has been allocated to broadcasting up to 2030. There is less certainty after that point, and some spectrum may be allocated to mobile but, particularly in countries where other alternatives are more limited, digital terrestrial television (DTT), broadcasting may continue well beyond that point.

At the same time, broadcasting network operators may be well placed to act as platforms to enter or grow in adjacent markets such as mobile hosting, small cells, IoT, data centres and even fibre deployments. All of these areas have the potential to generate significant growth, although some are higher risk.

In the long run, there will always be winners and losers in this sector as with any other, largely driven by the market dynamics in individual countries as well as broadcasting players’ chosen strategies. These assets may be most appealing to more sophisticated investors who are well placed to assess the long-term risk of DTT switch-off, as well as the suitability of the specific target to capitalise on potential growth opportunities.”

Several different entities have a proven interest in broadcast tower assets:

Alinda Capital Partners

Infrastructure investors who acquired Polish broadcast towerco Emitel from Montagu Private Equity in 2013.

AMP Capital 

Bought Axion, the Spanish broadcast towerco from Antin in 2016. Among other communications infrastructure investments, Australian AMP Capital also owns Irish towerco Towercom and has been linked to Finnish towerco Digita.

Antin Infrastructure Partner

Antin Infrastructure Partners has a solid track record in telecom and broadcast towers, having sold FPS Towers to ATC Europe in 2016, and also sold Spanish Axion to AMP Capital in the same year.

APG Asset Management 

APG is a Dutch investor with a strong track record in European infrastructure. They are rumoured to be interested in Finnish towerco Digita.

Arcus Infrastructure Partners

Arcus form a part of the consortium which owns TDF and also sold UK-based Shere Group to Cellnex for €393mn in 2016.

Brookfield Asset Management

Current investors in TDF and led the consortium which came close to acquiring Arqiva in summer 2017. Brookfield are actively pursuing tower investments around the world.

Cellnex 

As well as owning their own legacy broadcast assets, Cellnex acquired Dutch broadcast towerco Alticom in 2017 for €133mn. Cellnex has ambitions for strong growth in Europe and a clear vision of the expertise they need to bring in to lead the 5G infrastructure rollout.

Canada Pension Plan Investment Board (CPPIB)

The Canada Pension Plan Investment Board is a part of the consortium, led by Macquarie, which owns Arqiva. They also own Broadcast Australia, an Australian broadcast towerco, and have a small stake in TDF in France.

Digital Bridge 

Digital Bridge has been linked to several tower sale processes in Europe, including the Arqiva sale process. Their current companies include Mexico Tower Partners, the largest independent towerco in Mexico and companies offering ‘neutral host’ and data centre services.

EQT

EQT is a Swedish investor with a large global portfolio and a strong background in TMT investment. They’ve been linked with the Digita sale process in Finland.

First State Investments 

Australian First State currently own Finnish broadcast towerco Digita, which they acquired from TDF in 2013. They are looking for buyers for the asset.

IFM Investors 

Infrastructure investors on a global scale. Currently form a part of the consortium which owns Arqiva.

InfraVia Capital Partners

Infrastructure investor InfraVia Capital owns Cignal, the ambitious Irish towerco which acquired Cellcom in 2017. They have also been linked to the sale of Finnish towerco Digita.

Macquarie Group

Macquarie is a prolific investor in towers, with current investments in Arqiva, Russian Towers, Towercom in Slovakia, Ceske Radiokommunikace in the Czech Republic, Viom Networks in India, InSite in the USA, D’LIVE in South Korea and Axicom Group in Australia.

PSP Investments 

Canadian PSP Investments is currently a part of the consortium which owns French TDF.

DTT and the future of broadcast

Broadcasting is currently seen as a critical part of European infrastructure, and indeed it is generally considered to be critical national infrastructure by most governments. However, the increasing consumption of content via the internet and the rise of IPTV services such as Netflix and Amazon Prime have led to speculation that digital broadcasting could be ‘switched off’ as soon as 2030, and the spectrum repurposed to provide further bandwidth for mobile communications.

Clearly, for towercos whose profits rely on the services they provide to the broadcast industry, this is a significant threat to the longevity of the business. Simon Beresford Wylie, Arqiva CEO, refuted the claims that IPTV would replace broadcasting, “It is arrant nonsense. People are over simplifying,” he told the Financial Times, saying that in the UK, ‘hybrid’ platforms such as Now TV were helping to maintain the relevance of free-to-air live television.

However, like many broadcast towercos, Arqiva is investing heavily in diversification, working on a comprehensive small cell offering and adding the SIGFOX IoT network to their portfolio. In Finland and Estonia, Digita and Levira have both developed impressive data centre capabilities and of course broadcast now makes up just 33% of Cellnex’s annual revenues, with their growth strategies focussing on telecoms towers and future networks.

One advantage which broadcasting towercos have over telecoms towercos is their experience in delivering a full service to tenants. Whereas telecom towercos have often acted more as straightforward ‘real estate’ investors, broadcast towercos will generally provide power, backup and O&M services, as well as delivering active services, with many providing the transmission itself.

As 5G drives network evolution over the next five to 10 years, and the rise of small cells and network virtualisation drives the need for outsourcing more and more of the network to neutral hosts, these capabilities will become increasingly valuable in the tower’s toolkit.