Investing in European towers

TowerXchange Meetup Europe brings together not only the who’s who of towercos and wireless infrastructure owners in Europe, but also the key investors in the sector. With billions of euros at work in European towers, investors from across the value chain use the event to build a rounded view of the asset class and share their expertise with our attendees. On 17th April we brought together a panel including Jack Colbourne, Partner at Arcus Infrastructure Partners, Spencer Kurn, Partner at New Street Research and Eric Crabtree, Chief Investment Officer of the IFC, to discuss the investment landscape for European towers and how this will evolve over the next few years. 

Most European MNOs went through a period of solid growth in the early 2000s before seeing contractions around a decade ago, in particular in terms of mobile service revenue. Although the period of contraction is now over for most operators, growth is still slow, which will have an impact on towercos – how much can you grow if your client isn’t growing? Thus far, towers have been a low profile asset class, with solid growth, partly through their contracts with clients and partly through the nature of the infrastructure. Some of the valuations which are being talked about at the moment are making investors cautious, particularly when downstream customers are struggling. 

The core value proposition of towercos remains: MNOs have been expected to invest in capex and frequencies while their top line has stagnated, if the towercos can lower the TCO, that’s where the value lies. However, towercos in Europe have expended a huge amount of time and energy building the business case and creating relationships, and still MNOs often won’t enter into agreements with towercos unless circumstances force it. This certainly has an effect on towercos entering new markets, particularly in Eastern Europe, where many countries don’t have any kind of tower industry at all. In Eastern Europe in particular, there needs to be catalysts for divestiture, perhaps something like the Telenor sale to PPF or Veon selling their remaining towers in central Asia. 

The growth of macro towers is slowing relative to growth in small cells and indoor DAS deployment. In the US many towercos are addressing this by going into small cells and fibre, with companies like American Tower focussing on new business models, such as installing antenna on light poles. Organic growth is currently much higher in the US than in Europe. 

The French market is seeing a lot of build to suit activity, largely driven by relative newcomer Free mobile. A similar situation occurred in the Netherlands, when a fourth entrant needed to build new sites, and we will see it happen again in Italy as Iliad enter the market there. 

The economics of build to suit are good, and the ability to plan and build ‘capital assets’ rather than just sticks in the ground means they can be leased up and monetised much more effectively. With land rights and building rights in place from the outset, build to suit can add a significant level of value. In addition, in many western European countries much of the build to suit activity is driven by government initiatives, where public policy is driving coverage where it wouldn’t have made commercial sense for an MNO to build their own towers. 

In Eastern Europe, where there is lower 3G and 4G smartphone penetration, there is still enormous potential for growth in customer data. 5G won’t be the main driver in these markets for some years, and although demand for towers can be lumpy, depending on the budget of MNOs at any given time, building up critical mass may be an entry point for obtaining towers via divestiture when the opportunity arises. 

Further west, a change in network architecture centred around (but not exclusively driven by) 5G rollout will drive change. Macro networks will continue to expand to fill genuine coverage holes, and regulators may well step in to drive some of this growth as well. A lot of the action in lower level sites and micro cells won’t affect the macro layer too much, and will mainly be used for adding capacity in cities. Towercos will have to consider how ready they are for that business, and prove their ability against OEMs like Nokia or Huawei, who have been running active networks for years.

In the US there has already been a switch, with most growth in the country driven by small cells rather than macro cells. Verizon is paving the way here, and using small cells to support their existing wireless business in the densest markets. 

European towercos have acquired towers through traditional sale and leaseback transactions; through acquiring broadcast incumbents, whose towers were often built by the state and are proving to be solid physical assets in developing the telecoms business; and from non-traditional owners such as utilities, police forces, local authorities or ‘mom and pop’ operations. There are still plenty of opportunities for growth, and towerco consolidation is a key part of this. 

In some markets, such as Russia or Ireland, where there are a number of towercos in the market, there will doubtless be opportunities to consolidate and benefit from economies of scale. However, there are limits to how far the benefits of consolidation can go, and acquiring parallel infrastructure won’t increase the value of a towerco or their offering to customers. It’s also healthy for towercos to have competition, and in markets where there is only one towerco, there’s a risk that MNOs will pressure the regulator to intervene on lease rates.

Many European macro sites are based on rooftops, but they’re much harder to exploit than towers. When many rooftop sites were being built there was no plan to commercialise them in place, and in recent sale and leasebacks there is value in the assets but it’s much harder to turn an occupational lease into a site which can be shared effectively, and access is much harder for customers too. Rooftops are about relationships as much as assets, and are much less tangible. 

When buying into a towerco, investors can use cheap equity capital, and also buy an opportunity to put more money in at a later date, buying a privileged platform to invest. Investment in towers also opens up opportunities in adjacent businesses, some of which might not even fully exist today.

Huge pools of capital confine themselves to North America, Western Europe and parts of Asia, but we may see more investment in ‘emerging’ markets as investors look for better multiples. Investors will also continue to look at Western Europe, sale and leaseback opportunities and incumbent broadcasters where available.