Sale and leaseback in Europe

The sale and leaseback of telecoms towers first began in the USA 23 years ago, but has only really found momentum in Europe since 2012. We investigate why there’s been such a disparity in market development, what the motivations are for a European MNO to sell and lease back their towers, what operational benefits can be expected and what key differences are prevalent in the European model. 

Currently there are around 600,000 towers in the European market, of which 76,287 (15%) are owned by independent towercos. We predict that the number of towers to move from MNOs hands into independent towerco ownership will increase over the next four years, and that MNOs will also continue to spin out their own towercos, either in order to secure investment or ahead of a sale to an independent infrastructure provider. In many European markets, an MNO’s passive infrastructure is no longer likely to be a source of competitive advantage; the markets are mature and the networks are built out, some would even say overbuilt in some areas. The price of towers in Europe are perhaps at a high point, with huge interest from strategic and financial investors when towers come to market, so it makes sense for MNOs to look at divestment now. 

Cellnex have been leading the charge in terms of deal making and the number of sale and leasebacks seems to be snowballing, with Altice the latest MNO to bring towers to market in France and Portugal. Thus far €3.66bn  has been deployed in SLB activity in Europe since 2012, accounting for 24,873 towers across 15 discrete deals. In recent years growth in European towercos has been driven by sale and leaseback rather than build to suit.

The simple and most obvious driver for sale and leaseback is that each MNO running parallel infrastructure is unnecessary. Colocating technology on one tower, rather than two, three or even four, allows for huge opex efficiencies which could be even further enhanced as towercos move towards a service model and offer shard backup, maintenance and other operational services. Allowing a neutral party to facilitate sharing, and subsequent decommissioning, will increase efficiency for all MNOs.

MNOs are increasingly viewing their passive assets less as a strategic advantage and more as a cost centre, and the case for stabilising and reducing opex while freeing up funds to invest in expanding capacity or fibre rollout is getting stronger. By divesting towers, MNOs can focus on their core business, and also free up capital to invest in revenue generating activities.

Some seek high purchase price (often when the deal is needed to pay down debt), others seek low leaseback (generally when making a strategic decision to sell in order to stabilise opex), the two factors cannot be delinked. Often this is the catalyst for deals collapsing: finding the balance between cash released and long term lease rate commitments can make it hard to come to a win-win outcome. MNOs need to consider whether they’re doing a sale and leaseback in order to provide a high injection of capital or to lower the monthly burden of managing their assets.

The biggest SLB deals in Europe to date have been done with MNOs who are reengineering debt, but now the model is proven most MNOs are at least considering their options, as they have pressing capex needs ahead of 5G rollout. The speed at which towers come to market can vary dramatically, for example Altice were very cold on the idea of selling towers until recently, and now selling their assets is a critical part of their gameplan as their debt load has become untenable for shareholders. For an MNO like Sunrise, who weren’t struggling with high debt, it seems more likely that they took a strategic decision to release cash to drive growth, and to take a non-core asset off the books.

Viewpoints on operational issues are becoming more sophisticated, with MNOs realising that if an action increases EBITDA it increased shareholder value. Capex and opex avoidance must also be taken into account when assessing a sale and leaseback deal.

Attitudes towards sale and leaseback differs between organisations, between territories and depends heavily on the internal structure of an organisation. Each decision maker needs to be able to quantify the benefits of selling their assets. It’s becoming more complicated than just assessing the cash-out price and leaseback rate – there’s more homework to be done.

Although SLB relieves non-value added activities such as health and safety and regulatory obligations for MNOs, there can be huge opposition from internal stakeholders, who don’t want to lose control of a key part of their responsibility and find it hard to see how a third party could do a better job of maintaining towers or negotiating with landlords. An MNO has to overcome this internal dissent as part of the process of preparing an asset for sale and leaseback.

MNOs will SLB in order to release future cash and avoid paying out for network capex investments and maintenance of the infrastructure. There’s a huge overhead cost to manage assets with zero value in the books.

One of the key factors is corporate structure. Companies which lack debt are less likely to sell, and those with more localised power structures can assess divestment at a market by market level, rather than as a strategic decision.

Historically, lease fees paid to towercos were typically classified by leesee MNOs as operating leases, rather than financial leases. This is because the MNO tenant was leasing only part of the tower, not the whole asset. As such, the operational lease enabled tower transactions to be conducted off the balance sheet, often by MNOs seeking to use the capital from the sale of their towers to delever.

From 1 January 2019, under the new international accounting standard IFRS 16 Leases, existing long term, non-cancellable leases, including tower leases, must be brought on balance sheet. As a result tower leases may amplify rather than relieve debt, placing more pressure on MNOs’ debt covenants. However, because the lease goes on the books, leasing towers won’t adversely impact EBITDA like it does at present.

Many MNOs in Europe believe that IFRS 16 will have an effect on the rate of SLB in Europe, as the current model will not relieve their balance sheets, however towercos are finding ways to reduce capitalising debt and have been working closely with their customers to make the model work for them, and even to improve it. Some towercos feel that restructuring Master Lease Agreements (MLAs) as Master Service Agreements (MSAs) would enable their tenants to avoid bringing towerco fees back onto balance sheets. It remains to be seen how the regulators will respond to towercos’ switch from MLAs to MSAs, and whether they’ll insist on more profound change than simply in name alone in order to comply with the new standards, and we may see the rate of SLBs slow for a short period in late 2018 as MNOs wait to see what the effect will be.

To date, sale and leasebacks have focussed solely on passive infrastructure, and not incorporated any active roles at all. The drivers for this have come from both sides: for MNOs they still see strategic value in controlling their network and are unwilling to pass control to a third party. Towercos have been reluctant to facilitate RANsharing when their business model is predicated on how much space they sell on each tower. In addition, OEMs (who sell antennae) are adverse to RANsharing for the same reasons. 

However, as MNOs double down on their core business and towercos look to increase their role in the market, the transfer of active sharing to towercos is beginning to happen. Crown Castle are buying fibre, American Tower is working with Philips to put antennas on lamp posts (and, indeed, to replace lampposts) – it seems that towercos’ reach is expanding, and they could become important facilitators for RANsharing, as well as deploying capital to connect cities.

In CEE, for example, Petr Kellner, owner of PPF, has bought new MNOs from Telenor in Hungary, Bulgaria, Montenegro and Serbia, and may follow the model which PPF created with CETIN, in totally separating the retail and infrastructure parts of the business. Many towercos and other key players see a future where active equipment becomes less core to MNOs, and is viewed more like towers are. In terms of 5G and small cells, there’s an opportunity to lower TCO upfront by sharing, and prevent the rollout of parallel networks which was so capex-heavy during macro rollout.

For towercos, sometimes it can be more tax efficient if an MNO creates a new towerco first, but if an MNO seeks to create an asset with multiple tenants before acquisition, there can also be a risk of not delivering against expectations, which would erode value. For MNOs selling assets because they’re non-core, there’s no responsibility to add value, and it could backfire. In the case of Sunrise in Switzerland, the creation of Swiss Towers AG worked well to carve out the assets and simplify the acquisition process. For INWIT or Deutsche Telekom, for example, which are much more established, any acquisition will be much more strategic on the part of both MNO and towerco.

All eyes are on the ongoing Altice process in Portugal and France, through which the MNO hopes to realise around €4.5bn for their ~13,000 towers. Rumours that Deutsche Telekom are reviewing their assets, and may either divest or expand the role of their Deutsche Funkturm towerco arm in partnership with an independent towerco may be borne out in 2018, with eyes on the Dutch and UK markets in particular. PPF’s recent acquisition of Telenor’s assets in Hungary, Montenegro, Serbia and Bulgaria may result in a decoupling of retail and infrastructure businesses, although whether these assets would come to market remains to be seen.