Vodafone to create Europe’s largest towerco

After several months of the secretive Project Skylon, Vodafone has announced plans for the carve-out and monetisation of its 61,700 towers. By May 2020 Vodafone will have separated its towers into as yet unnamed entity referred to as “TowerCo”, with a dedicated management team and control of its assets, with Vodafone becoming its anchor tenant. Meanwhile, in Italy, Vodafone announced a €2.1bn deal to combine its towers with TIM’s towerco INWIT. TowerXchange takes a deeper look at the deal. 

Details of Vodafone’s plans to carve out approximately 61,700 towers were announced on the 26th July, swiftly followed by news that their 11,000 Italian towers would be combined with TIMs towerco, INWIT, leaving a balance of 50,700 towers. Following the development in Italy, towers across nine markets will be included and TowerCo will own Europe’s largest tower portfolio. 70% of the Vodafone TowerCo sites will be in the major markets of Germany, Spain and the UK. A further 15,100 towers in other European countries are also to be included, totalling nine of Vodafone’s 13 European markets. In addition to its Italian operations, The Netherlands VodafoneZiggo is excluded, as are operations in Malta and Albania, but sites in Ireland, Portugal, Czech Republic, Hungary, Romania and Greece will be included. At present, Vodafone’s TowerCo appears limited to their European footprint

“[Prior to the news that their Italian towers would be combined in INWIT rather than transferred to TowerCo] Vodafone claims that based on market benchmarks for anchor tenant lease rates, plus existing third party revenues and the attributable cost base, TowerCo could generate proportionate annual revenue of €1,700mn and EBITDA of €900mn, representing a 53% margin. Vodafone estimates that TowerCo’s annual maintenance and expansion capex will be around €200mn. Vodafone’s target EBITDA margin is realistic, given the performance of other ‘operator-led towercos’ (towercos that are at least 50.1% owned by MNOs). TIM’s towerco INWIT trades at a 56% EBITDA margin, Deutsche Telekom’s Deutsche Funkturm at 61%, Bharti Infratel at 44%, and China Tower trades at 58%.

Given the varied markets in which Vodafone operates, and the lack of clarity around the details of Vodafone TowerCo’s proposed business model, there is a lot of room to discuss appropriate benchmarks and valuations. Much will depend on which assets are included, whether the assets are fully controlled, the details of the anchor tenancy Master Lease Agreement and the anchor tenant terms and lease rates that Vodafone decides to set. 

Vodafone have announced that preparations are underway for a variety of monetisation options; with alternative options being explored market to market as well as a potential IPO of TowerCo. Following an €18.4bn deal for Liberty Global’s assets in Eastern Europe, Vodafone will use the proceeds of the sale to reduce Group debt.

Project Skylon, a review of Vodafone’s tower portfolio in Europe, has been ongoing since November 2018. As devotees of the telecom tower industry in all its forms, TowerXchange welcomes the news that Vodafone has decided to carve-out and monetise its towers. In the era of infrastructure sharing, and with the valuation arbitrage between MNOs and towercos sustained at 4-5x, it is increasingly difficult to justify to shareholders why 30% of the world’s towers remain trapped on MNO balance sheets. With the carve-out of Vodafone’s towers, there will be “significant scope” for generate operational efficiencies and for increasing tenancy ratios across the portfolio. Vodafone also emphasised to its shareholders that tower monetisation and network differentiation and long-term flexibility were not in conflict.

Vodafone revealed that during the course of project Skylon, it received several offers for various parts of its tower portfolio, which it took as a sign that its tower assets would command an attractive valuation because of TowerCo’s “superior asset quality, strong market positions and higher anchor tenant credit rating.”

MNOs in Europe have faced a trifecta of problems which tower monetisation may be able to help unblock. Intense competition and a record of poor returns on invested capital have left mobile operators with substantial debt burdens, secondly, operators need capital to bid for expensive 5G-spectrum and rollout denser than ever networks, and thirdly, operators in Europe have not seen the revolution in network efficiency which can only be unlocked by independent tower management. Vodafone’s TowerCo ticks all three boxes. 

Nick Read, CEO of Vodafone, said: “Building on our position as Europe’s largest converged operator, we are now creating Europe’s largest tower company. Given the scale and quality of our infrastructure, we believe there is a substantial opportunity to unlock value for shareholders while capturing the significant industrial benefits of network sharing for the digital society. We are focussed on executing this strategic priority over the next 18 months.”

Vodafone already has active and passive sharing agreements in place in Italy, Spain and the UK. Sharing appears to be the new normal for Vodafone as it seeks to benefit from a faster rollout of 5G at a lower cost across its largest markets. James Ratzer commented on the deal “Vodafone wanted to capture industrial synergies itself before selling out to third-parties. This has now been achieved in Italy, Spain and the UK, but critically we await tower sharing agreement in Germany, with either DT or Telefonica Deutschland.” TowerXchange takes a deeper look at what the change in strategy will mean for Europe’s largest markets.

Vodafone’s TowerCo will own 19,300 of the 79,033 cell sites in Germany. Only around 20,000 of those cell sites are ground based towers, so a significant proportion of TowerCo’s assets will be rooftops, which may limit lease up options in Germany, or at least require addition work to split sites and make them shareable. For example, Deutsche Funkturm’s rooftop portfolio has a tenancy ratio which is currently 0.8x lower than their ground based towers. 

Deutsche Funkturm will remain Germany’s biggest towerco, with just over 30,000 sites across the country. Telefónica has already sold its ground based towers to infraco subsidiary Telxius which now owns 2,373 towers in the country. In September Telefónica announced plans to accelerate the monetisation of further assets, with the MNO owning 19,000 (primarily rooftop) towers in the country. Whether Telefónica sells such towers to Telxius or another third party remains to be seen, with the operator exploring various options. In addition to Deutsche Funkturm and Telxius, American Tower’s ATC Europe has been active in the German market since acquiring KPN’s ~2,000 E-Plus towers for €393mn in 2012. Their portfolio has grown slightly over the last six years to a total of 2,210, mainly through the acquisition of 186 transmission towers from German broadcaster WDR. Vodafone TowerCo’s German assets would make an attractive acquisition target for American Tower if it is to expand its German footprint and compete effectively with Deutsche Funkturm.

Vodafone’s TowerCo announcement was only the second most significant piece of tower news in Italy on Friday. Vodafone has also announced the combination of its towers with TIM’s INWIT creating a listed towerco managing 22,100 sites. Vodafone will receive €2.14bn in cash plus a 37.5% stake in the combined company. There should be little overlap between the two merged portfolios, because Vodafone and TIM have operated a co-ordinated network planning programme for many years. Most of the tenants on the towers are Vodafone and TIM and the combined entity will begin with a tenancy ratio of 1.75. The deal values the towerco subsidiary at €5.27bn, and Vodafone says it will have EBITDA of €110 million by 2026.

As part of the deal both Vodafone Italia and Telecom Italia have committed to new master services agreements for an initial eight-year period, with an eight-year renewal period. For the next four years both have also committed to add more points-of-presence on the towers. The agreement also states that INWIT will be have first refusal on new tower build for Vodafone Italia and Telecom Italia for their 5G roll-outs. Over the next ten years Vodafone Italia and Telecom Italia have committed to be anchor tenants on 1,900 new towers and 2,500 small cells built by INWIT. INWIT has already deployed 2,600 small cells, with many more expected for 5G. The deal’s small cell and macro minimums will help INWIT achieve its target of building a total of 10,000 new macro sites and small cells by 2021.

Vodafone Italia’s Chief Executive Aldo Bisio said “Network sharing reaps the benefits of 5G and at the same time reduces the impact on the environment and lowers rollout costs, allowing more investment in services for customers.” The capex required for 5G has long daunted Europe’s mobile operators and network sharing is clearly becoming the favoured method for reducing opex costs, and Vodafone and TIM already have a 5G RANsharing agreement in place.

The announcement cements the dominance of the towerco model in Italy’s telecoms market.Cellnex now owns 10,600 towers in the southern European state. Hutchison’s Windtre is also in the process of carving out its 8,100 towers its own infraco CK Hutchison Networks. Away from the major players, Italy is home to a long tail of smaller towercos including TowerTel, HighTel, El Towers and RaiWay. James Ratzer of New Street Research thinks there are clear winners and losers: “The transaction allows Vodafone to partially cash out of their tower assets at a very attractive multiple (24x FY18 EBITDA)… For TI, we expect the transaction to deliver a modest cut to leverage once they sell down to 25%. But the primary value for both MNOs is in facilitating active network sharing, which should enable them to deploy superior networks at lower cost… For the other Italian actors, the deal is likely an incremental negative. For Cellnex, this deal is likely to lead to tenancy loses over the next four years… For Iliad and Wind, the deal represents a means for TI and Vodafone to strengthen their network advantage.”

On the eve of this deal 42% of the 48,629 broadcast and telecom towers and rooftops in Spain were owned by towercos, led by Telefónica’s Telxius and European market-maker Cellnex. Cellnex own 8,832 in Spain, behind Telxius’s larger portfolio of 10,997 sites. TowerXchange estimates that the balance of sites is made up of 17,500 Orange sites and 9,700 Vodafone sites.

It was announced earlier this year that an old network sharing deal between Orange and Vodafone had been extended to cover municipalities with fewer than 175,000 people, meaning up to 14,800 sites will feature active sharing for 2G, 3G and 4G technologies by both companies, with the potential open to 5G sharing too. This has caused Vodafone to report their Spanish tower count as 9,700 in an adjustment for the sharing deal with Orange.

Like in Italy, the future of Vodafone’s towers in Spain is uncertain. In 2016, Telefónica’s Telxius scrapped a planned IPO due to lack of interest in the market, but followed up with a sale of a 40% stake in Telxius to investment firm KKR for €1.3bn. AMP Capital acquired Axion, a company with 584 broadcast towers, from Antin Infrastructure in 2018. So as well as Cellnex, there are a number of asset owners with capital already committed to telecoms infrastructure in Spain, making this a market with both an established culture of infrastructure sharing, and a good potential for monetisation for Vodafone.

The UK is another market where Vodafone’s tower carve-out may prove more complicated thanks to sharing agreements. Uniquely the UK has two deep joint ventures between the incumbent four network operators. BT/EE and Three still own their towers, but share those towers, and some elements of their active network, through MBNL. Vodafone and O2 share their towers through Cornerstone. Critically, the Vodafone and O2 towers are both on the Cornerstone balance sheet. Until now Vodafone and O2 have not shared their active network, but announced earlier this week a plan to share antennae to reduce the cost of their 5G roll-outs.

Vodafone announced the carve-out of 6,600 towers in the UK, reporting it as 50% of the total towers owned by Cornerstone. What route to separation from Vodafone these 6,600 towers take is unclear, although with Telefónica having announced plans to accelerate the monetisation of further assets, the time appears to be right to rethink plans for the joint venture. Currently, independent towercos own just 27% of the 42,492 active towers in the UK, so the impact of Vodafone’s carve-out will be significant if the towers are separated from Cornerstone or if Cornerstone passes into new ownership.

Cellnex recently announced the acquisition of Arqiva’s telecom division, adding 7,400 towers to the modest number of sites it had previously acquired from Shere Group as well as securing the rights to market 900 further Arqiva sites. Cellnex has also signed a deal with BT to manage and market their 220 high sites in the country. The towerco’s newly found scale may preclude them from an acquisition of Cornerstone’s entire tower portfolio (with such a deal potentially being met with resistance on competition grounds), but should they assets be broken up, Cellnex is likely to be a willing buyer. Digital Colony also has a presence in the UK market where it has been acquiring several smaller indoor and outdoor coverage players and may also see an opportunity to add scale to its operations with the acquisition of an attractive portfolio of macrosites. Beyond Cellnex and Digital Colony, further independent towercos are active in the UK, headed up by Wireless Infrastructure Group and their portfolio of ~2,000 sites.

15,100 sites in other European countries are also on the block for monetisation.

Vodafone’s stock rose as much as 10.4% on the news, which was the biggest intraday jump since November 2008. The news was announced alongside financial results which beat expectations, so it is hard to tease out the isolated impact of the deal, but it is clearly substantial. Releasing the value in Vodafone’s towers and separating management of the passive assets from its network will enable Vodafone to create a lot of value. American Tower is trading at an enterprise value of around 25x earnings before interest, taxes, depreciation and amortization, whereas Vodafone is trading at 5x. 

James Ratzer of New Street Research said TowerCo could be worth €16bn, depending on the company’s structure. “These assets trade on high multiples at the moment where you have strong anchor tenant agreements,” Ratzer said, due to investors’ “insatiable appetite for yield.”