Telefónica to accelerate tower monetisation plans

STOP PRESS: On 27 November, Telefónica announced a new five point plan involving a major restructuring of the business. Placing a focus on their key markets of Spain, the UK, Brazil and Germany and creating an operational spin off their businesses in Hispanic Latin America, Telefónica will also create Telefónica Infra. With 50.01% of Telxius as its main asset, Telefónica Infra will bring together Telefónica’s shareholdings in telecom infrastructure vehicles, serving third-party operators and incorporating partners. Telefónica Infra will aim to optimise the value of the company’s assets, focussing on the development and monetisation of towers, DAS, datacentres - including EDGE-, greenfield fibre projects or submarine cables, among others

Additionally, Telxius has stuck a deal with Telefónica Brasil (Vivo) for the acquisition of 1,909 sites for R$641mn, a deal which will take their total site count in the country up to 3,850 sites.

On 10 September 2019, Telefónica announced plans to accelerate the monetisation of its tower portfolio. The operator, which owns a portfolio of 68,000 sites across 12 markets had already commenced a tower monetisation strategy back in 2016 through the creation of its infrastructure subsidiary, Telxius, into which it has since transferred c. 18,000 towers and sold a 49.99% stake. TowerXchange examine Telefónica’s next steps for their remaining tower portfolio. 

With a presence in twelve markets across Europe and Latin America, Telefónica operates one of the largest portfolios of mobile sites in the world. Using 130,000 sites, the operator owns over half of these, with an owned total site portfolio close to 68,000 (the balance being owned by towercos and other operators).  

Between 2011 and 2015, the operator conducted a number of sale and leaseback transactions with independent towercos across several of its markets, divesting over 20,000 towers and raising over €1.8bn (see figure 2a). In spite of such transactions, Telefónica continued to experience considerable financial pressure. The company had amassed a significant amount of debt following a number of acquisitions, whilst revenues struggled amidst weak Latin American currencies and poor opco performance. Telefónica aimed to take a significant chunk out of its debt pile with the sale of its UK O2 business to Hutchison (for an initial £9.25bn, with a further £1bn due upon certain targets being met), however when the move was blocked by the European Competition Commission, Telefónica was forced to pursue an alternative strategy.

With the successful IPOs of Telecom Italia’s INWIT and America Movil’s Telesites both sides of the Atlantic (coupled with the high multiples being posted by publicly listed towercos) the monetisation of Telefónica’s tower portfolio presented one such attractive strategy. In 2016, the operator announced the formation of its infrastructure subsidiary, Telxius. The first infrastructure assets to be carved into the business were c. 11,000 Spanish towers and 31,000km of subsea cabling. On 24 March Movistar Chile (Telefónica’s opco in the country) agreed the sale of 328 towers to Telxius for CLP7.85bn (€10.4mn). This was followed a week later by Telefónica Peru’s sale of 849 towers to the unit and Telefónica Brasil’s sale of 1,655 towers to Telxius for BRL760mn (€192.6mn). On 21 April, Telefónica Deutschland announced the sale of 2,350 towers to the infraco for €587mn. Telefónica has since sold further towers to Telxius including approximately 350 Argentinian towers in 2017 and 1,090 towers in Peru, Chile and Spain in 2019 (constituting their remaining towers in those markets, with the exception of handful which are unable to be transferred for various reasons). Telxius’ site count (which also includes new towers that the infraco has constructed) now totals 17,550 across six markets (figure 3).

On 28 April 2016, just a few months after the formation of its infraco, it was reported that Telefónica had appointed banks to prepare Telxius for an IPO. An early July listing on the Madrid Stock Exchange was mooted, however the market uncertainty created by the Brexit vote in June caused timelines to slow. On 20 September, Telefónica announced that it planned to list up to 40% of Telxius on 3 October at a price of €12-€15 per share, valuing the infrastructure unit at around €3.38bn as a midpoint and raising an estimated €1.5bn for the operator. With weak investor interest however, Telefónica pulled the IPO and explored other strategies to crystallise the value of its tower business.

On 20 February 2017, it was announced that Telefónica had reached a deal with global investment firm KKR Group for the sale of a 40% stake in Telxius for €1.275mn implying an enterprise value of €3.18bn, in line with the company’s expectations in the IPO process.  

On 27 July 2018, Telefónica reached an agreement with Pontegadea for the sale of a 16.65% stake in PONTEL (the Telefónica subsidiary which owns the 60% of the share capital of Telxius not owned by KKR). Pontegadea’s acquisition equates to an effective 9.99% stake of Telxius’ total share capital and places Telxius enterprise valuation at €3.8bn. 

In January 2019, Telefónica agreed the sale of its El Salvador and Guatemala opcos to América Móvil for US$650mn (€592mn), and in February, Telefónica agreed the sale of its businesses in Panama, Nicaragua and Costa Rica to Millicom for US$1.7bn (€1.55bn). Whilst the deals in Guatemala, Nicaragua and Panama have since closed, and the Costa Rican deal was approved by the regulator last month, the transaction in El Salvador has twice been blocked by the country’s Competition Commission. In addition to plans to sell five opcos, Telefónica also reached a deal to sell eleven data centres to Asterion Industrial Partners for €550mn this past May. 

Commenting on the latest deal, Telefónica explained that the deal was part of the group’s asset portfolio management policy which is “based on a strategy of value creation, improving return on capital and strategic positioning” adding that “[the deal] also complements the objective of organic debt reduction and strengthening the balance sheet in a growing cash flow scenario, which allows the company to maintain a sustainable and attractive shareholder remuneration.” 

On 10 September 2019, Telefónica issued a press release announcing further asset monetisation plans in line with this strategy, stating that they planned to accelerate the monetisation of their tower portfolio. The group is reportedly analysing various options for their towers and expects to execute a transaction within the next 12 months. 

Telefónica Group has a presence in 12 markets (figure six) pending the sale of opcos in El Salvador and Costa Rica. The company owns a portfolio of c. 68,000 sites, just under 18,000 of which are held by Telxius meaning a further 50,000 are owned by Telefónica’s opcos in each country. Of the 50,000 sites, over 60% are located in Telefónica’s major countries of operation (Spain, UK, Germany and Brazil).

In Germany, Telefónica Deutschland has transferred 2,350 towers to Telxius but still owns around 19,000 sites, one of the largest single country portfolios in Europe. The vast majority of these sites are thought to be rooftop sites, with most of the operator’s ground-based towers having been transferred to Telxius already. 

In the UK, Telefónica’s opco, O2, owns a 50% stake in Cornerstone, the infraco created with Vodafone, into which the two operators pooled their portfolios of towers. Telefónica’s 50% stake equates to effectively 7,000 towers. 

In Spain, Telefónica sold over 4,500 towers to Cellnex back in 2012 and 2014 with the operator transferring the majority of its remaining portfolio (c. 11,000 towers) to Telxius back in 2016 (followed by a final tranche of sites in Q3 2019). TowerXchange suspect that Telefónica will still retain a handful of assets which it is unable to sell to Telxius for various reasons. 

In Brazil, where Telefónica has sold 5,855 towers to independent towercos and transferred 1,655 to Telxius, TowerXchange estimate Telefónica Brasil to own c. 4,000 towers. 

In Peru, Telefónica did a tower deal back in 2012 (selling 350 sites to Torres Unidas) and has since transferred its remaining portfolio to Telxius. Telefónica does still retain around 300 sites in the market and has confirmed that these are unable to be transferred to Telxius due to legal restrictions in their contracts. In Chile, Telefónica also carried out some sale and leaseback activity in 2012 (selling towers to both Torres Unidas and American Tower) and as with Peru, has transferred the remainder of its portfolio to Telxius (with TowerXchange suspecting Telefónica to retain up to 200 sites for similar reasons as in Peru).

In Argentina, Telefónica has transferred just 350 sites to Telxius and TowerXchange understand the operator to have around 6,000 sites in the market. In Mexico, the operator sold over 2,000 towers to American Tower back in 2011 but still retains 3,500-4,000 sites in the country, most of them understood to be rooftop sites. Collectively in Colombia, Ecuador, Uruguay and Venezuela Telefónica has 9,500-10,000 sites (see figure 5).

Telefónica announced that it was examining different strategies for the monetisation of further sites, stating the sale of further sites to Telxius was one such strategy under review. One cannot rule out however an asset sale to a third party and with towercos operating in a number of Telefónica’s markets, one can anticipate a number of interested parties.  

As to what the towers could fetch in the market, the answer is largely dependent on which towers are sold, who the buyer is and what the terms of the deal are.  

Telefónica’s biggest chunk of remaining sites are in Germany, and whilst the transfer of 2,350 Telefónica Deutschland towers to Telxius for €587mn back in 2016 valued each tower at just shy of €250k, the remaining sites are not expected to attract such a valuation. The vast majority of the German opco’s 19,000 sites are understood to be rooftops and rooftop sites in the country are notoriously difficult to co-locate at good margins due to landlord demands. A sale to Telxius definitely remains a distinct possible fate for the towers but the operator may also consider a sale to a third party. The world’s largest independent towerco, American Tower also operates in the German market following the acquisition of KPN’s (primarily ground based) towers and could potentially view Telefónica’s sites of strategic importance for the rollout of 5G should the price be right. 

In the UK, Telefónica’s sites are held by Cornerstone, a joint venture with Vodafone. With Vodafone having announced plans to form their own in-house towerco in the next 12 months, a sale of a majority or minority stake in Cornerstone is widely expected to happen early next year with Vodafone reportedly considering the opportunity to take on more than their 50% share in the JV. Cornerstone’s tower portfolio is also likely to attract the interest of other European towercos, with several already active in the UK market and the UK being an attractive country for others to enter.  

In Latin America, a large number of towers still remain on Telefónica’s balance sheet and analysts had previously questioned why so few were transferred to Telxius during the first wave of transactions in 2016. In Brazil it was pointed out that most of the operator’s most attractive towers had been sold to independent towercos, in Colombia, the government’s stake in Telefónica’s opco was likely the reason the towers were excluded, Venezuela’s turbulent political situation is likely the reason the portfolio in that country was excluded whilst in Argentina the currency devaluation and unfavourable tax regime meant it was not the most opportune moment to monetise their portfolio in the country. Towercos are however active in seven of the nine Central and Latin American markets in which Telefónica operates (Venezuela and Uruguay being the two countries where towercos are yet to step foot) and so may express an interest in the operator’s towers should they not be transferred to Telxius.

Ultimately Telefónica has laid out three goals for its tower monetisation strategy; (1) Maximising shareholder value; (2) improving return on capital employed; and (3) making more efficient use of its infrastructure. The operator states that “based on comparable market benchmarks, [their] portfolio of c. 50,000 sites could generate approximately €830mn in revenues and €360mn in OIBDA and could require €25mn in maintenance capital expenditure on a full year pro-forma basis” adding the caveat that “these figures are illustrative, based on comparable market benchmarks, and will differ depending on the ultimate perimeter and transaction structure to be implemented and the lease rates to be agreed.”  

As to what value Telefónica may receive for their towers, there are too many variables at play to accurately forecast, however for illustrative purposes, in 2018, Telxius and its then portfolio of c. 17,000 sites generated revenues of €792mn (+8.4% YoY) and OIBDA of €370mn (+ 7.1% YoY), similar to the figures that Telefónica is forecasting for its remaining portfolio of 50,000 sites. Pontegadea’s July 2018 acquisition of an effective 9.99% stake in Telxius placed the company’s enterprise valuation at €3.8bn and whilst too crude a comparison to draw a meaningful conclusion, could be a rough target valuation figure for their c. 50,000 sites. The terms of Telefónica’s MLA with Telxius are as such that contract terms must be renegotiated should Telefónica’s shareholding fall below 50%. Should Telefónica’s c. 50,000 towers be transferred to Telxius, one can assume that Telefónica will retain a 50.01% shareholding in the assets as they have in the past; should they be sold to another third party the operator may give up all equity in the towers thus raising further funds. 

TowerXchange eagerly watch for further developments.