The three pillars of Cellnex’s growth

TowerXchange was yet again granted the privilege of speaking with Cellnex Telecom CEO, Tobias Martinez, as he reflects on the activities of 2018 and plans for growth in 2019 and 2020. As ever, Europe’s biggest and most acquisitive towerco has a clear vision for both its current and future service offering to customers, which is reflected in its entry into new contracts with clients to deliver services in edge computing, as well as consolidating core competencies in towers, small cells and fibre. We asked Tobias what he thought about how the market was developing, and where opportunities may lie in 2019, as well as finding out more about the ‘three pillars’ on which Cellnex is building out its service offering to customers. Look here to see who will be joining Tobias at Meetup Europe in April.

TowerXchange: Thanks for making time to speak to TowerXchange again Tobias. Can you update us on Cellnex’s 2018? What were the activities which you considered the most important to the company?

Our focus over the past year has been on two areas: market consolidation and increased contracts for 5G. On existing market consolidation, 2018 has been an important year for us to enhance our footprint by strengthening relationships in existing markets. Our most notable achievement has been to enter into new contracts with tower customers looking for 5G solutions. In terms of our 5G activity, we have seen a number of acquisitions and agreements. These include our recent fibre acquisition in Catalonia and more recently our agreement with Bouygues to build to their requirements for strategic telecom centres known as Metropolitan and Central Offices. Although 2018 was not remarkable in terms of M&A activity, nonetheless Cellnex grew its portfolio through organic market development and greater 5G service contracts. 

Our latest deal with Bouygues, which is a five-year BTS construction project for 88 Metropolitan and Central Offices, is followed by a 15-year service agreement. This serves as a good case study for other telecom operators who are considering entering into deals beyond towers with infrastructure providers. Cellnex is one of the major players moving from being a tower operator to also becoming a network operator. 

These transactions with Bouygues demonstrate to other market players that they have opportunities to share their existing networks beyond the current remit of just towers or rooftops. Fibre will be part of this value proposition as will edge computing and Metropolitan and Central Offices where we’ll see the consolidation of data and voice services. This allows us to deliver the core of the 5G network, going beyond pure towers and ensures MNOs slim their infrastructure by outsourcing and investing in future infrastructure. 

Generally, when building a new platform like Cellnex is, people expect greater M&A activity. However, the opportunities aren’t always readily available to consolidate your strategy. This is why we did a lot of work on organic growth in 2018 and we’re optimistic that in 2019/20 we will be able to capture outsourcing opportunities with more MNOs. Nonetheless, we believe 2019 will be more active in terms of M&A.

TowerXchange: There has been a lot of change in the European market too, with new market entrants and MNOs exploring new options. What is Cellnex’s view on how the market is developing? 

2018 has not been as attractive in terms of M&A, as we only saw the Altice transaction come to market for a minimum stake. However we see the big players are reviewing their strategy to outsource passive infrastructure, as such we think 2019 will be very active. 

This is because 5G network design, planning and execution is and will be highly demanding, requiring two to three years of work ahead of a massive rollout. This is why MNOs are starting to review their outsourcing strategy accordingly. For a company like Cellnex, with a clear value proposition and neutrality at its core, we expect this will be an opportunity. The growth in the market is very appealing for investors such as private equity funds, infrastructure funds, as we saw in 2018 with the SFR transaction with KKR, but those transactions were minority stakes, and we will see how they are affected by IFRS 16. 

TowerXchange: Talk us through Cellnex’s current growth plan and market objectives.

As I said, for us it’s very important to gain scale on our existing markets, we want to find the right target in the UK and the Netherlands because scale matters when talking about telecoms infrastructure. We will also test the water around our domestic markets, potentially acquiring more assets from the big European MNO players and smaller towerco acquisitions. In terms of market consolidation, many of these smaller towercos are owned by infrastructure funds and financial institutions and sooner or later we expect this basket of towercos in Europe will be accessible for consolidation. 

TDF, for example, is not a small towerco as they also deliver broadcasting and FTTH and are really a wholesale telecom infrastructure player, but TDF coming to market would be a sign of the current markets dynamism. 

TowerXchange: We believe several towerco assets may be coming to market in the CEE region soon. Will this be of interest to Cellnex?

Central and Eastern Europe is our second priority. Our first priority is to explore and consolidate in Western Europe: we don’t have enough scale in the UK yet, the second largest market in Europe; we’d like to do more in the Netherlands; we will have to track how potential prospects in our core markets evolve, like TDF. There are many moving parts but when it comes to looking at Eastern Europe, why not? We would consider some countries, in Eastern Europe there are several markets with different appeal for us so we are keeping one eye on CEE as well. 

TowerXchange: At the last count we estimated there were around 65 towercos of various shapes and sizes in Europe. Do you think we will see an acceleration in towerco consolidation in the coming year? Is this a priority for Cellnex?

This is one of the ‘baskets’ of towers we are looking for. One is the MNO towers, the second one is the small telecom operators, the third is the existing towercos in Europe. There is an opportunity for  consolidation in every country, we just need to understand shareholders’ ambitions and their willingness to sell down and consolidate the capital gain. At a certain point in time these financial investors should sell and these exits are an opportunity for us to assess and consider the integration of those type of companies. 

TowerXchange: We’ve been talking for some time about convergence between communications infrastructure verticals. Cellnex is clearly leading the way in this in the European market with acquisitions and expertise in small cells, DAS, datacentres and fibre. What will ‘towercos’ look like in 5 years’ time?

The first thing we see is that the towerco model is evolving thanks to the advancement of technology and changes to our customers business models, which is in turn is driving ‘pure’ towercos to become network infrastructure providers. It’s a question of time, but we feel that this is the evolution of the structure and value creation that telecom infrastructure companies like us will take.

We are building our own value creation proposition on three pillars: the first is the extension of existing wireless infrastructure, by which I mean adding small cells, DAS, and datacentres, so it’s no longer a question of towers but of urban infrastructure as well. Second is fibre, at least to the antenna. If you have more than that you can provide backhaul services to the interconnection point, which will be a value add for our customers. The third pillar of our development is based on edge computing. This is maybe the newest part of our role in the value chain: we don’t have previous experience in managing edge computing, which is why we are very happy to help our customers, like Bouygues, to develop this new business model. This was the reason why we acquired Alticom in 2017, as they already delivered a part of these types of services. All in all, we’re focussing on improving our capacities, our experience and our knowledge to deliver these new types of services for 5G. This is the path where we are developing our future strategy and structure and crystallising the whole telecom infrastructure system related to 5G. There are a lot of new roles in the value chain, it’s not just a real estate proposition. 

TowerXchange: Do you see your customer base changing shape as 5G use cases and proven and it rolls out further?

Yes, very much so. There will be new roles for the MNOs or for new providers in the market. 5G will require more vertical solutions aside from  connectivity or capacity. Telecoms operators should deliver more solutions and integrate more niche companies to provide more services for all kinds of verticals such as insurance, manufacturing or healthcare. Partnerships will allow a small but highly knowledgeable skill set to be integrated into a solution around 5G technology. I don’t expect to see Orange or Deutsche Telekom, for example, delivering industrial solutions without partnering with specialist niche companies. Then what will be our role? Delivering edge computing and telecom services on our passive infrastructure. We are exploring the new part of this role with our core customers now.

TowerXchange: We are seeing European MNOs looking to spin out their towers into captive towercos rather than looking for a trade sale. Does this mean the days of sale and leaseback are numbered? Will towercos have to look elsewhere for growth?

I can see the appeal of this structure, when extracting the monetisation without any accounting adjustment as it was prior to IFRS 16, but after this you should move from MLAs to MSAs. If you keep MLAs you will receive 49.9% of the value of monetisation but the ratings agencies will account for this through debt or EBITDA adjustments, meaning you gain nothing. This won’t be the best way to reduce debt, and minority transactions won’t be the most attractive, while we expect majority stake transactions and opportunities to deliver a lift to capitalisation of contract through IFRS 16.

This is the reason why we believe 2019/2020 will be critical for big players to consider best strategy for them considering the impact of IFRS 16. A lot depends on objectives of telecom operators, looking at big players we don’t believe that a minority stake transaction could be the best for them. It may well be a first step, but it may not be the most efficient solution to capture all the value of their asset and reduce net debt. 

We don’t think the days of sale and leaseback are numbered, there will be opportunities out there, but operators will need to think carefully in terms of how the deal is structured, an MSA in our opinion is the best solution as it’s a service and means you don’t have to make adjustments in terms of liabilities, so you’re maximising the value of the transaction by monetising a bigger portion of your infrastructure and avoiding capitalisation of the service contract. 

TowerXchange: The European market is probably one of the most diverse in terms of towerco profile – independent towercos, broadcast towercos, MNO captive towercos and joint ventures all serve the MNO community in Europe, backed by a variety of financial structures. How do you think this will evolve further as the industry develops? What new business structures or partnerships could we see evolving?

From our point of view we are open to any type of collaboration in terms of infrastructure but having said that we have one line in the sand which we will not cross – that of neutrality. It’s not just a marketing play, we believe in the value of being neutral to all the players in the market and we must be able to allocate services to everyone under the same conditions, as we do on our existing infrastructure. As a long-term partner of mobile network operators, we consider this to be critical, it’s around this pillar that we develop the best solutions in each country.

We have formed partnerships before, for example in Switzerland with Swiss Life and Deutsche Telekom Capital Partners, so why not consider other strategies and arrangements with partners to help us execute our business plan, incorporate assets or consolidate our position in certain countries. We’re certainly not against partnering with others but we should have majority control in order to deliver our independent role. This is our commitment to our investors: we can’t be a passive, minority investor, nor just a financial investor, we need to capture synergies amongst our assets and deliver the same service to our customers across Europe – there are a lot of restrictions and requirements which invite us to remain as an industry player with a controlling stake in all our operations. However, under the right circumstances we are open to partner with the right and suitable players in every country. This is not about money is about sharing a common vision on the drivers of this industry and how a network infrastructure operator is able to meet its customer’s demands and expectations.

Hear more from Tobias Martinez and his team at TowerXchange Meetup Europe, on April 9-10 at the Business Design Centre in London. To register click here