Vodafone will carve out 61,700 towers in ten European countries [11,000 of which have already been injected into INWIT in Italy], Hutchinson will carve out a further 28,200 towers in six countries, and Telefónica are seeking to monetise 50,000 towers, of which ~26,600 are in Europe. How will these transactions affect…” the shape and future of European towers, and the opportunities to put capital to work in this attractive infrastructure asset class?
Vodafone, Hutchinson and Telefónica made game changing announcements in successive months between July and September 2019, indicating that over 20% of Europe’s telecom towers could be transferred to towercos.
While Vodafone, Hutchinson and Telefónica have avoided committing themselves to a specific future for their carve out towercos, in each country they essentially have five options:
1. Carve out and retain control of a captive “operator-led” towerco
2. Sell a substantial stake in the carved out towerco to a financial investor
3. Sell a substantial stake in the carved out towerco on a stock exchange
4. Inject their carved out towers into another existing operator-led towerco and form a joint venture
5. Carve out and sell the towerco to a “pureplay independent towerco” like Cellnex or American Tower
To a limited extent, these options are not mutually exclusive – they could choose to retain control of their towerco but sell only a minority stake on a stock exchange or to a financial investor, the latter option having previously been taken by Telefónica which has sold a 49.99% of its towerco Telxius to KKR and Pontegadea. Technically, the MNOs could sell a minority stake to a pureplay independent towerco, but listed independent towercos are unlikely to bid for a minority stake if they cannot consolidate the assets. And of course, Vodafone Hutchinson and Telefónica could take a different option in different markets, and against differing timescales.
While TowerXchange believe all five options remain in play, our analysis and forecast for the future of European towers assumes that both Vodafone and Hutchinson retain control of captive towercos in almost all their European markets – at least through 2021.
The only exception to the assumption that Vodafone and Hutchinson would retain control of their towercos is that we have forecast the sale of Cornerstone to an independent towerco. While we have no definitive indication that that is Vodafone or Cornerstone’s plan, the case to retain towers is partly based on adding value by leasing them up to third parties prior to monetisation. While there is potential value to be added to Cornerstone through lease-up, many of the towers are already utilised by both Vodafone and O2, while O2’s owners Telefónica have a track-record of monetising towers (and a need for debt relief). Ultimately, we forecast the sale of the Cornerstone towers as much as anything to reflect the fact that we suspect some, but by no means all, of the Vodafone and Hutchinson towers would be sold, particularly to raise capital for 5G spectrum and rollout. Indeed, the need for capital for 5G could drive any of Europe’s MNOs to monetise their captive towercos.
While Telefónica has announced plans to monetise 50,000 towers, ~23,400 of those are in CALA, many in markets where the regulatory, tax and ownership conditions surrounding the towers may make it difficult to monetise them. Regardless, the fate of Telefónica’s CALA towers has no impact on our European forecast. Of Telefónica’s ~26,600 retained European towers, we feel 6,600 will be sold with Cornerstone, as mentioned above. Most of the other 20,000 are in Germany, where American Tower, Cellnex and perhaps Deutsche Funkturm would be prospective buyers. However, we feel the most likely outcome is that these towers will be injected into Telefónica’s own towerco Telxius (as they have since done with their remaining Spanish sites).
Figure one: Forecasting European tower ownership, including the impact of the Vodafone and Hutchinson carve outs and Telefónica monetisation
At the end of Q2 this year, prior to the Vodafone, Hutchinson and Telefónica carve outs, and with Cellnex’s 10,700 tower deal with Iliad announced but not closed, 349,090 (58.2%) of Europe’s towers remained stranded on MNO balance sheets, effectively suppressing their value. By the end of Q421, we forecast that fall to 194,240 (29.8%).
As several of Europe’s joint venture infracos are restructured (as well as the aforementioned Cornerstone, we think the restructuring will affect MBNL and 3GIS, which hold Hutchinson towers), we also think the necessity of infrastructure sharing will precipitate the creation of new infrastructure sharing joint ventures. The net effect is still a forecast that the number of towers held by joint venture infracos in Europe will fall from 64,400 (10.7%) to 50,100 (7.7%) by Q421.
The gains will come in the operator-led towerco category, rising from 112,740 towers (18.8%) in Q219 to 228,590 (35.1%) in Q421, while we forecast over 100,000 towers being added by pureplay independent towercos, rising from 73,770 to 178,570. That’s not all inorganic growth – carve outs and sale and leasebacks – our forecast includes 50,000 new towers being built in the 30 month period, 5,500 by MNOs, 19,000 by operator-led towercos, and 27,000 by pureplay independent towercos.
Figure two: Breakdown of Europe’s tower ownership as it is and as it will be in Q421 post-Hutchinson and Vodafone TowerCo carve outs and Telefónica tower monetisation
By the end of 2021, TowerXchange forecast that towercos will own 64.9% of Europe’s towers. That puts the market structure on a trajectory similar to the USA, where towercos own over 80% of towers. But while the U.S. market is dominated by American Tower, Crown Castle and SBA Communications, Europe is headed toward a market structure where operator-led towercos and independent towercos share the mantle of deploying and managing wireless infrastructure. What are the implications of this? Could the cost of the network, and the valuation of towercos, be slightly suppressed by the increased control of customers? Could the European tower industry continue to evolve as deeper, closer partners of MNOs, pushing towercos to diversify into adjacent segments of digital infrastructure? Or could the era of European carve out towercos give way to an era of monetisation of those towercos, giving rise to giant pureplay independents? The answers to these questions can be found in our forecast for the future of European towers 2022-24… which we’ll write in a couple of years!
Stay tuned to our research, and if you’re a stakeholder in European towers, don’t miss the 5th Annual TowerXchange Meetup Europe, taking place on 19-20 May 2020 in Barcelona!
Differentiating between operator-led towercos, pureplay independent towercos and joint venture infracos
TowerXchange recognises three simplified subcategories of towercos, as used in our forecasts.
The “pureplay independent towercos” (shown in red in our infographics) category most closely follows the original U.S. blueprint from the mid 1990s – they are public or privately owned towercos with little or no residual equity retained by MNOs. European pureplay independent towercos include Cellnex, American Tower, Russian Towers and Wireless Infrastructure Group.
The orange segments of our infographics represent “operator-led towercos”; towercos that are themselves at least 50.01% owned by their parent MNO or MNOs. Vodafone’s TowerCo and CK Hutchinson Networks will be operator-led towercos, as are Deustche Funkturm, INWIT, Telxius and Global Tower.
Joint venture infracos aren’t strictly towercos, if for no other reason than they seldom proactively market their sites for co-location beyond the joint venture partners. European examples include Cornerstone, MBNL, 3GIS, Net4Mobility, SUNAB and TT-Networks.
What are the most appropriate comps for Vodafone’s TowerCo and CK Hutchinson Networks?
Assuming Vodafone and Hutchinson carve out and keep controlling stakes in their towercos, the most relevant comps are not pureplay independent towercos like American Tower, Crown Castle, SBA Communications and Cellnex. More direct comps would be other towercos carved out of MNOs where the parent MNO or MNOs still owns at least 50.1%, such as Telecom Italia’s INWIT, Deutsche Telekom’s Deutsche Funkturm, Telefónica’s Telxius, Axiata’s edotco, América Móvil’s Telesites, or China Tower Corporation, in whom China Mobile, China Telecom and China Unicom still have significant stakes.
INWIT: Vodafone Italy is in the process of injecting its towers into Telecom Italia’s towerco INWIT, in return for €2.14bn and a 37.5% stake, raising INWIT’s tower count to ~22,100. The enlarged INWIT’s tenancy ratio (the average number of tenants per tower) will be 1.75, the majority of which are TIM and Vodafone tenancies, although they also have tenancies from Italy’s other MNOs. INWIT IPOed in June 2015, since when it’s share price has increased 2.3x.
Deutsche Funkturm: Deutsche Telekom carved out towerco Deutsche Funkturm (aka DFMG) in 2002. DFMG have a healthy tenancy ratio of around 2.3 on ground based towers, but EMF restrictions and challenging landlord relations mean they have a much lower tenancy ratio (estimated to be between 1.1 and 1.5) on rooftops, which make up around 70% of their portfolio. DFMG has 29,200 towers and rooftop sites in Germany, where they added 1,300 sites in 2018 and aim to add 1,800 in 2019. Deutsche Telekom has carved out its T-Mobile towers in the Netherlands, and will do likewise in Austria, managing them through DFMG.
Telxius: Telefónica’s Telxius has 17,550 towers across in six countries: Brazil, Chile, Germany, Peru, Spain and Argentina. The Telxius tenancy ratio is around 1.36. Telefónica sold 40% of equity in Telxius to KKR in 2017 for €1.3bn, and a further 9.99% to Pontegadea in 2018 for €379mn.
edotco: edotco is in six countries (Bangladesh, Cambodia, Malaysia, Myanmar, Pakistan and Sri Lanka), and is poised to enter Laos and the Philippines. edotco has a tenancy ratio of 1.6 on 29,325 towers. Axiata sold a total of 37.6% equity in edotco between 2016-17 at a price which would have then valued the company at US$1.9bn.
Telesites: América Móvil’s Telesites is primarily in Mexico, with a small operation in Costa Rica. There is speculation they may expand further into America Movil’s Central and Latin American footprint, but nothing has been confirmed yet. Telesites tenancy ratio remains below 1.2, and they have 16,606 towers. Telesites IPOed in July 2016, since when the share price has increased by 5%.
China Tower Corporation (CTC): CTC has 1.95mn towers with a tenancy ratio of 1.55. CTC has built over half a million towers and added over 1.25mn tenancies in five years. 55% of China Tower’s revenues are derived from China Mobile, 23% from China Unicom, 22% from China Telecom. China Tower debuted on the Hong Kong stock exchange in August 2018, since when its share price is up 57.7% (as at 1 August 2019).
