Europe 2019: TowerXchange forecasts a dynamic year

Despite 5G use cases being thin on the ground, both towercos and MNOs are beginning to make significant changes to their organisations in order to position themselves to capture the nascent value in the impending ‘fourth industrial revolution’ and to minimise the cost of infrastructure rollout. TowerXchange predicts a busy 2019 for European towers, from carve outs and tower sales to a much sharper focus on managing opex through data generation and analysis. Business models will continue to multiply, with state players entering the market, MNOs creating more towercos and investors keen to deploy capital into this growing asset class. In this article we highlight some of the major changes we predict for 2019, and assess some of the drivers behind them. 

With European MNO still struggling under the pressure of debt, and investor confidence remaining shaky, operators are evaluating their options and exploring how they can monetise their passive assets. Recent 5G auctions in Italy saw MNOs bidding as much as €6.5bn for spectrum, and the burden of rolling out 5G infrastructure is making operators question the economics of the 5G model. 

With this in mind, towercos can offer MNOs solutions on two fronts: firstly, through the acquisition of their existing macro infrastructure, offering both the chance to release capital and the conversion of capex expenditure into more predictable opex commitments. Secondly, towercos can position themselves as neutral hosts for the rollout of 5G infrastructure, accessing their own capital to build new infrastructure and allowing MNOs access to a more efficient, shared network rather than creating four parallel sets of infrastructure, as was often the case in the creation of macro networks in the 1990s. 

However, European MNOs are keen to retain control of their assets and we’re seeing a proliferation of MNO-captive towercos being created, with more expected in 2019. In addition to the long established Deutsche Funkturm (Deutsche Telekom’s captive towerco in Germany and, more recently, the Netherlands) and Global Tower (Turkcell’s captive towerco in Turkey), we saw Telecom Italia create and IPO towerco INWIT in 2015 as well as Telefonica carving out their German and Spanish towers (plus towers in LATAM COUNTRIES and subsea cable), 49% of which was sold to KKR in 2017 for €1.3bn. 

Most recently, Altice created two SPVs in 2018: Hivory (the new name for SFR Towerco) in France; and Towers of Portugal in Portugal, of which Altice sold 49% to KKR and 75% to Morgan Stanley and Horizon Equity Partners respectively. 

The trend could well continue into 2019. New Vodafone CEO Nick Read has stated that the British giant is in the process of creating a ‘virtual tower company’ with a dedicated management team as he attempts to reduce operating costs by €1.2bn by 2021.  Read’s suggestion of partnering with a towerco may be well received, but suggestions Vodafone might sell a minority stake in the towers will most likely leave the towercos with the digestive capacity to get on board cold, particularly in light of IFRS 16 regulation and the needs of towercos such as Cellnex or American Tower to control their own portfolios. We’re therefore more likely to see Vodafone entering into a deeper agreement with one or more towercos across Europe, or looking for a financial investor who will be happy to settle for a 49% stake in the new towerco. With KKR already holding minority stakes in 16,198 European towers across two portfolios, there’s no doubt there could be appetite for more. 

While MNOs such as Duetsche Telekom and INWIT have already spun off their towers into new entities, we may begin to see captive towercos coming to market. Telecom Italia already kicked the tires of a sale of their 60% stake in INWIT in 2016, but postponed (at the time saying 2019 seemed like the optimal time to sell). With internal politics between Vivendi and Elliott possibly driving a very infrastructure-light model, we may see this parcel of towers coming to market in 2019 as well, an rumours of Deutsche Funkturm coming to market have sprung up several times over the last few years. 

In Italy, Three is looking to sell ~7,000 towers and rumours abound that they may divest towers in others European countries as well. Telia has also carved out its own towerco, and we believe Telenor may be doing the same – all vehicles which can help MNOs to manage their portfolios more effectively, but in light of IFRS 16 they may become more effective in terms of managing cost of sold to a majority partner. 

There will be no shortage of MNO towers moving balance sheets in 2019 – but exactly whose balance sheets they move onto remains to be seen.

(Net debt/EBITDA)

In 2018, Digital Colony entered the European market. Hoping to replicate their investment platform model which has worked so successfully in the USA and Latin America, they acquired Finnish Digita and UK indoor service providers OpenCell and Stratto over the course of just five months. Highly acquisitive and dynamic, we anticipate Digital Colony will make further acquisitions in towers, fibre and communications infrastructure throughout 2019. 

American Tower, whose operations have remained fairly low key in Europe since the acquisition of French FPS Towers in 2017, have recently undergone a management reshuffle, placing Julian Plumstead, former Managing Director at Rothschild, as the new CEO of Europe. With so many potential opportunities to both consolidate towerco portfolios and acquire towers from MNOs in 2019, we expect American Tower to play a more active role in 2019 processes and to expand their European portfolio through strong deals with high profile counterparties. 

In a recent interview with Tobias Martinez, CEO of Cellnex, he stated that Cellnex are looking to consolidate their portfolios in the Netherlands and the UK, so we can expect Cellnex to be actively looking for acquisitions in these markets, as well as their other primary target markets including Portugal, Ireland, Belgium, Germany and Austria (Target Markets i: Cellnex Annual report 2017)

We expect to see an increasing amount of towerco consolidation in 2019, with markets such as Ireland, where there are eight towercos or JVs active in the market, ripe for acquisitions. 

Despite the high number of towercos in Europe, we are seeing new ventures launching as well, headed by experienced tower professionals who believe they can fulfil needs that have not been met by the current players. 

One such towerco is Atlas Tower Group, launched in the UK by a team with a background on the MNO side of the fence: CEO Russell Jeffries has held various roles at MBNL, Vodafone and Three, and has a vision for a flexible, dynamic towerco which offers a build to suit solution for UK MNOs. From the Altice deals, Portuguese OMTEL also launched in 2018, with 2,900 towers across the country and plans for more and Altice/KKR towerco Hivory is bringing a further 10,198 towers for colocation in France.

With IPOs shelved by Arqiva and Global Tower in the last three years in Europe, 2018 saw three African towercos (IHS, Eaton and Helios) prepare and fail to float their businesses. The only listed company fluctuation in Europe in 2018 was EI Towers’ de-listing, undertaken as part of a plan to try and acquire broadcasting competitor Rai Way. 

We expect to see more IPO attempts, and successful ones, in 2019. Global Tower’s expanded and ambitious plans to consolidate towers in Turkey will possibly see them engage with a minority investor prior to another IPO attempt, but their need for a more diverse ownership in order to build value as an independent player is clear. Arqiva has spent the last 18 months putting together new partnerships, refining their value proposition and posting consistently positive results, which will stand them in good stead for another run at a floatation. With the TDF process also ongoing, we may well see Arqiva’s French counterpart considering an IPO if the sale process fails to meet valuation expectations.

---

Convergence. We’ll see the growth in diversification accelerate, with towerco’s looking to get into fibre, data centres and small cells.  That said, increasingly diversified business models could cause problems for some of the new classes of investor getting into digital infrastructure. 

Services. The ecosystem around core infrastructure assets is likely to grow.  There is a lot of pressure to roll-out more efficiently and faster. I wouldn’t be surprised to see growth and consolidation in the service sector.

5G is going to be a game changer. The big issue is that nobody quite knows how!  This is already leading to a scramble for positions on the starting grid.

Carve-outs. There are still a lot of towers to be carved out of MNOs and captive tower JV’s which are ripe for outside investors. The economic pressure on MNOs to get these deals done will increase with the need to roll-out 5G.

Oversupply? There are a lot of deals which could come to market in a relatively short space of time.  Whether this will lead to reduced multiples or even oversupply and deal fatigue remains to be seen.

---

As the European tower market matures and towercos look to manage costs, the effective deployment of capex and tighter control of opex will become more and more critical. From delivering consolidated backup power solutions for tenants whose networks form a part of critical national infrastructure, to managing a tenfold increase in points of presence as small cells roll out, towercos will need to manage their assets more closely in order to improve EBITDA as their model moves away from ‘real estate’ and towards ‘service’. 

In addition to managing existing portfolios, regulations and operational challenges around urban infrastructure will change the cost structure of small cell roll out, bringing new service providers into the ecosystem and driving a leaner model which will be driven by new partnerships. 

Permitting, power, accessibility and access to fibre will all become critical components of small cell rollout, while the technical and engineering services needed for macro networks will become less relevant to newer, denser urban networks. 

Since the capex-heavy days of the 90s and early 00s, when MNOs rolled out their networks, European infrastructure has tended to need little investment beyond some infill and expansion. However, this will need to change dramatically over 2019 and 2020 as infrastructure owners prepare for 5G rollout. Many industry commentators have stated that the infrastructure needs of moving from 4G to 5G won’t be simply a case of adding a few towers; the investment and reach needed will more closely mirror the initial network rollout of 20 years ago. TowerXchange’s own research discovered that 51,500 new towers are planned for construction in Europe over the next five years, and a further 180,000 towers will need to be reviewed for their suitability for 5G equipment, with significant upgrade work required. 

Finally, towercos will need to be able to generate, manage and interpret huge amounts of data from across a burgeoning number of sites in order to maximise the value of their portfolios and provide the depth of service their customers will demand. Effective platforms which will help to manage and analyse data will become more and more critical as we move through 2019. 

Cellnex have been at the forefront of communications infrastructure convergence, with acquisitions in fibre, datacentres, small cells and DAS over the last few years, as well as a new contract with Bouygues to deliver 88 new data processing centres. Digital Colony’s entry into the European market will bring their expertise in datacentres, fibre and towers to the continent and we’re seeing new partnerships and investments from dynamic smaller players such as Wireless Infrastructure Group and Axion. 

For towercos to maintain the infrastructure multiples they have been achieving in recent years, and to retain their access to low cost capital, they will need to ensure their offering in urban infrastructure becomes more than a simple aggregator of municipal leases, and the pressure to secure partnerships, infrastructure and expertise in growing areas such as fibre, data centres or strategic telecom centres will be increasingly important. 

Could 2019 see greater state involvement in European towercos? As 31.9% owner of Deutsche Telekom, the German state is a de facto minority owner of Europe’s biggest towerco, Deutsche Funkturm, and Norwegian Telenor, who have been rumoured to be carving out towers in Europe and Asia, is 54% owned by the Swedish government. However, we may be about to see a more conscious move by governments to enter telecoms infrastructure, perhaps to harness a highly successful growth industry, or perhaps to allow them to push rollout in directions which are believed to be beneficial for government goals. 

Most notably in Europe, Rostelecom, Russia’s state telecoms provider has recently expanded ambitiously into digital services. Owners of Russia’s fixed line network, they are already the biggest fibre owner in Russia, also offering datacentres and digital solutions. Their recently announced ‘Strategy 2022’ sets out Rostelecom’s digital transformation from a telecoms operator into an IT-company, servicing retail, business clients and the Russian Government. Already over 50% of the Rostelecom’s revenue comes from digital and content services, internet access, pay TV, cloud-based solutions, data centres, cybersecurity and other services, and now they are undergoing significant organisational changes internally to reflect their new focus. Rostelecom is establishing new teams and centres of excellence created to boost key focus areas, such as biometrics, cybersecurity, IoT and smart homes.

Owned by the state-owned Bank for Development and Foreign Economic Affairs and the Federal Agency for State Property Management, this state-owned organisation owns 45% of Tele2, giving it substantial interests in wireless telecommunications infrastructure as well as access to Russia’s broadcast towers.

To date, only Rostelecom and Russian MNO MegaFon have access to Russia’s 5G spectrum, with MegaFon trialling 5G in Moscow and St Petersburg in 2018, and Rostelecom doing the same with partners Nokia and Ericsson in different locations. 

Rostelecom owns much of the infrastructure needed to support 5G rollout but only owns a handful of high towers, lacking the wireless infrastructure needed for 5G. Their stake in Tele2, which owns ~9,000 towers in Russia, could be augmented to a controlling stake of around 55% through the transfer of assets from Russian banks and insurance companies, which would effectively make Tele2 the mobile wing of Rostelecom, and give them access to towers in Moscow and St Petersburg.

The option which would give Rostelecom national reach, however, would be to acquire the ~15,000 towers which MegaFon claims to be bringing to market, or to do a deal to work collaboratively with MegaFon in order to use their infrastructure. Combining the towers of Tele2 and MegaFon could result in a network of ~24,000 towers across Russia, which, combined with Rostelecom’s existing fixed line network, data centres and infrastructure, would put them significantly ahead of any one of the European towercos focussed on preparing for 5G rollout.

In Turkey, where the only towerco to gain scale in recent years has been TurkCell’s carve out, Global Tower, PTT, the Turkish Ministry of Transport and Infrastructure group company, has established a new tower arm, PTT Kule, which will allow the Turkish government to capitalise on the ownership of tower infrastructure in Turkey, as well as creating some of the most impressive pieces of infrastructure in the world. With a 369m tower under construction in Istanbul, which will provide space for 80 broadcasters and all three Turkish MNOs as well as ISPs, IoT providers and other wireless service providers, PTT is already throwing a lot of capex at Turkish infrastructure. However, with several thousand towers currently managed by Turkish MNOs due to revert to government ownership in 2022, and over 3,500 towers rolled out in rural areas as part of the state-mandated Universal Services Project, there are plenty more opportunities for PTT Kule to reach significant scale very rapidly. 

While 2019 will be a busy year, we expect the pace of evolution in the European market to accelerate into 2020 and beyond. As 5G economics are proven through demonstrated use cases, technology is refined and business models for towercos become more evident, we will see more tower owners following the first movers in diversifying their portfolios and delivering a full range of communications infrastructure services, not just to MNO partners, but to a greater number of relevant parties. €100s of millions will exchange hands in 2019 as investors, towercos and MNOs strive to find the optimal landscape from which to grow European 5G infrastructure efficiently, quickly and collaboratively.