Cellnex takes a quantum leap forward

The M&A strategy of an acquisitive towerco is necessarily opportunistic. Towercos cannot wait for the perfect opportunity because MNOs define where, when and, to a certain extent, how much they sell their towers for. But when the opportunity arose for Cellnex to agree a game-changing sale and leaseback with Iliad and Salt, adding 10,700 existing towers and up to 4,000 BTS in three of their core markets, that opportunity was as close to perfect as it gets! TowerXchange analyses Cellnex’s recently announced €2.7bn deal with Iliad in France and Italy, and with Salt in Switzerland.

Subject to the usual conditions precedent, Cellnex has agreed to acquire 10,700 sites from Iliad and Salt. The lease term has a 20 year duration with provision for a ten year extension. The deal is forecast to close in Q419, at which point the legacy towers will be ingested in one go, rather than in a phased handover, increasing Cellnex’s European tower count to ~34,000.

Cellnex’s initial cash outlay will be €2.7bn. The deal breaks down as €1.4bn for a controlling 70% stake in Iliad’s 5,700 site French portfolio, €600mn for 100% equity in Iliad’s 2,200 sites in Italy, and €700mn for a controlling 90% stake in Salt’s 2,800 site Swiss portfolio.

Iliad France and Salt retaining 30% and 10% stakes respectively reflects the MNOs’ recognition that the towers remain strategic elements of their value chains, enabling them to increase their familiarity with the day-to-day operation of their new long-term partners.

Cellnex has existing liquidity to fund the deal: €1.2bn raised in their recent (16.6x oversubscribed!) rights issue, €600mn in cash, and €1bn on credit lines already available and not disposed for the time being.

Cellnex anticipates deploying a further €1.35bn to realise a substantial build-to-suit (BTS) programme of up to 4,000 sites, thereby further amplifying the value of the deal. The BTS programme consists of up to 2,500 sites in France, 1,000 in Italy, and 500 in Switzerland through 2027. Together with existing BTS programmes, the Iliad+Salt BTS programme would put Cellnex on track to scale to 44,486 towers by 2027.

Cellnex would have a portfolio of ~34,000 towers if the deal closed, taking them past IHS, GTL Infrastructure, Deutsche Funkturm, SBA Communications and edotco to become the world’s seventh largest towerco, and Europe’s undisputed market leader.

Assuming the Iliad / Salt deal closes, and Cellnex executes on their enlarged BTS plans for Iliad+Salt, and for and Bouyges, Wind Tre and Sunrise, the deal puts Cellnex on a run rate to double revenues from €901mn in FY18 to ~€1.8bn by 2027.

Cellnex would be buying €510mn of incremental EBITDA (€230mn from France and Italy, €70mn from Switzerland and the rest from the BTS programme) which, again together with existing BTS backlog, is forecast to more than double Cellnex’s EBITDA from €591mn in 2018 to €1.3bn by 2027.

The Iliad+Salt deal would increase Cellnex’s recurring levered free cash flow (RLFCF) by €300mn.

Investors continue to enjoy the ride with Cellnex. At time of writing (27 May), Cellnex share price was at an all-time high of over €30, more than double the mark set at the time of their 2015 IPO, with a market cap in excess of €9bn.

One of the attractions for investors is that Cellnex continues to increase the proportion of their revenues derived from telecommunications infrastructure services, further diluting their legacy broadcast service business. Prior to the Iliad+Salt deal, telecommunications infrastructure services constituted 65% of Cellnex’s annual income by business line (€586mn out of €901mn total). Upon closing, that will rise to ~75%, with the BTS programme ‘run rate’ forecast to increase that further to 80% through 2027. “In the longer-term Cellnex is still exposed to potential broadcasting risk,” commented James Ratzer, a partner at New Street Research. “But all of these transactions are helping them to diversify away from this business.”

This latest acquisition will continue Cellnex’s strategy to internationalise via the acquisition of telecom rather than broadcast assets, reflecting the greater medium to long term potential of telecom infrastructure assets.

The Iliad+Salt deal will also continue the geodiversification of Cellnex’s portfolio. Pre-IPO, 95% of Cellnex’s EBITDA was generated in their home country of Spain. Assuming the completion of the deal and execution of the BTS programmes, this deal would not only increase Cellnex’s EBITDA 5.5x since 2014, it will also result in 75% of Cellnex’s EBITDA originating from France, Italy and Switzerland (with Spain, the UK and The Netherlands making up the balance).

Assuming the Iliad+Salt deal closes, by 31 December 2019 Cellnex’s BTS pipeline will include:

- Up to 4,832 BTS sites in France, including 2,500 for Iliad France, plus the BTS programme already agreed with Bouygues.

- Up to 1,100 BTS sites in Switzerland, including 500 with Salt plus BTS committed with Sunrise 

- Up to 2,152 BTS sites in Italy, including 1,000 for Iliad Italy, others BTS committed with Windtre 

The Iliad+Salt BTS programme would double Cellnex’s sales backlog from €18bn to €36bn.

Cellnex anticipates their new build pipeline will be only minimally offset by decommissioning due to strict EMF regulation in the three countries. Cellnex has not disclosed a detailed overlay of existing and new build programmes (indeed, much depends on search rings yet to be defined by MNOs), as such there may be locations where, for example, Bouygues wants a site in a similar location to Iliad so only one tower is built. In such instances, the total volume of new build may be reduced, but the towers affected would be going up with at least two tenants from the outset, so such consolidation of BTS requirements would be value accretive for Cellnex.

At their 2019 AGM, Cellnex called attention to opportunities they are evaluating to add further European telecoms infrastructure assets with an enterprise value up to €4bn, including further sale and leasebacks, the potential consolidation of existing European towercos, BTS programmes and the expansion of their business model into DAS, FTTA and edge computing.

Asked about the relative attractiveness of the Iliad and Salt towers compared to other towers that might come to market in Europe, Àlex Mestre, Cellnex’s Global Business Managing Director told TowerXchange: “This is an opportunity-driven market. We permanently have our heads up to explore every opportunity that arises in the dynamic European tower market. It’s not a question of prioritising one opportunity over another, but once it became clear that it was possible to reach an agreement with Iliad and Salt, and that theirs and our interests coincided, we were keen to reach agreement.”

Cellnex will doubtless be particularly interested in any assets brought to market as a result of Vodafone’s project Skylon, an initiative in which Vodafone is exploring carving out or selling many of their ~55,000 European towers. While assets are not expected to come to market for months, perhaps years, Vodafone’s increased willingness to share and monetise their towers is already reflected in an agreement to merge Vodafone Italy’s 11,000 towers with TIM’s towerco INWIT. It remains possible that, in the medium term, TIM and Vodafone may seek to monetise the enlarged INWIT business, in which case Cellnex would doubtless be prospective buyers.

In the meantime, Vodafone’s project Skylon could shake loose the ~600 towers they own in the Netherlands (in a joint venture with Liberty Global). There has also been growing speculation that joint venture partners Vodafone and Telefónica may be interested to sell a minority or majority stake in Cornerstone (formerly CTIL). Cornerstone owns around 16,000 UK towers. If a majority stake were made available then Cornerstone, or any other towers brought to market in the UK or the Netherlands, they would be attractive incremental acquisitions for Cellnex’s existing businesses in those countries.

Responding to analyst questions during their Q119 earnings call, Cellnex CEO Tobias Martinez admitted that Cornerstone matched “all of the requirements as a target for Cellnex. This is the reason why it remains as a target for us (both Cornerstone), and the UK as a country.”

Beyond Vodafone assets, there have been rumors that Orange and Telenor are reviewing their tower strategy, while there are a further ~7,000 Italian towers believed to be coming to market from Windtre – another prospective incremental acquisition for Cellnex. Meanwhile TDF headlines a cluster of broadcast tower portfolios coming to market across Europe, although Cellnex are less likely to be interested in broadcast businesses.

“Cellnex has now said that TDF is off the table, but Cornerstone and INWIT, if and when they come to market, are still of interest,” commented New Street’s Ratzer. “However, I think Cellnex would require further equity funding to do this. Given where the share price is, clearly the market reaction to this rollup strategy is positive.”

With the Iliad+Salt deal poised to substantially increase their EBITDA both in the near-term, and in the mid-term through the doubling of Cellnex’s sales backlog, and with their RLFCF increasingly derived from telecom rather than broadcast infrastructure, Cellnex is well placed to raise further debt to fund further acquisitions.

Asked about their strategy for raising further capital to fund future acquisitions, Cellnex’s Corporate Affairs Director, Toni Brunet, told TowerXchange. “We could use available credit lines, corporate and convertible bonds – and if a project arises that needs specific funding, we may consider a new rights issue or capital increase. When ConnecT joined as a key shareholder they committed €1.5bn to accompany our capital increases, of which we already consumed €400mn in last rights issue, but they still have margin to continue to support us if a new capital increase was needed to support an interesting market opportunity.”

Cellnex’s acquisition of 5,700 Iliad towers in France would consolidate the towerco’s status as the largest independent tower operator in France, with 8,918 sites (15.6% of the country’s total tower stock), rising up to ~13,750 by 2027 with the completion of BTS programmes for both Iliad and Bouygues.

It seems unlikely the competition authorities will object to Cellnex acquiring the Iliad France towers as Orange remains France’s largest tower owner, with ~15,000 sites.

Also active in France is Hivory, the new name for the recently carved out SFR Towerco, which has 10,198 sites. Cellnex, and other pureplay independent towercos, are believed to have balked at the opportunity to invest in the SFR towers when it became apparent that majority owners Altice did not wish to sell a controlling stake, leaving the way clear for KKR to acquire a 49.99% stake in Hivory at an enterprise value of €3.6bn. Hivory has a 1,200 site BTS programme with SFR. CEO Tobias Martinez has suggested that the integration of the Iliad towers would preclude Cellnex bidding for TDF, which owns 7,728 telecom towers. An equally important consideration is that Cellnex would not wish to backtrack on their efforts to dilute their broadcast infrastructure business. Owners Brookfield, APG, Arcus and Credit Agricole Assurances are believed to have instructed banks to look for a buyer for TDF.

American Tower operates 2,504 towers in France, the majority of which date back to the December 2016 acquisition of FPS Towers for €697mn.

With 74% of the country’s towers now under independent ownership, the French tower market has transformed to a towerco-led structure. With 5G driving urban densification, and the French government driving a rural coverage initiative which could require 15,000 more towers, there is plenty of organic growth opportunity for France’s towercos.

While the acquisition of 2,200 towers from Iliad would ratchet Cellnex’s Italian site count to 12,009 (27.1% of the country’s total tower stock of ~44,350), INWIT will remain the country’s tower market leader if an agreement is finalised to integrate ~11,000 towers from Vodafone Italy, doubling INWIT’s portfolio to ~22,000 towers. TowerXchange anticipate Cellnex will consider bidding for INWIT if, as suspected, Elliott Management Corp continues to instigate a lean business model at INWIT owners TIM.

With Windtre believed to be selling ~7,000 towers, there could be further opportunities for consolidation in the Italian tower market. New build has been more or less cancelled out by decommissioning of parallel infrastructure in Italy, but with EMF regulations remaining tight, and densification sites needed for 4G QoS, nevermind 5G, Cellnex is bullish that their pipeline of 2,152 BTS sites will substantially increase their Italian tower count.

EI Towers’ TowerTel, HighTel and a fragmented ecosystem of small private towercos complete Italy’s telecom tower landscape, a market where 84.2% of towers will soon be controlled by towercos.

There may be as much growth from small cells as macro cells in Italy, with INWIT having deployed 2,400 small cells and the lion’s share of Cellnex’s 1,600 sites being in the country, primarily through partnerships such as those with the cities of Milan and Genoa.

Cellnex is doubling down on the Swiss market, aggregating 2,900 Salt towers with 2,339 acquired from Sunrise for €430mn in 2017. The deal will elevate Cellnex’s Swiss tower count to 5,270, representing 46.6% of the country’s current tower stock, with the balance retained by market leaders Swisscom.

While new build has been relatively muted in Switzerland for the past two years, 5G will re-energise the market, and a significant majority of Switzerland’s new build is likely to be completed by Cellnex, which reports a pipeline of 1,100 BTS towers in the country through 2027. Around two thirds of Switzerlands cell sites are rooftops as opposed to ground based towers, although many of those rooftops have ‘stub’ towers on them, making them more readily co-locatable. Swisscom, Salt and Cellnex have all been pioneers of microcells and DAS in Switzerland.

TowerXchange is not aware of any other tower companies operating in Switzerland.

This is a game-changing acquisition for Cellnex, giving them a significant scale advantage over other European tower consolidators. Indeed, when one considers that Cellnex’s five closest competitors in terms of scale in Europe (Deutsche Funkturm, Telxius, INWIT, Global Tower and Hivory) are all operator-led towercos that have not to date been acquisitive, Cellnex’s closest rival as an aggregator of European towers appears to be American Tower. Upon completion of the Iliad+Salt deal, Cellnex’s portfolio will be approximately 7.2x the size of American Tower’s in Europe.

Cellnex may face increasing competition for the broader digital infrastructure services proposition from Digital Colony, albeit their initial focus appears to be on fibre, small cell and IBS as opposed to macro towers in Europe. Nonetheless, Digital Colony is building a substantial European footprint, which may soon be augmented by tens of thousands of route miles of metro fibre from Zayo, giving them an interesting backbone to leverage.

Cellnex has been a change-agent in European towers, effectively initiating the transition toward professionalised infrastructure sharing. TowerXchange has identified a further 65,900 towers that we forecast could be transferred to independent towercos in Europe in the coming two and a half years, plus a further 33,000 new towers we think towercos could build over a similar period. We’re not forecasting that Cellnex will capture all that growth, but they will doubtless continue to prioritise attractive incremental acquisitions in their existing markets, while considering opportunities in new markets in a disciplined manner.

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TowerXchange always seem to characterise sale and leasebacks as win-win deals – probably because they are only agreed when both parties agree it is a win!

“I think both sides did well,” commented James Ratzer, Partner at New Street Research. “From an Iliad perspective, it materially helps with deleveraging, and for Cellnex, it is both a value and earnings accretive transaction. For Cellnex, there could also be opportunities to increase the tenancy ratio on these towers further.”

“The acquisition looks like an excellent fit, given it is a perfect overlap with Cellnex’s existing towers in France, Switzerland and Italy,” continued Ratzer. “However, that being said, I was surprised how little their initial focus was about integrating them with their existing assets to get operational synergies.”

The valuation multiple for this acquisition is comparable to previous large European tower sale and leaseback transactions. “The BTS component makes the deal more attractive as it looks like the longer-term multiple of this transaction is lower – 13x EBITDA, versus 17x EBITDA on the initial towers,” said New Street’s Ratzer. “However, the payback period on this is longer, as it is going to take up to seven years to build this out.”

“Cellnex has not confirmed, but based on the similar structure we have seen on the Wind deal, it could well be that approximately one third of the revenues relate to the adaptation revenue. This would imply an underlying lease rate of approximately €20,000 per year, which seems reasonable as an anchor tenant,” added Ratzer. A lease rate of €1,667 per site per month would be comparable with other European benchmarks.

With a cost per tower of €252,336, the Iliad+Salt deal compares to the €285,610 per tower Cellnex paid to acquire 4,100 sites from Bouygues Telecom for €1.171bn across four deals in 2016-17. Cellnex’s previous deal to acquire 7,377 towers from Wind (VEON) for €770mn in two phases across 2015-17 at €104,348 per tower is starting to look like an outlier, but as usual, all these comparisons really show us is that cost per tower is a meaningless metric without knowing the underlying lease rate, which itself is usually considered confidential.

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