In their FY20 results, Orange announced the formation of its new towerco, TOTEM. The towerco, comprising initially of assets in France and Spain is expected to launch at the end of 2021, with a management team to be appointed in the coming months. Further Orange assets may be brought into the TOTEM perimeter whilst TOTEM has an appetite for further M&A opportunities. Here we examine the latest on Orange’s towerco plans and what the future could hold.
Just over a year ago, during the presentation of its Engage 2025 strategic plan, Orange announced plans to carve out its European towers into an Orange-owned towerco, starting with its largest markets of France and Spain. In October 2020, the company announced the formation of a dedicated group-level organisation running the towerco strategy; in the latest results presentation this week, the operator presented further details on the economics of its towerco unit and revealed the new business’ name ’ TOTEM.
TOTEM’s geographic scope and tower count
TOTEM’s geographical remit will initially be confined to France and Spain (as initially proposed). In France, TOTEM will own and operate 17,600 sites, of which 55% are ground based towers and 45% rooftops; in Spain TOTEM’s portfolio will number 7,900 sites of which 52% are ground based towers and 48% rooftops (see figure one).
Orange has stated that they will explore the possibility of integrating towers from Orange’s other European operations, a move which could add up to a further 15,400 sites to the towerco down the line. For now, there are no plans to bring Orange’s towers in the Middle East & Africa into TOTEM, with Stephane Richard commenting that coverage is very much still a source of competitive advantage in the developing markets in the region. Whilst the incorporation of MEA towers might be off the table in the short term, Orange’s Chairman and CEO, St’phane Richard commented that it could come under consideration in the longer term.
Figure 1: TOTEM’s portfolio
Figure 2: Orange’s pan-European tower portfolio
Key financial metrics and contractual terms
Orange and TOTEM have a framework agreement in place, which provides for an initial 15-year contract with a tacit renewal of 2 x 10 years (with an all or nothing clause). Orange state that the inflation-linked Master Service Agreement, with no cap and a 0% floor, is in line with current market norms with the anchor tenant fees in line with local market benchmarks. There are provisions in the contract to protect against any future network sharing agreements (Orange and Vodafone already have a network sharing agreement in place in Spain), and TOTEM has right of first offer on all new sites to be built by Orange.
Based on the terms of the MSA in place, and the number of sites being integrated, Orange state that TOTEM’s revenues would have been ’500mn in 2020, with an EBITDA (IFRS16) of ’444mn (87.0%) and an EBITDAaL of ’292mn (57.2%). Two thirds of TOTEM’s EBITDA would have been generated in France.
Organic growth potential and towerco competition in France and Spain
With tailwinds such as 5G rollout, coverage obligations and capacity requirements, and with a core business focus on commercialising their assets, Orange forecast significant organic growth for TOTEM. The tenancy ratio of the portfolio currently sits at 1.3x and Orange forecast this will increase to 1.5x by 2025. TOTEM is also expected to build up to 3,000 new sites for Orange over the next eight years whilst also hosting and deploying sites for other operators.
Both France and Spain have well established towerco markets, and TOTEM will face competition from both other MNO owned towercos and independent players in achieving this organic growth.
In France, TOTEM’s largest competitor is Cellnex, Cellnex having announced or completed tower deals with three of France’s four MNOs. The towerco has acquired the tower portfolio of Free Mobile (owned by Iliad), completed a number of deals with Bouygues Telecom (with the two parties’ relationship also extending to fibre and metropolitan and central offices) and is in the process of finalising the acquisition of Hivory (the towerco carved out of Altice’s SFR). The world’s largest independent towerco, American Tower also has a presence in France, with American Tower (in conjunction with Dutch Pension fund PGGM) having acquired FPS Towers back in 2016 (FPS having acquired the majority of its portfolio from a deal with Bouygues Telecom). Broadcast towerco TDF has a successful telecoms business, US-based towerco Phoenix Tower is steadily growing a French tower portfolio through a BTS agreement with Bouygues Telecom and new kid on the block, Valoc’me (formed by the founders of FPS Towers) is shaking things up with their innovative business model.
Figure 3: Tower ownership in the French market
In Spain, TOTEM will once again face competition from both Cellnex and American Tower. Cellnex acquired the bulk of its Spanish portfolio through a number of transactions with Telef’nica and Yoigo across 2012-2014 (and has also acquired a portfolio of 1,500 ’non-strategic’ sites from Orange); American Tower is set to enter the market later this year, when it finalises the acquisition of Telef’nica’s Telxius. In addition, Vodafone’s Vantage Towers operates in the Spanish market, with Vodafone and Orange also having an active sharing agreement in place. Axion, active in both the telecoms and broadcast sector, marks Spain’s final towerco.
Figure 4: Tower ownership in the Spanish market
Inorganic growth potential
In addition to incorporating up to a further 15,400 towers from Orange’s other European markets (a strategic review of the strategy around this expected in the second half of 2021), Orange has stated that TOTEM has an appetite to participate in tower M&A opportunities across the European market. This M&A appetite has two channels ’ the acquisition of tower portfolios from other operators and the formation of joint ventures with other MNO owned towercos.
On the subject of joint ventures, Orange’s CEO Stephane Richard name dropped two players in the company’s Q4 20 results, namely Vodafone and Deutsche Telekom. Vodafone has already formed one joint venture with another MNO owned towerco, combining the towers of Vodafone Italy with those of TIM’s INWIT, with Vodafone and TIM having an active sharing agreement in place in the country. With Vodafone and Orange having an active sharing agreement in place in Spain, a tie up between Vantage Towers and TOTEM in the country, merging their combined portfolio of 16,700 sites could be one move the operator is considering. Orange and Vodafone’s portfolio also overlaps in Romania, where the two operators’ networks are already jointly managed by the joint venture, Netgrid Telecom, making a deeper tie up another possible option on the cards. In a similar vein, Orange’s Polish network is jointly managed with that of Deutsche Telekom’s T-Mobile, with the joint venture NetWorkS! managing the tie up. Creating a joint venture towerco with its own balance sheet could be another logical next step, especially with Cellnex having reached deals to acquire the tower portfolios of Poland’s other two operators, Play and Polkomtel. Orange and Deutsche Telekom’s portfolio also overlaps in Slovakia and Romania.Whether a broader scale pan-European tie up between TOTEM and either Vantage Towers or Deutsche Telekom (creating a 100,000+ tower towerco) could happen remains to be seen.
In terms of acquiring the tower portfolios of other MNOs, whilst in France and Spain all Orange’s competitors have either divested their towers to independent towercos or formed their own towerco, the same can not be said for Orange’s other markets. Across Orange’s footprint, there are a number of players active in just one or two countries who are unlikely to consider the creation of their own towercos, the tower portfolios of such candidates could represent attractive acquisition targets.
In Belgium, for example, Orange and Proximus have been keen to put in place an active sharing agreement ’ a move that has been meeting resistance from third placed Telenet and the competition authorities. Proximus, which also operates in Luxembourg under the brand name Tango, has yet to announce a plan for their towers, but with Orange keen to explore network sharing with the operator, a combination of their tower portfolios could be an attractive strategy.
Could TOTEM’s perimeter extend to Africa?
In the short term, no ’ but the possibility should not be ruled out in the longer term. That was the messaging from Stephane Richard when questioned on the topic during Orange’s Q4 2020 results call. Elaborating further, Richard went on to explain that in Africa, coverage is still a source of competitive advantage ’ therefore creating a towerco and opening up towers to competitors does not make commercial sense. When you build a new tower in Africa, you will see a jump in new subscribers ’ tower sharing diminishes this commercial gain. In Europe, competition is far less about coverage and more about managing networks in a smarter way; as such, the sharing of passive infrastructure does not impact the business in the same way. As African markets mature however, there exists the potential to bring Orange’s tower portfolios across the continent under TOTEM. This could add a potential further 22,000 towers to the towerco’s asset base, although would significantly change the risk profile of TOTEM.
Will TOTEM diversify beyond macro towers?
Orange also states that TOTEM will ’develop new digital services’, implying that the towerco will follow in the footsteps of the world’s other leading towercos, diversifying from a core macro-tower offering. The provision of in-building solutions and outdoor small cells networks are likely to be the most imminent opportunities with areas such as industrial IoT and edge computing being a potential longer term play.
What is Orange’s ideal capital structure for TOTEM?
A complete sale of TOTEM is off the table. Speaking during their Q4 2020 results, CEO Stephane Richard said ’Passive mobile infrastructure is a core asset for Orange, benefitting from exceptional operational expertise in the areas of deployment, hosting and maintenance. We are determined to keep these strategic assets within the scope of the Group. They represent a long-term industrial view and are an essential asset in guaranteeing Orange’s independence as well as its ability to foster sustainable economic performance.’
The operator intends, however, to use the full scope of TOTEM’s capital structure flexibilty, including taking on additional debt (with a leverage ratio of 5% thought to be sufficient to have an investment grade rating for TOTEM) and equity issuance. Both an IPO (as was the case for Vodafone’s Vantage Towers) or a stake sale to a financial investor (as Telefonica did with a sale of a stake in Telxius to KKR and Pontegadea, prior to divesting to American Tower), remain options for Orange. Orange have stated that they are open to all options.
Whilst Orange has been clear that it wishes to retain a controlling stake in Orange, the point that they would consider co-control with another operator was heavily stressed during the presentation of TOTEM. As to what the capital structure of TOTEM would be, Orange have stated that it very much depends on the options on the table in light of their appetite to potentially join forces with another operator owned towerco and also acquire the portfolios of other players in the market.
So, what’s next for TOTEM?
In the first half of 2021, Orange expects to appoint the TOTEM’s management team, marking the next most significant milestone on the towerco’s roadmap. The completion of the carve out of towers in France and Spain is expected to be completed in the second half of the year, at which time a strategic review will be undertaken ’ with this including the consideration of including further Orange assets under the TOTEM perimeter. In their Q4 2020 results, Orange stated that they expected the consolidation of the European tower market to play out in a matter of months, hinting that discussions with other operators were currently underway. All has been quiet from the Vantage Towers and Deutsche Telekom camps on the potential formation of joint ventures with TOTEM, and so TowerXchange eagerly awaits news of Orange’s next move.
