The winds of change are blowing through the Australian Tower market. Hot off the heels of the news of that Telstra have sold a 49% stake in their recently formed tower business, Telstra InfraCo Towers, Singtel have announced a shortlist of contenders for the tower business of their Australian MNO, Optus, with formal bids due by September.
When news broke in November 2020 that Telstra were looking to monetise their newly formed tower business, it was anticipated that a deal would be done by the start of 2022. It was a surprise therefore, when Telstra announced at the end of June 2021 that a sale had already been agreed months ahead of schedule.
An investment consortium headed by Australia's sovereign wealth Future Fund and featuring pension funds Commonwealth Superannuation Corp and Sunsuper approached Telstra with a deal that valued the entire company at A$5.9 billion and is expected to complete by Q1 FY22.
The consortium will become a strategic partner in Telstra InfraCo Towers after agreeing to acquire a 49% interest for a sum of A$2.8bn. Telstra will retain 51% ownership of InfraCo Towers, and continue to own the active parts of its network. This includes the radio access network and spectrum assets, to ensure the continuation of its mobile coverage and network. Telstra sees ownership of this infrastructure as important in ensuring they maintain their status as market leaders and so a sale of a minority stake to financial investors was preferred over a sale and lease-back.
Telstra were approached by the consortium earlier in the year as they recognised the value of the roughly 8,200 towers that make up the InfraCo Towers portfolio, and provided what Telstra described as ‘compelling rationale’ to progress the transaction ahead of schedule.
Telstra also stated that they were pleased to have achieved a very favourable price while maintaining 51% control of their towers. Indeed, the price paid for the stake was above what most observers were forecasting and even at the upper end of Telstra’s expectations.
The 28x EBITDA multiple was far higher than most observers’ predictions of a 20x sized deal and pitted InfraCo Towers alongside the US public independent towercos, avoiding any discount that can sometimes be applied to MNO-owned players.
Over 50% of the funds raised by the deal will be returned to Telstra’s shareholders, as announced by Andrew Penn, CEO of Telstra. This decision has attracted some scorn from backbenchers in the Australian Liberal party, who pointed to the lack of investment directed towards mobile blackspots. Telstra was previously awarded a A$200m grant and had used the money to build 894 additional towers in areas that frequently experience outages. Politicians are unhappy that only A$75m of the A$2.8bn raised by the sale, has been allocated towards further investment in this project.
Telstra, however, have rebutted this criticism by pointing to the fact that the A$200m did not go in its entirety to the InfraCo Towers business, and highlighted the further investments to expand and improve its mobile network across Australia. Its recent commitments to invest in regional areas are worth almost half a billion dollars.
A spokesperson also pointed towards the fact that the vast majority of infrastructure investment has occurred after the privatisation of Telstra in the late 90s. This means that the funding from this investment has come from shareholders and not taxpayers. Shares in Telstra jumped 5% following news of the deal.
What does the future hold for Telstra Infraco Towers?
Telstra’s current portfolio of 8,200 towers includes 5,570 mobile and 2,630 non-mobile sites, making the InfraCo Towers business the largest mobile tower infrastructure provider in Australia.
A 15-year MSA is in place with Telstra as anchor tenant and Infraco Towers will turn its focus to opening up the portfolio to other operators and non-traditional tenants. The average tenancy ratio across the portfolio currently stands at 1.34x and the towerco’s commercial team will be laser beam focussed on driving this up whilst also securing new build contracts, with the company targeting a minimum tenancy ratio of 1.55x on new towers. Infraco Towers is working on simplifying its processes and pricing to make it easier for the industry to access its available sites and is understood to have already selected a site management system to better manage its asset base.
In addition to focussing on top line revenues, one can also assume that as Infraco Towers professionalises the management of its tower portfolio it will also be heavily focussed on optimising its cost base. Ground lease costs are the biggest operating cost for a steel and grass towerco and are likely to be a positioned firmly within their crosshairs. Infraco Towers is yet to publicly state whether power provision and management will be in its remit, but with an exponential increase in power forecast as data usage booms in a 5G era (necessitating upgrade or hybridisation of grid connections), Telstra’s continuing focus on reducing its carbon emissions, and Australia’s vast territory meaning off-grid sites will be amongst the portfolio, one can assume power must be a key consideration for Infraco Towers.
Infraco Towers’ CEO has been appointed, with current Telstra Towers & Pole Executive, Jon Lipton set to steer the ship. The Towerco will operate under a board comprised of other Telstra and consortium representatives, with InfraCo CEO, Brendon Riley chairing the board.
What further deals are on the horizon in Australia?
Australia is a three player MNO market with Telstra leading the market, followed by Singtel-owned Optus and third placed TPG Telecoms (formed by the recent merger of Vodafone Hutchison Australia and TPG Telecoms Limited – the latter having had a limited presence in the mobile market) as can be seen in Figure 1.
Figure 1: Subscribers to Australia's MNOs (Million)
Source: Company websites and press releases Prior to Telstra’s announcement that it was looking to monetise its tower portfolio, Optus had already announced its intention to potentially sell towers. Whilst Telstra may have got a deal away first, Singtel owned Optus will be encouraged by the high EBITDA multiple that Telstra were able to secure. Whilst Optus’ tower portfolio, at 2,000 sites, may be significantly smaller, the operator’s historically more open attitude towards infrastructure sharing means their tenancy ratio is higher, and current estimates suggest that Optus should be able to find a buyer for between A$1.5 billion and A$2 billion.
To get this, however, they are looking to sell a majority stake in the business, with between 60 and 70% up for grabs. Binding bids are expected by the end of September 2021, but Optus has revealed a respectable shortlist already, signifying no shortage of interest in the portfolio.
For starters, Australia’s largest independent towerco Axicom, which is backed by Macquarie, has thrown its hat in the ring. Axicom acquired the majority of their c. 2,000 site portfolio from the 2015 acquisition of Crown Castle Australia (Crown Castle Australia having previously acquired 700 towers from Optus (then owned by Cable & Wireless) back in 2000)
Also emerging on the shortlist was QIC, who were joined by bid partner KKR. KKR’s appearance on the shortlist marks a further interest from the alternative investment giant in the APAC tower market, after previous injections of capital into New Delhi based Indus Towers in 2017, and more recently in local Filipino players, Pinnacle Towers in late 2020.
KKR has recently exited its investment in Telxius, selling its stake to American Tower, so the investor may be looking for a fresh investment in the tower space. Being joined by Australian state backed QIC demonstrates the government’s ambitions to support and invest in infrastructure for the country.
Additional firms present on the shortlist include Toronto headquartered Brookfield Infrastructure Partners, who rejected working with any bid partners, and were reportedly interested in the Telstra portfolio as well. Brookfield’s investments in the tower space include India’s Summit Digitel, UK’s Wireless Infrastructure Group and most recently the tower portfolios of Telia in Norway and Finland.
Local players IFM Investors and AustralianSuper are also reportedly interested, as are domestic Towerco Stilmark as part of a consortium named Symphony. Stilmark are joined by Canadian Pension fund OMERS infrastructure and US based ATN international, a newly formed holding company that would own the circa 2,000 towers should they prove successful.
Figure 2: Estimated Tower Ownership in Australia
Source: TowerXchange The third MNO in Australia, TPG Telecoms, was born following the 2020 merger of Vodafone Hutchinson Australia and TPG Telecom Limited but are yet to announce plans for their tower portfolio. At the point of the merger, Vodafone Australia's mobile network consisted of 467 owned sites, with the operator using a total of 5,613 mobile sites.
Of these, 1,800 are held under their joint venture with Optus, which is set to continue indefinitely and subject to a three-year notice period to cancel.
Following a years’ worth of integration work between the two entities infrastructure, these 467 sites are now a part of TPG Telecoms. But for how long? Trent Czinner, Group Executive for Legal and External affairs at TPG, commented that the Telstra sale was very good news for the industry.
Speaking to The Sydney Morning Herald about their own approach, he stated that “These are significant infrastructure assets and we are always considering options to unlock more value for our business.”
With all having been quiet on the M&A front in Australia for a number of years, the tides are very much changing, creating significant interest amongst the local and international towerco and tower investment community.
