Vodafone has announced it is selling part of its 81.7% stake in Vantage Towers, its pan-European towerco to a consortium of investment firms KKR & Co., Global Infrastructure Partners (GIP) and The Public Investment Fund of Saudi Arabia (PIF), and will use to the funds from the sale to reduce its debt. Under the proposed deal, the MNO will also form a joint venture with the private equity firms, which will buy out the minority shareholders in Vantage Towers. The deal continues Vantage Towers’ meteoric rise from Vodafone’s Project Skylon to independent, private towerco. What does it mean for towerco consolidation in Europe?
The deal and what does it mean for Vantage Towers
Vodafone will transfer its stake in Vantage Towers to a holding company, which will be indirectly co-controlled by Vodafone and the consortium. The consortium will obtain a shareholding of up to 50% by acquiring joint venture shares from Vodafone for cash.
The holding company will launch a voluntary public takeover offer for all outstanding free float shares of Vantage Towers which are 18.3% of the share capital. Vantage Towers shares have surged at the news, indicating that investors see the proposal as both credible and welcome.
The transaction values Vantage Towers at 26x adjusted EBITDA for the 12-month period ending 31 March 2022, which puts it significant above other publicly listed European towercos, and a 6x premium to its valuation as recently as mid-October. The 26x multiple puts Vantage Towers on a par with the big American towercos.
Figure one: Towerco valuations, Source: MoffetNathanson (19 October 2022)
Vodafone has said it expects to receive minimum net cash of €3.2bn and maximum net cash proceeds of €5.8 to €7.1bn depending on the take up in the voluntary takeover offer and subject to GIP and KKR raising further equity.
Vodafone will work together with KKR and GIP, whose expertise in digital infrastructure we share below, to advance the company’s strategic programme and to expand the company’s activities beyond its core business into fast-growing adjacent markets such as 5G private networks, data centres, edge computing, small cells and IoT, and deploying fibre to the tower.
The consortium will invest in improving Vantage Towers’ existing infrastructure by driving network expansion and enabling the deployment of next-generation technologies so it further strengthens its pan-European presence. At present Vantage Towers have around 45,000 towers in 10 European countries.
Figure 2: Vantage Towers site count (as of HY2 22 on eve of announcement):
In comments to analysts at Vantage Towers’ H1 FY23 financial results announcement on 14 November the company shared it has added 710 net new tenancies in H1 FY23 resulting in a tenancy ratio of 1.45x which translates to more than half-way to its medium-term target of 1.50x ratio. This is an increase from 1.39x ratio from March 2021 when Vantage Towers was carved out.
The company’s ambitious strategic plans also include expanding build-to-suit to help customers meet new coverage obligations and densification requirements. KKR and GIP also envisage enhancing Vantage Towers’ utilisation of existing assets by capturing additional co-location opportunities from new and existing third-party customers. This will allow Vantage Towers to further diversify its tenant base, increase the size and depth of its tower portfolio, while also creating further cost efficiencies and improving its profitability.
Vodafone has been seeking to sell a stake in Vantage Towers for many months after carving out the units into a towerco in early 2021. In early 2022 the MNO considered merging its towers with rival GD Towers or Orange’s TOTEM but reversed course when terms could not be agreed.
Some Vodafone investors have been eager to see a deal for Vantage Towers materialise as it would release billions in capital to help reduce the parent company’s debt. Blackstone and Brookfield had both considered bids for the towers business at an earlier stage but those did not progress.
Who are Vantage Towers’ new co-owners
Global Investment firm KKR is far from new to towerco investments.
KKR manages multiple asset classes including private equity, energy, infrastructure, real estate, credit and, through its strategic partners, hedge funds. Current towerco investments include Indus Towers in India and Pinnacle Towers in the Philippines. Global towerco investments which KKR has recently exited include Telxius and Hivory. KKR’s 49% investment in Telxius was exited when the towerco was acquired from Telefonica by American Tower. The Hivory investment was exited through a sale to Cellnex.
GIP has previously invested in the Indian telecom tower company Ascend Telecom which provides passive telecommunication infrastructure services to all four mobile network operators. The company has pan-Indian coverage and owns approximately 7,200 towers with over 12,300 tenancies.
GIP was also linked to the GD Towers alongside KKR and Stonepeak (GD Towers having subsequently been acquired by Brookfield and DigitalBridge). GIP is targeting US$25bn for what would be the world’s biggest pool of capital dedicated to infrastructure investments. Investments in the digital infrastructure space include Cyrus One, a global hyperscale data center platform with a portfolio of over 50 operating data centers located in key digital gateway markets primarily across the U.S. and Europe.
KKR and GIP have been competing with other bidders for Vantage, including a consortium of Spanish telecommunications group Cellnex Telecom and Singapore’s sovereign wealth fund GIC Pte. KKR and GIP are set to invest more than Saudi Arabia’s PIF in the deal, however more details are yet to be announced.
Saudi Arabia’s PIF which is also art of the consortium as a minority investor, is keen to invest in telecom infrastructure and will help fund a deal. PIF is said to be among suitors bidding for network towers being sold by Qatari telecom firm Ooredoo QPSC that could be valued at as much as US$5bn. The sovereign fund has also sent a non-binding offer to Saudi telecom stc to buy 51% of stc’s carve-out towerco TAWAL, following a transaction which saw PIF buy Zain Saudi Arabia’s towers.
What will be the impact on the European tower market?
When TowerXchange started covering the European tower market back in 2016, tower carve-outs and independent towercos owned just 28% of towers. Since then, the European towerco market has boomed with two thirds (66%) of Europe’s towers now owned by some form of towerco. The structure of the towercos has varied enormously in this time, with many MNOs carving out towers before then selling them off. Telefonica’s Telxius is now part of American Tower. CK Hutchinson’s short lived towerco was acquired by Cellnex. Now Vantage Towers brief spell as a publicly traded towerco is likely to attend through this acquisition. Vodafone and its investors have done very well out of this deal, and Vantage Towers medium term future as an independent entity looks secure, however a future merger has not been ruled out.
The deal presents an opportunity to improve the digital infrastructure across the continent in the next few years as well as boost organic growth due to 5G rollout, co-location options for Europe’s towercos, and fibre to the tower. The infusion of new capital to the sector, and the elevated valuation will make further investments in network infrastructure easier to carry out.
With regard to future M&A, while many countries in Western Europe are starting to see 100% of towers in towerco hands, much of Central and Eastern Europe remains relatively untapped by the towerco model which presents big potential and should be closely watched. TowerXchange is aware of moves from United Group, A1 Towers and other operators in the region that are looking to carve-out or sell their towers. The newly invigorated Vantage Towers will be a likely suitor.
The deal also defies the slowdown in global telco M&A activity this year. MNOs are shifting their assets to help raise funds for fibre-optic rollouts and wireless upgrades, and are finding willing buyers in the form of investment firms seeking predictable returns in volatile markets.
Sovereign wealth funds from the Gulf have been active across global markets as the oil-rich region enjoys a boom from high energy prices. The deal would give Saudi Arabia exposure to critical European communications infrastructure. As rising interest rates make acquisitions more difficult to finance, dealmakers are forming consortiums and bringing in Gulf investors who are able to finance big value deals.
Conclusion
We expect to continue seeing existing towerco owned tower portfolios change hands. Whilst such deals do not increase towerco penetration per se, they may change the penetration of the different types of towerco models and will present new M&A opportunities for existing and prospective investors in European towers.
We will also see the towerco model expand further as while 66% of Europe’s towers are owned by some form a towerco, the remaining 34% of towers (over 220,000) are still locked on MNO balance sheets which signals there is still significant room for growth.
