Cellnex enters the Portuguese market

After highly active 2019 on the M&A front, Cellnex kicks off 2020 with the announcement they are to acquire Portuguese towerco, OMTEL, adding 3,000 towers and an eighth market to their rapidly expanding tower portfolio. TowerXchange examine the news and the implications for the Portuguese market.

On 2 January, Cellnex announced that it had reached an agreement with Altice Europe and Belmont Infra Holdings to acquire 100% of Portuguese towerco, OMTEL, and their portfolio of c. 3,000 sites. The deal, which also includes a build to suit commitment of 400 new sites for MEO over the next four years, places OMTEL at an enterprise valuation of €800mn. Cellnex will fund the transaction through available cash reserves, making an initial payment of €300mn with the remaining balance to be paid in December 2027 at fair market value.

OMTEL is Portugal’s first independent towerco, created in 2018 from the carve out of 2,961 towers from PT Portugal (operating under the retail brand MEO and owned by Altice Europe), the leading MNO in the country.

PT Portugal agreed the sale of a 75% stake in the tower company (then called Towers of Portugal) to a consortium of investors including Morgan Stanley Infrastructure Partners and Horizon Equity Partners, with PT Portugal reinvesting to own a 25% stake.

The creation and monetisation of OMTEL was as part of a move by Altice to alleviate the debt pile it had amassed following a series of acquisitions. Prior to OMTEL’s formation in 2018, Altice’s debt stood at €31.3bn, around 5.5x annual earnings (compared to around 2-3x net-debt-to-earnings for most of Europe’s big MNOs). The sale of a 75% stake in OMTEL raised €495mn for the operator, whilst a simultaneous sale of a 49.99% stake in their newly created French towerco (SFR Towerco, since rebranded to Hivory) to KKR raised a further €1.799mn, lopping €2.3bn off the operator’s debt.

Some were surprised that Altice had decided against a full divestment of the tower portfolios through a more conventional sale and leaseback, instead opting to forgo a higher capital raise in favour of benefiting from the additional revenues and EBITDA that their stake in the towercos would contribute to their balance sheet. Speaking at the time of the transaction, founder Patrick Drahl said “I am enthusiastic about creating new tower partnerships in France and Portugal. With KKR, Morgan Stanley Infrastructure Partners and Horizon Equity Partners, we have found long-term partners of the highest-quality who share our vision to invest in leading infrastructure and growth opportunities. We will create a leading European tower business, including the #1 in France. Both tower businesses will be uniquely positioned to grow as they provide increasingly important infrastructure services to operators in both markets. Simultaneously, these transactions underline our commitment to de-lever and proactively manage our balance sheet while highlighting the significant underlying value of Altice Europe’s business.”

Drahl’s comments surrounding a “long-term partnership” with Morgan Infrastructure Partners and Horizon Equity Partners suggest that at least publicly there were no plans for the towers to change hands in such a short time-frame. Yet on closer inspection, the transaction may be more to do with Morgan Stanley Infrastructure Partners’ acquisition of a stake in Altice’s fibre assets than their desire to exit their investment in OMTEL.

On 13 December 2019, Altice announced that it had entered into a €4.3bn equity partnership with Morgan Infrastructure Partners in Portugal to create the first nationwide fibre wholesaler in Europe. Morgan Infrastructure Partners acquired a 49.99% stake in the entity for €2.315bn, with an initial payment of €1.565bn followed by the balance being paid in two tranches in 2021 and 2026. Many infrastructure funds have demonstrated a stronger appetite for fibre assets than towers, understanding the long term role of fibre in 5G networks better than they do for towers. Whilst Morgan Stanley has a large infrastructure fund, sources suggest that their combined investment in Altice’s Portuguese fibre and tower assets (totalling just over €2.8bn) may have been reaching the limit of the fund (or at least its appetite for Portuguese telecoms infrastructure) and as such, they prioritised their investment in the fibre over the towers. What’s more, sources suggest that the fibre sale was down to the last two remaining bidders with both Cellnex and Morgan Stanley Infrastructure Partners in the running, and Cellnex looking more likely to pip Morgan Stanley to the post. With the fibre arguably being more attractive to Morgan Stanley, and the towers arguably more attractive to Cellnex, the reshuffle in ownership presents a winning solution for all parties concerned. Morgan Stanley gets their preferred investment in fibre, Cellnex bolsters their growing tower portfolio with 3,000 further towers and the addition of a new market and Altice continues to alleviate their debt.

OMTEL’s tower portfolio is strategically located throughout Portugal and is the single largest tower portfolio in the country (ahead of Vodafone with 2,500 sites and NOS with 1,300 sites). Approximately 60% of the sites are ground based towers and 40% rooftops and the portfolio has a customer ratio of 1.25x. 

MEO is the anchor tenant on the portfolio, with Cellnex having agreed an inflation linked Master Lease Agreement with the operator for an initial 20 year term, automatically extendable for five year periods on an all or nothing basis (with undefined maturity).

In addition to having in place an agreement to build up to 400 new sites for MEO over the next four years, Cellnex anticipate the build to suit programme could well be enhanced with the addition of a further 350 sites up until 2027.

There are three mobile network operators in the Portuguese market; MEO (owned by Altice’s PT Portugal), Vodafone and NOS. MEO has the largest mobile market share (42.1%) followed by Vodafone (30.3%) and NOS (25.0%) (Source: ANACOM H1 2019 mobile services report)

There has been limited infrastructure sharing in the Portuguese market to date, with co-location having been organised on an ad hoc basis and the tenancy ratio in the country sitting close to 1, although the country’s regulator, ANACOM, has been keen to promote infrastructure sharing. OMTEL has been operating as the sole towerco in the market since its formation back in mid-2018, hoping to capitalise on its first mover advantage in the expansion and rollout of 4G/5G networks in the country. In July 2019, Vodafone announced that it was carving out its European towers to create a new, as yet unnamed towerco, with the operator’s 2,500 Portuguese towers to be included in the plans. Third placed NOS is yet to announce any plans for its 1,300 towers in the market.

5G spectrum is yet to be awarded in the country, although ANACOM has authorised the use of spectrum for the country’s operators and their partners to test 5G technologies over the past couple of years and in October 2019, Matosinhos became the first Portuguese city to achieve 100% 5G coverage.

On 30 December 2019, ANACOM adopted a final decision on the frequencies it intends to designate for 5G use. With an auction expected in Q2 2020, the regulator will auction spectrum in 700MHz, 900MHz, 1800MHz, 2100MHz, 2600MHz and 3.6GHz bands (following the frequency migration of DTT in the 700MHz band). The rollout of 5G will necessitate overlay on existing infrastructure whilst requiring further sites for densification creating significant opportunities for towercos in the market (alongside ongoing work to improve 4G coverage).

Cellnex plans to add a further 750 towers for MEO in the next seven years, representing a 25% increase in the scale of the tower portfolio formerly owned by the operator. Cellnex are also planning to rollout further densification solutions (including small cells and DAS) for their main client. New build for Vodafone will most likely be managed by their new towerco which is in the process of being formed, although one can expect NOS to consider signing build-to-suit agreements with the market’s towercos. Whilst new build looks to be significant in the country, major emphasis will be placed upon site sharing - the global average tenancy ratio for an independent towerco sits at 2.0x and with the OMTEL tenancy ratio currently sitting at 1.25x, there is a long runway for growth.

Cellnex’s acquisition of OMTEL adds an eighth market to the towerco’s rapidly expanding portfolio and marks the seventh major deal struck by the towerco in the past 12 months. In the first half of 2019, Cellnex signed agreements with Iliad (in France and Spain) and Salt (in Switzerland) to acquire 10,700 new sites, with a built to suit programme of 4,000 new sites; in June Cellnex signed a deal with BT in the UK gaining the rights to operate and market 220 tall towers; in September Cellnex signed a deal to acquire Ireland’s Cignal; in October Cellnex signed a deal to acquire Arqiva’s telecoms division in the UK; and in December Cellnex announced the acquisition of 1,500 towers from Orange in Spain (figure three).

When combined and all towers have been transferred and built, the deals will take Cellnex’s tower portfolio up to 58,000 sites (with the rights to market additional sites) from today’s total of 35,560 sites (figure five). The move into Portugal adds a new anchor tenant to Cellnex’s client base in the form of MEO and will provide an additional adjusted EBITDA run rate of c. €90mn (assuming all sites are transferred and built) with RLFCF of c. €60mn. The acquisition will increase Cellnex’s sales backlog by €2.5bn to €38.5bn, with 85% of the company’s revenues coming from telecom infrastructure services. Whilst Portugal has a sovereign rating of BBB, the comparably modest size of the portfolio in relation to the rest of the company’ assets means that c. 80% of Cellnex’s revenue will come from countries with a sovereign rating of A or above (figure four). As Cellnex continues to consolidate towers in its existing markets, where competition grounds will present a natural limit to the number of towers they can acquire in any given country, the addition of new markets to their portfolio is an important step in continuing the company’s impressive growth trajectory.

Commenting on the deal, Cellnex CEO, Tobias Martinez said “ With OMTEL, we are not only integrating one of the leading independent telecommunications infrastructure operators in Portugal. We are also committing to consistent growth in Europe, incorporating an eighth market - which naturally extends the current geographical coverage of the seven countries in which we already operate, and in this case especially due to the proximity and operational synergies that may arise with the Group in Spain. We are also incorporating a new client, MEO, which is the market leader and joins a rich and diversified mix of clients in Europe, covering the leading operators in the markets in which we operate”