CK Hutchison has recognised the global tide of MNOs carving out their towers, and hopes to ride the wave to improved efficiency –ultimately to an improved valuation. In July 2019, Hutchison announced that by the year end they anticipated carving out their 28,500 European into captive towerco CK Hutchison Networks. The towerco is to start with a footprint in the UK, Italy, Sweden, Denmark, Austria and Ireland, and tenancy ratio of 1.2.
The carve-out announcement
During CK Hutchison’s July 2019 earnings call, Frank John Sixt, Group Finance Director, Deputy MD & Executive Director told participants “we have developed a full plan and established as a subsidiary of CK Group Telecom, a new company called CK Hutchison Networks… (We) plan to transfer all of our tower assets from that group into a separate company. This is a structural separation, and we expect by the end of the year to have completed it in the sense that either the legal title or the full economic benefit and burden of the tower assets will be in this company by the beginning of next year.” (Earnings call transcription courtesy of Yahoo Finance).
CK Hutchison Telecom has “interests in” 28,500 tower assets in Europe initially, language which reflects the fact that thousands of those towers are currently managed by 50:50 joint ventures, such as MBNL (with EE) in the UK and 3GIS (with Telenor) in Sweden. CK Hutchison retains the option of adding a further 9,300 sites in Asia into their towerco.
The new company structure and refinancing transaction will allow Hutchison to generate significant financing cost savings from 2020 onwards, as well as reduce the debt of the consolidated parent company, CK Hutchison Telecom.
The new towerco CK Hutchison Networks will have a long runway for growth, starting with an average tenancy ratio of 1.2 across the portfolio: 1.1 in Denmark, 1.2 in Ireland, Italy and Austria and 1.3 on owned towers in Sweden. The tenancy ratio of towers held in MBNL, the UK joint venture with EE, and 3GIS the Swedish joint venture with Telenor, is likely to be closer to two, but exactly how the assets are extracted and injected into the CK Hutchison Networks entity, if they are to be extracted at all, remains to be seen.
CK Hutchison Networks is yet to define whether the scope of their tower company will include power systems (batteries, cooling, generators and grid connections), which it says will be determined on a country by country basis.
In future we could see CK Hutchison Networks seek external investment, similar to companies such as Telefónica which sold 40% of their towerco Telxius to KKR, or set up joint ventures with other tower companies, such as the recent alliance between TIM’s towerco INWIT and Vodafone in Italy. That said, when Hutchison were asked if the carve out was a precursor to the spin off of their towerco, they answered a flat “no.”
Figure one: CK Hutchison Networks’ footprint
The top 12 towercos in the world with a new number 12
Where CK Hutchison is carving out and what it might mean
United Kingdom
CK Hutchison Networks will have 7,300 cell sites in the UK.
The UK tower market currently has a unique structure wherein independent towercos own just 27% of the 42,492 active towers in the UK, with the balance operated by joint venture infrastructuring sharing companies Cornerstone (a joint venture between Vodafone and Telefonica’s O2) and MBNL (a joint venture between BT/EE and CK Hutchison’s Three).
Cornerstone (formerly CTIL) has ~16,500 UK towers and rooftop sites on their balance sheet. MBNL is a deeper infrashare, inclusive of active network sharing, but in contrast to Cornerstone, MBNL does not have BT/EE and Three’s ~14,600 towers and rooftops on its balance sheet. It remains to be seen if and how CK Hutchison’s (Three’s) towers are to be extracted from MBNL, if they are to be extracted at all. The same goes for Cornerstone, whose parent companies, Vodafone and Telefónica have both announced plans for the carve out (or further carve out in Telefónica’s case) of towers with a view to monetising the assets. It is possible, should both parties in each joint venture be in accord, that we may see MBNL and/or Cornerstone emerge as a bona fide independent towerco.
In the event either pair of joint venture partners saw fit to monetise their UK towers, there would be no shortage of prospective buyers. Whilst Europe’s most acquisitive towerco Cellnex’ recent acquisition of Arqiva may preclude them from acquiring the full portfolios of either Cornerstone or MBNL (placing too high a concentration of towers in the hands of one party) should the assets be broken up, Cellnex may be one such interested buyer). Serial digital infrastructure investors Digital Colony has also been building a portfolio of UK assets, recently adding ~120 towers from Spyder to their market-leading portfolio of IBS. Wireless Infrastructure Group, which has 2,050 UK towers, and the world’s most valuable towerco American Tower would also doubtless be interested, alongside a throng of infrastructure investors.
Italy
CK Hutchison Networks will own 8,100 tower assets in this market of 46,400 towers.
The Italian telecoms market has always boasted a strong culture of infrastructure sharing which has allowed tower companies to grow quickly. Cellnex, which acquired 7,377 towers from Wind in 2015, and one of Europe’s most successful MNO tower carve outs, INWIT, both completed successfully IPOs, and investors have benefitted from substantial valuation improvements since.
Vodafone has also announced the combination of its towers with TIM’s INWIT, expanding their portfolio to 22,100 sites. Vodafone will receive €2.14bn in cash plus a 37.5% stake in the combined company. Most of the tenants on the towers are Vodafone and TIM and the combined entity will begin with a tenancy ratio of 1.75. The deal values the towerco subsidiary at €5.27bn, and Vodafone says it will have EBITDA of €110 million by 2026.
Cellnex now owns 10,600 towers in Italy. Italy is also home to a long tail of smaller towercos including TowerTel, HighTel, El Towers and RaiWay.
Sweden
CK Hutchison Networks claims to have 6,200 towers in Sweden, a count which seems high based on third party sources. A significant proportion of Hutchison’s towers are held by joint venture 3GIS, which was established in 2001 to rollout and operate 3G RAN shared between Telenor and Hi3G (Hi3G is CK Hutchison’s Scandinavian brand). There are two other network sharing joint ventures in the Swedish telecoms market: Net4Mobility (Tele2+Telenor) and SUNAB (Tele2+Telia).
CK Hutchison Networks won’t be the first carve out towerco in Sweden. Telia has carved out ~1,600 towers in Sweden into its captive towerco, Telia Towers. Telenor are also believed to be reviewing their tower strategy, so there could be multiple new towercos emerging in Sweden.
Denmark
CK Hutchison Networks will own 1,200 cell sites in Denmark – another count much higher than previous reports. If validated, this would increased TowerXchange’s estimated tower count to around 3,800 in Denmark.
Infrastructure sharing is second nature in the mature Danish mobile market, where Telia and Telenor formed active infrastructure sharing joint venture TT-Network, which operates 1,200 towers. TDC has separated a netco (“TDC Netco”, with 1,100 towers) from their opco. A further ~300 are owned by third parties, with Falck the only identified independent towerco in the country, although KPR Consult manages co-location.
Austria
CK Hutchison Networks will have 4,600 towers in Austria, and is expected to commence operations at a similar time that T-Mobile starts operating their towers as a towerco, T-Mobile’s parent company having decided to extend the footprint of their German towerco Deutsche Funkturm (DFMG) into the Netherlands and Austria. A1 Telekom, the market leading MNO in Austria, is majority owned by América Móvil, which has carved out its towers in Mexico and Costa Rica into captive towerco Telesites, although there are no immediate indications that they will carve out towers in Austria.
Ireland
CK Hutchison Networks will own 1,100 cell sites in Ireland, most of which originate from Hutchison’s acquisition of O2. Local stakeholders tell us Three has a maximum of 800 towers in Ireland, so Hutchison’s 1,100 count may include alternate site typologies. It was also noted that significant improvement capex may be required to improve the structural capacity of the Hutchison towers.
There are around 4,600 towers in Ireland, of which around 40% are owned by independent towercos, headed by Cellnex (which recently acquired Cignal), Towercom, ESB Telecoms and Shared Access, so there is a culture of infrastructure sharing.
Three Ireland and eir (formerly Meteor) had operated a network sharing venture called Mosaic, but that is being unwound, as is the associated RAN share. This could lead to some tenancies on the Hutchison sites being terminated if there is not capacity for both sets of antennae. The partners in Mosaic retained ownership of towers, so extraction of Hutchison’s assets should be straight forward.
Currently, around 200-300 new sites are built per year in Ireland, with both eir and Three refreshing RAN and adding infill sites, while Fixed Wireless operator Imagine is leveraging capital from new investors Brookifield to rollout.
Why are CK Hutchison carving out?
As well as the usual goal of reducing debt, specifically related to the €10bn of external debt raised to buyout joint venture partner VEON in Italy, the carve out of CK Hutchison’s towers is motivated by the creation of operational efficiencies and new value by leasing towers to third parties, and the capture of value from future network investments. Referring back to the earnings call, Group Finance Director Frank John Sixt explained: “We think that there’s cost synergies to be achieved by doing this as well as operating efficiencies. Our tenancy ratio is currently 1.2x. We may very well be able to increase that by having more coordinated marketing of the assets. And of course, we achieve complete optionality in terms of what we do with this company -- it can be financed however we want to finance it. It starts, of course, with just the assets and the business and no debt. And it will also, in effect, own the future in terms of passive infrastructure. In other words, as we go into the 5G period, the new stuff that’s required in the [dumb] side of the asset ledgers, will be going into this company.”
In riding the wave of MNOs carving out independent towercos, CK Hutchison is hoping to capitalise on relative valuation arbitrage, wherein towercos can attract valuations 3-5x higher than MNOs. This reflects investors’ appreciation of the separation of telecom infrastructure assets, generating secure revenue on long term contracts from credit worthy counterparts, from retail telecommunications, which has greater exposure to technology and commercial risk.
“We were very happy to see the Vodafone share price is up 15% after they announced that they might be able to (carve out their towers) at some point in the next 18 months. But as I say, we have the plan in place in detail to accomplish the necessary, we believe, within the next six months,” commented Frank John Sixt, Group Finance Director, Deputy MD & Executive Director, CK Hutchison.
For an analysis of how the CK Hutchison tower carve out, and that of Vodafone, will re-shape the European tower market, read "TowerXchange forecast that 59.4% of Europe’s towers will be owned by towercos by Q421."
