Towers of power: European telcos find value in masts

Telecoms groups in the US, Africa and India deemed their large tower estates expendable when they sold them off in recent years, but some of their European peers are choosing a different course to selling off the family silver, or more specifically steel.

Mobile towers — the metal structures on which radio antennas sit — were once considered vital to a company’s competitive standing. But as more networks started to share infrastructure to reduce costs and improve coverage, those masts instead became valuable assets that companies have looked to monetise.

French groups Altice and Bouygues, Ireland’s eir and Swiss group Sunrise are among those to have cashed in and sold thousands of towers to specialist companies including Spain’s Cellnex and Blackstone’s Phoenix Towers in recent years.

Yet some of the region’s biggest players — Deutsche Telekom, Vodafone, Telefónica and Orange — are forging their own path, retaining ownership or carving out their towers into separate companies that they still control.

Even the upheaval caused by the pandemic has not distracted them from these plans, with a broader wave of restructuring and consolidation anticipated as European governments demand thousands of new towers to better connect rural areas and roll out 5G networks.

“I think infrastructure is a sexy story in Europe,” Nick Read, chief executive of Vodafone, said in an interview with the Financial Times. The UK group revealed in July plans to list its towers business in Frankfurt at a potential value of more than €20bn.

Chart showing mobile tower ownership in Europe

Spurred by activist investor Elliott Management, Mr Read has been preparing to split off the towers business since he took the helm in 2018 as a way to boost Vodafone’s falling share price. He revealed that the company had turned down a number of approaches to break up and sell off its huge tower estate.

“A lot of tower companies came to the door saying don’t do this, we are the experts,” he said. But Mr Read argued that it was Vodafone that was the genuine tower expert. Vantage Towers, which will still be majority-owned by Vodafone, will be the fifth largest tower business in the world, covering nine markets with 68,000 towers.

Vodafone also operates a joint venture, Inwit, with Telecom Italia after the two merged their Italian mast businesses. Shares in Inwit hit an all-time high in April.

Separating tower assets into a new vehicle but retaining ownership allows telecom groups to unlock their value while moving debt off the parent company’s balance sheet, and creates an avenue for groups to increase their exposure to infrastructure.

In June Telefónica’s towers unit Telxius, which it owns alongside US buyout group KKR, acquired 10,000 towers in Germany from Telefónica Deutschland in a €1.5bn deal. The deal doubled the size of Telxius, making it a sizeable infrastructure player.

But the market remains highly fragmented. About 90 per cent of telecoms towers in the US are owned by specialist companies compared with 60 per cent in Europe, according to an estimate from Barclays.

Mr Read argued that smaller networks will become “hemmed in” over time and a small number of large dedicated players, be they controlled by established telecoms groups or newer players such as Cellnex, will consolidate the market.

Chart showing the share price of Cellnex

The pooling of towers assets is regarded by some bankers as a “back door” route to consolidation within European telecoms which has slowed due to regulatory blocks on domestic mobile mergers. With about 40 network operators active across Europe, compared with three in the US and three in China, some expect that a pooling of infrastructure assets could achieve similar cost and scale benefits without triggering the same antitrust concerns over consumer harm.

The appeal of towers to specialist players, such as Cellnex and American Tower, and infrastructure funds is high. Maurice Patrick, an analyst with Barclays, said the pace of deals was likely to accelerate in 2020 due to the high valuations of tower specialists and the need for networks to raise cash for investment.

“With anemic revenue growth and demands for increased infrastructure investments we expect mobile network operators to continue to utilize the cost-saving benefits of TowerCos,” he said.

Cellnex has been the biggest mover and shaker in the market having acquired tens of thousands of masts in the past five years from companies including the UK’s Arqiva, Portugal’s NOS, Sunrise and Iliad to build a business valued at €21bn.

In July the Barcelona-based company announced plans to raise an additional €4bn to pursue more acquisitions and pointed to a pipeline of €11bn of potential deals. Its share price has surged more than 50 per cent since March, making it one of the best-performing stocks in Europe during the pandemic.

Cellnex has acquired tens of thousands of masts in recent years with the Spanish group scooping up assets from smaller networks Cellnex has acquired tens of thousands of masts in recent years with the Spanish group scooping up assets from smaller networks © REUTERS

Giles Thorne, an analyst with Jefferies, said the Spanish company would continue to pursue a “domino effect” by forging larger deals in countries where it had gained a toehold, such as the UK.

Investors who have pushed into the market in recent years include Macquarie, which has bought and sold towers in locations including the UK and eastern Europe, and Brookfield, which last year bought 3i’s UK tower vehicle Wireless Infrastructure Group.

Some of them still believe there are opportunities despite competition from the biggest networks and players such as Cellnex.

Mark Crosbie, managing partner at Antin Infrastructure Partners, said there was a lot of activity “behind the scenes” over potential deals this year with infrastructure funds still hungry for telecoms assets such as towers and fibre. Antin has been investing in towers in Europe for more than a decade.

“They won’t have the market all to themselves,” he said of his rivals.