Read this article to learn:
- Why Altice chose to create new towercos rather than sell their towers
- What the creation of SFR TowerCo means for the French market
- Projected growth for the French market broken down by entity
- How Towers of Portugal will affect Portuguese tower rollout
In Q118, following a rocky final few months of 2017, Altice restructured and shortly after announced its intention to sell ~10,000 towers in France and ~3,000 towers in Portugal, as well as divesting their tower assets in the Dominican Republic. Suitors including towercos and investors lined up to take a look at the assets, and Altice was hopeful of raising around €3bn from the sale of its European assets. In June 2018 the outcome of the process was revealed: not the divestment of the full portfolios, but partnerships with investors and the creation of two new special purpose vehicles, allowing Altice to pay down their debt pile but also to consolidate the EBITDA of the assets. TowerXchange explores the background for these decisions, and assesses the impact the new towercos may have on their respective markets.
Founded in 2001 by entrepreneur Patrick Drahi, Altice has spent the last 17 years growing across three continents in telecoms, content, media, entertainment and advertising. Drahi still owns a 60% controlling stake in the business, with 15% of the business listed on Euronext Amsterdam (in January 2014) and 7% of the U.S. business listed on the NYSE in June 2017.
Drahi began building his empire in France, merging several telecoms businesses under the brand ‘Numericable’ in 2007. From 2013 the acquisition spree gathered pace, as Altice acquired Orange Dominicana, before acquiring SFR, France’s second largest operator, and Virgin Mobile France in 2014. In 2015 Altice’s ambitions moved further, with the acquisition of U.S. cable company Suddenlink Communications (a deal completed in conjunction with CPPIB and BC Partners) and U.S. cable provider Cablevision. In Europe, Altice further expanded its footprint with the acquisition of Portugal Telecom. Altice was also reported to have bid for both Time Warner Cable in the U.S. and Bouygues Telecom in France in 2015, although neither of these deals came to fruition.
Last year (2017), Altice acquired video ad tech firm Teads and Israeli telecoms operator HOT, and also listed part of their U.S. operations on NYSE in June; one of the biggest listings of 2017. However, by November things were looking less rosy, as disappointing quarterly results saw share prices halve and Altice’s €50bn debt pile began to cause concern. CEO Michel Combes stepped down and Drahi announced the company focus would shift away from acquisitions and towards reducing debt.
Figure 1: timeline of key Altice acquisitions and developments
Altice is selling stakes in its newly formed towercos for a total of ~€2.5bn, in an effort to reduce Altice Europe’s net debt, which stood at around 5.5x annual earnings (compared to around 2-3x net-debt-to-earnings for most of Europe’s big MNOs), or €31.3bn in March 2018.
As well as paying down their debt pile, Altice expects that the new towercos, whose remit will include passive infrastructure services and equipment, will be well-positioned to support further 4G expansion and densification and 5G rollout in France and Portugal, with services available to all MNOs in both countries.
“We will create a leading European tower business, including the number one in France. Both tower businesses will be uniquely positioned to grow as they provide increasingly important infrastructure services to operators in both markets.” Altice founder Patrick Drahi said.
“Simultaneously, these transactions underline our commitment to de-lever and proactively manage our balance sheet while highlighting the significant value of Altice Europe’s business,” he added.
Altice has entered into an ‘exclusivity agreement’ with KKR for the sale of a 49.99% stake in a new French towers business – SFR TowerCo. The transaction, expected to close in Q418, will include 10,198 sites and values the company at around €3.6bn, a valuation which is 18x the company’s pro forma EBITDA for 2017, bolstering the view that the investment community is chomping at the bit for stable European telecoms assets, and willing to accept a lower IRR in favour of steady growth.
In addition, there is a build-to-suit agreement in place between SFR and SFR TowerCo for approximately 1,200 new sites, with SFR TowerCo expected to generate ~€250mn in additional proceeds within the next four years.
We estimate that over 50% of Altice/SFR’s towers have Bouygues Telecom as a second tenant already, due to the two operators’ previous RANsharing deal, as well as some tenancies from Iliad’s French operator Free. Bearing this in mind, we estimate that the tenancy ratio of the newly formed SFR TowerCo may already be in the region of 1.6x, however this ratio has been achieved mainly through bilateral swaps, which may or may not be readily commercialised. Altice is also currently a tenant of some of their new towerco’s competitors, renting ~500 sites from ATC Europe (following ATC Europe’s acquisition of FPS Towers) and ~2,500 from TDF.
Figure 2: Cellnex: France tower portfolio (k)
Figure 3: France detailed PoP distribution (k)
The French tower market
There are just under 50,000 sites (ground based towers and rooftops) in France, of which just 15% remain fully operator-captive. The remainder are divided among three independent towercos and one new MNO carve out towerco.
Broadcast-telecom hybrid TDF has 7,728 telecom towers as well as an established broadcast business and growing fibre interest. In December 2016 American Tower announced the acquisition of FPS Towers for €697mn, a deal which closed in February 2017, gaining them a significant foothold in the market with 2,472 towers. Cellnex have bought into the French market having acquired 500 towers from Bouygues Telecom in two transactions in 2016, the first of which was for 230 towers at a valuation of €80mn and the subsequent tranche for 270 towers for €697mn, and in January 2017 they signed a deal with the aforementioned governing the transfer of 1,800 existing sites and 1,200 new build towers for a total of €354mn, giving Cellnex a good presence in France and a solid anchor tenant. Now SFR TowerCo becomes France’s first carve out towerco, with 10,198 more towers becoming available for colocation.
Entering the market with 10,198 sites allows SFR TowerCo to leapfrog the current largest towerco in France, TDF, which has 7,728 towers, as well as Cellnex (with 2,000 towers and another 2,100 in the pipeline) and American Tower with 2,472 towers.
The effect of this entry into the French market is yet to be seen, but the results are unlikely to be catastrophic for the rest of the towerco community: TDF is a more diversified business with broadcast and growing fibre assets; Cellnex has a strong relationship with Bouygues and an impressive pipeline of new build.
In terms of MNO activity in the market, reports in the French press that Orange and Iliad’s Free are teaming up to extend and deepen their infrastructure sharing agreement past the 2020 deadline may have an impact on France’s towercos, but the sheer volume of new sites needed in France, as well as the quality of tenants, keeps the market buoyant. According to French site BFM Business “By 2020, Orange, SFR and Bouygues must install another 50,000 antennas [in France]. Free, who entered the market six years ago, will have to catch up and install around 10,000.”
While general feeling is that other MNOs will choose an independent towerco given a straight choice, SFR TowerCo’s greater national coverage will no doubt benefit their growth plans, and they are focussed on driving up the tenancy ratio further while running as independently as possible. As with other carve out towercos such as Telxius, INWIT, Deutsche Funkturm or Global Tower, the full implications of MNO ownership can be a double edged sword.
There has also been recent activity in the broadcast vertical of the French market. With TDF acquiring ITAS for a reported €100mn (420 towers) and NRJ seeking a buyer willing to part with ~€300mn for their 500-tower asset Towercast.
Figure 4: Current site numbers in France
Growth in the French market
With a total of four significant towercos in France, there’s no doubt it is Europe’s most competitive tower markets, however there is still room for growth across the country, as large volumes of both macro and infill infrastructure are planned for the next five years. The French government has reached an agreement with Orange, Bouygues and SFR for a €3.7bn investment between now and 2020 which will add around 15,000 new sites in France to cover rural areas in return for an extension of their spectrum licences. The build will be split so that each operator takes responsibility for 5,000 towers, with Cellnex expected to build most of the new network for Bouygues and SFR TowerCo for SFR. With so much new build on the agenda, MNOs will look to manage capex by working with towercos wherever possible.
Another complicating factor in the French market, MNO consolidation, which has long been on and off the table, is now back on the agenda, with Orange Group CEO Stephane Richard saying consolidation will be ‘unavoidable’ and that a new round of merger talks will commence in 2019. Not only will this reduce the number of potential tenants for towercos by 25%, but a deal involving SFR or Bouygues could have a significant impact on the anchor tenants for SFR TowerCo or Cellnex’s towers.
Figure 5: Projected site numbers in France 2022
Towers of Portugal
As well as selling 49.9% of its French towers, Altice has also agreed to sell a 75% stake in its newly formed Portuguese towers business ‘Towers of Portugal’ to a consortium including Morgan Stanley and Horizon Equity Partners. Expected to close in Q318 and comprising 2,961 towers, Towers of Portugal is valued at €660mn, or as much as 18.9x pro forma EBITDA for 2017. As with the French towerco, the deal also includes a build to suit agreement for a further 400 new sites for Altice’s Portuguese opco MEO (part of Portugal Telecom) over the next four years.
The transaction has been structured on the grounds of a long-term partnership between Portugal Telecom and Towers of Portugal, while Portugal Telecom will reinvest to hold a 25% financial stake alongside the consortium, Altice Europe said.
Infrastructure sharing in Portugal is uncommon, even on a quid pro quo basis, meaning the tenancy ratio is close to 1x, and Towers of Portugal is the country’s first towerco in any form, making them well placed to capitalise on the densification needed to complete 4G coverage and begin 5G rollout.
The Portuguese tower market
Mobile tower ownership in Portugal
TowerXchange understands there to be ~6,800 ground based towers in Portugal, with a further ~4,700 sites in use across different topographies (rooftops, street poles, utilities etc). With no known bilateral sharing agreements in place, colocation is organised on an ad-hoc basis and the tenancy ratio across the country is close to one (the only exception to this being indoor DAS projects, where one operator provides the infrastructure and shares with the other two).
Altice’s MEO have the largest tower portfolio with 2,961 traditional structures, Vodafone owns approximately 2,500 and NOS about 1,300. In addition, there are around 350 broadcast towers run by state-owned Radiotelevisão Portuguesa, although TowerXchange are not aware of any current colocation agreements with Portugal’s three MNOs.
Figure 6: Tower ownership in Portugal
European MNOs seem to be increasingly keen to realise the benefits of using a towerco, as well as releasing chunks of capital, while not passing all of the control (and profits) to a third party. Carve out towercos such as INWIT and Telxius are already proving the model can work in the short term, and Global Tower and Deutsche Funkturm are pursuing growth in new markets, with new carve outs like MegaFon’s First Tower Company in Russian and Altice’s SFR TowerCo and Towers of Portugal still hitting the market. This new breed of European towerco is certainly having an effect on the landscape, but whether MNOs can have their cake and eat it in the long term remains to be seen. As Cellnex continues to grow, American Tower maintains a presence in Europe, Digital Bridge enters the market and SBA Communications is still not ruling out an entry into Europe, there are plenty of prospective buyers for proven portfolios if the price is right – as carve out towercos struggle to balance the needs of their parent company with market imperatives, we suspect they will have to compromise in terms of reach or lifespan.