In the past five years, over 20 tower transactions of scale with a combined deal value of over €4bn have been completed in the European tower market. Add to this the creation of joint venture ‘infracos’ and carve out of operator-captive towercos yet to be monetised, and the ownership of towers across Europe has seen a significant shift. With activity having ramped up in recent months, TowerXchange look ahead to 2020 and examine how the ownership of Europe’s towers is set to change.
Key terms and definitions
In order to better understand TowerXchange’s forecast it is first important to understand a number of key definitions and assumptions.
1. TowerXchange’s definition of Europe includes Russia, the CIS and former CIS States
2. With Europe’s status as a mature market, our forecast assumes that the total tower count of 600,000 sites will stay fairly constant, with new build being more or less cancelled out by the decommissioning of parallel infrastructure
3. Our definition of a “tower” includes ground based structures, rooftops, street poles and other structures that can accommodate multiple tenants and which are thus “shareable”. We exclude, however, multi-tenant DAS, microcells and small cells from headline counts, at least until a single small cell can be shared and monetised to multiple tenants.
4. TowerXchange tower counts are the result of qualitative market research – as such they should be treated as estimates. We assert copyright over data sourced to TowerXchange – you will need to request our permission to quote our data and there may be a charge to do so.
5. Our forecast is based on four different classes of tower owners:
a. MNOs: Mobile Network Operators whose towers are retained on their own balance sheet
b. Operator-led towercos: business units carved out of MNOs into which their towers have been placed; the MNO retains a 51-100% controlling stake in the infraco, but may list or sell a minority stake to a third party
c. JV infracos (“joint venture infrastructure companies”): Entities in which the towers of two or more MNOs have been pooled; this encompasses entities which have their own separate balance sheet (e.g. CTIL) and those on which the towers remain on MNO balance sheets (e.g. MBNL)
d. Independent towercos: Pureplay businesses who own and operate towers
A brief history of European tower deals
Europe’s MNOs have embraced the efficiencies of shared infrastructure, overcoming earlier concerns about compromising competitive advantage. Initially the preferred strategy was to create joint infrastructure sharing ventures; consolidation of parallel infrastructure and co-building helped to reduce both capex and opex, bringing considerable savings to the MNOs involved. Whilst this trend began in the early 2000s and achieved significant traction, particularly within the Northern European countries, the last joint venture to be formed was back in 2014 and appetite for such initiatives seems to have tailed off (figure one). Currently 10% of Europe’s 600,000 towers are owned by ‘JV infracos’.
Whilst the trend to form JV infracos seems to have tailed off, MNOs are however being increasingly attracted by the relative valuation arbitrage between towercos, typically valued at 12-24x, and MNOs, valued at 3-6x. Carving out and monetising minority stakes in their own towercos, or selling their towers outright to an independent towerco have become increasingly popular strategies, freeing up capital and management bandwidth to focus on core business activities.
Figure one: Tower transactions by deal type in the European market
The carve out of operator led towercos in Europe began in 2002 when Deutsche Telekom restructured their tower portfolio into wholly owned subsidiary, Deutsche Funkturm, and there have been a number of other operator led towercos created since then; Turkcell’s Global Tower, Telecom Italia’s INWIT, Telefónica’s Telxius, MegaFon’s First Tower Company and VimpelCom’s National Tower. Telecom Italia became the first to monetise their operator-captive towerco, listing a 40% stake in INWIT on the Madrid Stock Exchange in 2015 and raising €875mn in the process. INWIT’s successful IPO (along with towerco Cellnex’s successful IPO the same year) led to both Turkcell and Telefónica attempting a similar strategy in 2016, only for both IPOs to be subsequently cancelled (read “Why the Telxius was IPO cancelled” and “A change of heart: Turkcell postpones Global Tower IPO at the last moment”). Pursuing an alternative strategy however, Telefónica announced the sale of a 40% stake in Telxius in early 2017, with KKR paying €1.3bn for the shares. Currently 15% of Europe’s towers are owned by operator-captive towercos.
The trend for monetising assets in the European tower market dates back to 2008 when KPN commenced the divestment of their tower portfolio with a sale to Open Tower Company in The Netherlands. The operator subsequently sold Dutch towers to Shere Group and a Dutch subsidiary of Indonesian towerco Protelindo, before selling just over 2,000 sites in Germany to American Tower.
Figure two: Sale and leaseback transactions in the European market
In the midst of all this, Telefónica also undertook two sale and leaseback transactions with Cellnex in Spain, the first for 500 towers and the second for 4,277. In 2015, a year after purchasing the second tranche of Telefónica sites, Cellnex then announced Europe’s largest tower sale and leaseback (a record which still stands today), purchasing 7,377 sites from VimpelCom’s Italian subsidiary WIND Italy for €693mn. The only other operator to have sold towers to an independent towerco in Europe to date is Bouygues Telecom; the French operator agreed the sale of 2,031 sites to FPS Towers in 2012, before agreeing three transactions with Cellnex in the past 12 months, divesting a further 3,600 sites.
Figure three (a): Europe’s operator-led towercos, JV infracos and independent towercos with >1,000 towers
Figure three (b): Europe’s operator-led towercos, JV infracos and independent towercos with <1,000 towers
TowerXchange’s 2017-2020 forecast
Currently 62% of Europe’s 600,000 towers are MNO captive, 15% are owned by operator-led towercos, 10% by joint venture infracos and 13% by independent towercos. The biggest change in 2017 figures relative to Q1 2016 was in the operator-led towerco segment, with Telefónica transferring 11,000 Spanish and 2,350 German towers to Telxius.
In 2017, the biggest change in tower ownership is however expected to come from the transfer of sites from MNOs to independent towercos. Whilst in Russia the sale of VEON’s (formerly VimpelCom) towers is looking less certain, the operator is expected to initiate new tower sale processes in four countries across Eurasia. Tele2, VEON’s competitors in Russia have also initiated a process for the sale of their 9,000 towers. Meanwhile in the virgin towerco market of Switzerland, number two operator, Sunrise, are bringing their ~2000 towers to market. By the end of 2017, TowerXchange forecast that 19% of towers will sit in independent towerco hands (figure four).
Looking further ahead, over the next two to three years and TowerXchange forecast a number of other sale and leaseback transactions to take place as momentum continues to gather. Little in the way of JV infraco formation is expected and activity in the creation of operator-led towercos will slow, with several existing operator-led towercos likely to be monetised, at least a couple through a sale to an independent towerco, although we wouldn’t be surprised to see further sales of minority stakes to financial investors.
In terms of sale and leaseback transactions, the CIS will see further deals, and towercos planning expansion into Central and Eastern Europe reporting progressive dialogue with MNOs in the region, we expect transaction announcements in either 2018 or 2019. Such deals, along with rumoured transactions expected in a handful of other European markets, will transfer a further ~52,000 towers from MNOs to independent towercos before 2020.
As a result of such activity, TowerXchange forecast that by 2020, 46% of Europe’s towers will remain MNO-captive (versus 62% in today’s market). The number of towers owned by JV infracos will remain relatively constant at 9%, and as MNOs monetise operator-led towercos the percentage of towers owned by such entities will drop to 10% (versus 15% as of Q1’2017).
By 2020 independent towercos will own 34% of European cell sites. In addition to the movement of towers between market segments, TowerXchange forecast significant towerco-on-towerco consolidation. Cellnex, American Tower, EI Towers, INWIT, Service Telecom and Russian Towers all rolled up smaller towercos in the past twelve months and we don’t anticipate any slowdown in towerco consolidation in 2017 and beyond.
Figure four: Forecast breakdown of ownership of Europe’s ~600,000 telecom towers 2017-2020
