UK infrastructure giant Arqiva, owned by a consortium including the Australian investment bank Macquarie and the Canada Pension Plan Investment Board, has most recently cancelled their decision to IPO, following the announcement on 23rd October that they planned a flotation on the London Stock Exchange.
Complications surrounding Arqiva’s £3bn debt pile were thought to have made a sale look more appealing, and bids and negotiations were ongoing over the summer, but its believed that talks with the last remaining bidder, a consortium led by investor Brookfield, ended without an agreement and an IPO bid was announced then swiftly cancelled. Despite some political and economic instability in the UK caused by the Brexit vote, Arqiva remains an attractive asset in an attractive market, and interested parties may come back to the table. TowerXchange digs deeper into Arqiva’s background and takes a look at the potential outcomes of this process.
Arqiva - history and background
With over 60 years’ history in broadcast infrastructure, Arqiva is one of a uniquely European breed of towerco which has grown up from a solid history in television broadcasting and now owns a large chunk of both broadcast and telecommunications infrastructure in their home country.
The company has a long history in the UK starting at the beginning of the 20th century with roots going back to the ITA (Independent Television Authority) in the 1950s. Through a series of mergers and acquisitions, mainly in the early 2000s, Arqiva now consists of those ITA assets, as well as former BBC broadcast towers and National Grid Wireless infrastructure.
Arqiva in its current iteration is responsible for all UK television broadcasting and was responsible for implementing the digital switchover which occurred in the UK in 2013. They also do most of the radio broadcasting in the UK and buy wholesale satellite capacity to resell all over the world.
The company has recently invested heavily in an M2M division, winning the UK government’s smart meter tender for the north of the UK and Scotland, making them one of the biggest players in the UK, while Arqiva also has exclusive rights of the SIGFOX technology in the UK.
In terms of telecom infrastructure they own roughly 25% market share in UK macro tower sites. Arqiva services all of the four MNOs and has around 8,600 active towers for these mobile operators. Their tenancy ratio is around 2.5x. Although they have 8,600 active towers, the total portfolio consists of over 16,500 towers (the remaining ~8,000 towers are not active due to MNO rollout plans, rural locations where demand is low or deployment complexities as many of them are not dedicated telecoms infrastructure, such as electricity pylons)
In the past, Arqiva’s reputation has dipped in terms of delivery to clients, but the organisation has been working hard to turn around client relationships, and the appointments of CEO Simon Beresford-Wylie in June 2015 and subsequently of CFO Liliana Soloman in 2016, have been integral to this, with impressive growth across the business in Beresford-Wylie’s first year at the helm.
Figure one: Who owns the UK’s 37,282 telecom towers?
The company has long term and secure contracts with both MBNL (an infrastructure sharing joint venture between EE/BT and 3) and CTIL (a similar joint venture between Vodafone and O2) and grew the M2M and telecoms business unit by 6.4% in FY2015-16.
Over the last few years Arqiva has aggressively pursued a leading position in the UK’s growing small cells market, tendering for and winning street infrastructure in several London and Manchester boroughs as well as working with Virgin Media Business on assets in other major UK cities.
Over the last few years Arqiva has aggressively pursued a leading position in the UK’s growing small cells market, tendering for (and winning) street infrastructure in several London and Manchester boroughs as well as working with Virgin Media Business on assets in other major UK cities
Although Arqiva’s focus on small cells and future networks sets them up for potential future growth, investors close to the process lead us to believe that the bulk of Arqiva’s valuation is predicated on their core revenues in broadcasting and macro infrastructure for telecoms. With this in mind the lifespan of DTT is considered possibly the most critical factor in deciding the value of the asset.
And to Arqiva’s credit, growth came from the more traditional parts of the business as well, as Arqiva’s broadcast business grew 4.6% in the last financial year following significant new contract wins and renewals.
All in all, Arqiva represents a significant asset with 79% of the UK’s independent towers, improving relationships with clients, solid broadcast assets and a good foothold in the growing UK future networks. With a valuation of £6bn, there has been plenty of interest from investors keen to acquire a slice of UK infrastructure.
Why the U-turn?
It’s telling that the time from IPO announcement to cancellation was so short, implying that Arqiva’s valuation was not closely aligned with the market’s. There’s no doubt Arqiva’s new management team has made great improvements but the cost of debt has swallowed up profit and put them further into the red each year. The markets’ excitement about telecom towers and small cells has been offset by uncertainty about the debt pile and the longevity of Arqiva’s broadcast core, which accounted for 47% of revenues in the year to June, compared to just 33% of Cellnex’s revenues for FY 2016. Commentators have been speculating about the longevity of Digital Television Transmission (DTT), which itself replaced analogue transmission in 2014, although Arqiva has refuted these comments, saying ’hybrid platforms’ such as Now TV will maintain the relevance of digital broadcasting.
Arqiva is far from the first tower company to change their mind about an IPO over the last few years. In September 2016, Telefonica scrapped a planned €1.2bn flotation of their Telxius infrastructure arm (which had also been planned to reduce debt), after failing to attract sufficient demand from the market. In the following month, October 2016, Turkish Global Tower postponed their IPO citing market instability caused by the US elections.
In the following 12 months, a 40% stake in Telxius was sold to KKR for €1.275bn, whereas Global Tower’s need for capital appears less acute.
What next?
Having explored their options in terms of both a strategic sale and a public offering, Arqiva may well choose to wait and allow the dust to settle. Holding off and giving their accomplished management team time to prove their turnaround is sustainable will give Arqiva breathing room to close the gap between their own valuation and what strategic buyers will pay, however without significant restructuring Arqiva’s debt will continue to have an impact on its valuation.
On the other hand, just about every major (and proven) tower investor in the world has been connected with Arqiva over the course of 2017. There’s no shortage of appetite for what remains an attractive asset, just a valuation gap. Arqiva either needs to improve the confidence of their potential investors or to recalibrate their valuation.
That said, the UK and other developed markets are in something of a hiatus at the moment, with most of the 4G rollout on the order books, and very little visibility over what will come next. Once we have visibility of 5G infrastructure requirements and the implications for tower load and small cell rollout, Arqiva may well look even more attractive. With the government committing hundreds of £millions to making the UK a ’global leader’ and spectrum auctions scheduled for later in 2017, that visibility might come earlier than sceptics think.
