Deutsche Funkturm: Europe’s sleeping giant awakes
Deutsche Telekom announces ambitions to expand towers arm
Right at the end of Deutsche Telekom’s Capital Markets Day 2018, Thorsten Langheim, Executive Vice President of Group Corporate Development , took to the stage for the first time in eight years. A key part of his presentation referred to what he called Deutsche Telekom’s ‘sleeping beauty’ – DT’s tower arm, Deutsche Funkturm, which was carved out in 2002 and has remained relatively static in size and function since. TowerXchange summarises his comments and DT’s plans for the asset here.
What is Deutsche Funkturm?
Founded in 2002, Deutsche Funkturm is Europe’s largest (and possibly oldest) telecom towerco. Originally created in order to sell DT’s towers, Deutsche Telekom have been rumoured to be close to a sale of the assets several times in the last 16 years, but have never actually taken the step of selling, nor have they really put their resources into commercialising in the same way that other operator-captive towercos such as INWIT or Telxius have.
Deutsche Telekom has around 28,000 points of presence in Germany today, of which ~500 are TV towers, ~8,500 are masts and another ~20,000 are rooftop sites. In addition, they created a DFMG-controlled towerco ‘Omega Towers’ in 2016, when Telefonica Deutschland transferred 7,700 rooftops into DFMG’s hands. Current tenancy ratios across the DFMG points of presence is 1.5x on rooftops and other alternative typologies and 2.3x on GBTs.
The German market
Just 20,006 of Germany’s 75,474 cell sites are ground based towers – the rest are rooftops, which can be problematic for tower owners seeking to lease up their assets. Deutsche Funkturm’s rooftop portfolio has a tenancy ratio which is currently 0.8x lower than their GBTs, and this gap could grow as they actively pursue further colocations in the German market;access and landlord contracts make leasing up rooftops a significantly trickier proposition than ground based towers. As well as offloading their rooftops towers to Deutsche Funkturm, Telefónica transferred 2,350 German towers into their towerco Telxius in 2016 in a deal valued at €587mn, where these towers sit under management with assets in Spain and CALA, and alongside Telefonica’s sub-sea cable assets.
American Tower have been active in Germany since acquiring KPN’s ~2,000 E-Plus towers for €393mn in 2012. Their portfolio has grown slightly over the last six years to a total of 2,206, mainly through the acquisition of 186 transmission towers from German broadcaster WDR. Although the cost of these towers was not publicised, we estimate that American Tower probably paid around €35-50mn for the assets.
German broadcast towerco Media Broadcast Group owns a further 450 towers in Germany, and was acquired by Freenet in 2016 for €295mn (around 12x EV/EBITDA).
Estimated breakdown of ground based towers and rooftops in Germany
Of the remaining MNOs in the market, we believe Telefonica owns a further ~2,000 ground based towers plus ~12,000 rooftops sites, and Vodafone owns around 4,000 masts and ~18,000 rooftop sites in Germany.
There are a total of around 23,000 co-locations in Germany, most being on Deutsche Funkturm and American Tower’s ground based towers, with tenancy ratios estimated at 2.3x and 1.8x respectively.
Deutsche Funkturm in Germany
At the Deutsche Telekom Capital Markets day 2018, Thorsten Langheim listed DFMG’s strengths, referring to their position as the number one tower operator in Germany, the opportunities for structural growth in Germany, their portfolio of best-in-class sites, their compethensive and state of the art IT and their potential for significant optimisation.
At the beginning of 2017 DFMG was restructured from 100% subsidiary to a “sister company” of DT. DTremain their prime client but get no volume discount (they charge back on the same commercial terms as any customer). This was the beginning of their appraisal of the asset, which made €864mn in 2017, of which around 60% came from Deutsche Telekom’s subsidiary TDG, giving them a 59% margin of €510mn EBITDA (adjusted). Their tenancy ratio across the portfolio is 1.5x, rising to 2.3x on dedicated masts and towers (as opposed to rooftopfs and other typologies). According to Joerg Weber, SVP Investment Management at Deutsche Telekom, DFMG plan to add up to 9,000 additional macro sites in Germany over the next three to four years.
Thorsten Langheim calls the new DFMG version 2.0 – an entity with a diversified revenue stream, pursuing colocation much more actively than they have in the past.
This repositioning of Deutsche Funkturm allows Deutsche Telekom to avoid burdening the opco’s figures with capex at a time when investors are feeling nervous about the capital outlay needed for 5G and future network rollout in Europe. Running the infrastructure as a towerco will further dilute the capex impact of expansion, and add another asset to the portfolio.
Rather uniquely for Europe, Deutsche Funkturm also provide power to their tenants on around 3,000 sites, through another DT subsidiary PASM a partner of DFMG, placing DFMG ahead of other European towercos in some ways in terms of having the infrastructure ready to deliver a ‘service’ to their customers. However, although DFMG provides antenna space, technical space, power and air conditioning, they don’t provide a fibre offering and still have ‘blacklisted’ sites which are blocked for their competitors, with CFO Thomas Dannenfeldt saying: “The question is how to strike the right balance between having a proper and well-up setup in running tower business, … and not giving up the crucial sites, which make a difference in the network potentially. So the balance we are trying to strike here is quite simple, exclude the few ones which make a difference, don’t share that and share the big, big majority of those you can share.”. Whether this will change as DFMG rolls out and begins to commercialise more actively remains to be seen, but it will limit investment opportunities if they are seen to be restricting access to the best sites for their customers.
Deutsche Telekom presence in Europe
International growth plans
To date, DFMG has been focussed on the German market, but Deutsche Telekom now sees an opportunity for its subsidiary to roll out into their other European markets. In the short term, this means towers in The Netherlands and Austria.
In the Netherlands, the Deutsche Telekom towers are being carved out ahead of a merger of T-Mobile Netherlands and Tele2 Netherlands. The new JV is being created to consolidate into a more competitive 20% share of the Dutch market, with ownership by both parent companies. This represents the perfect time for Deutsche Telekom to carve out their towers into 100% owned DFMG ahead of expansion, and to secure a larger and more stable anchor tenant for their asset in the process.
Deutsche Telekom owns ~25,000 towers and points of presence across Europe (outside of Germany), although complex ownership structures in several of their Central and Eastern European opcos may cause an issue with minority leakage. With this in mind, DT is beginning their rollout in countries where their operations (or at least the towers, in the case of the Netherlands) are wholly owned – The Netherlands and Austria are the first markets for DFMG expansion, but there remain several European subsidiaries which may be promising targets for the next wave of expansion.
Another complication for some of DT’s international markets could be their network sharing ventures. Although Poland is 100% owned by Deutsche Telekom, for example, their participation in the NetWorkS! site sharing venture with Orange would be tricky to unpick (although it would also yield an instant tenancy ratio of around 2x, if the details could be worked out). In the UK, where Deutsche Telekom owns 12% of BT/EE, DT see decisions around tower assets as sitting with the BT management, despite their advocacy for unlocking the inherent value in towers. Similarly to Poland, BT’s tower assets are tied up in MBNL a joint venture with Three UK, and unpicking this would be a lot trickier than other markets.
Shifts in the towerco landscape
Langheim observed that the European market is still very fragmented, with DFMG and Cellnex leading the way with 28,000 and 27,000 towers respectively, whereas American Tower owns 150,000 towers leaving considerable room for consolidation and growth in the European market. With a further 25,000 sites across Europe, in solid markets such as the Netherlands and Austria, Deutsche Funkturm could easily consolidate into Europe’s biggest towerco by some margin. Working on the assumption that they would have in the region of 67,000 sites by 2021 (The jump in numbers would be due to the consolidation of assets in other countries as well as the 9,000 build to suit sites expected in Germany alone).
In 2017, Deutsche Telekom Capital Partners co-invested with Cellnex and Swiss Life in the Sunrise Towers in Switzerland. As a relatively small deal, Cellnex did not need capital investment, saying instead that the partnership was mainly strategic. Tobias Martinez, CEO of Cellnex, told us in January 2018: “We don’t have any additional commitment for other countries (I mean with DTCP) but we are both open to consider further opportunities to enlarge our footprint. Everything takes time to deliver, so we need to work with them. It’s more a strategic partnership than a pure financial relationship.”
Although Deutsche Telekom Capital Partners’ primary function is to make a return, there’s no doubt that the positioning of Europe’s two biggest towercos side by side on a deal in neutral territory was a chance for both parties to learn about and from each other.
Deutsche Telekom’s desire to have their cake and eat it (in particular in terms of ‘blacklisting’ sites which they consider of strategic importance) may be at odds with Cellnex’s highly commercial approach to tower assets, but Cellnex have proven themselves flexible and resourceful when it comes to expanding their portfolio, and a close partnership on this scale could catapult them from outside the top 10 to the fourth largest towerco in the world, as well as demonstrating their capabilities in terms of tower management at a time when new markets in the Middle East are opening up to this model – which may be an opportunity for Cellnex to expand into new markets.