European M&A and investment dynamics

Earlier this year, TowerXchange spoke with seasoned M&A advisors about what deals we could see in 2024. One of the predictions was that we can expect infra funds will remain keen to supplement their digital infra portfolios with tower exposure through 2024 and beyond. Investing in towers - whether in direct partnership with telcos or via a tower strategic – continues to make sense despite unfavourable macro conditions. We look at a throwback to TowerXchange Meetup Europe 2024 where European deals and financing were discussed at the end of April at an investment and M&A-focused panel.

The M&A world has been evolving in the last few years and one topic that has been quite common in the European transactions is the build-to-suit (BTS) component. The BTS component is important to define during a M&A transaction because it brings future growth for the buyer (usually the towerco) and the seller (usually the MNO).

According to Marc Cabre, Senior Director of Mergers and Acquisitions at Phoenix Tower International, this component has been quite under discussion in transactions between MNOs and towercos in Europe in contrast with North and Latin America.

The BTS contractual part defines for the buyer the possibility to acquire more assets in a longer period of time, and future expansion. In addition, for the seller it's a way also to guarantee the future growth. Although this needs to be very well defined, rules of engagement and the minimum conditions need to be very realistic.

Another theme that we have seen in the M&A space in the last couple of years has been the duration of the MLAs and MSAs, which according to Cabre represents another difference between Latin America and Europe. In Europe we tend to see longer terms of MSAs and MLAs, while in Latin America we tend to see shorter periods of MLAs and MSAs. And more recently we have inflation caps being applied as we’ve been operating during years with a high inflation environment for two years in a row.

In addition, MNOs want to have some level of certainty and control but inflation caps in contracts have impacted growth, a heavily discussed topic during negotiations. Cabre questioned if from an MNO’s perspective there was going to be interest in selling minority equity stakes in a higher -for -longer interest rate environment, and whether there's still interest in selling towers from an MNO perspective.

From a towerco perspective over the past five years there's been a significant increase in acquisition, in high levered transactions, and the tower companies have come to terms with the fact that in this higher interest rate environment the focus now needs to be on reducing leverage quite substantially, added Cabre. The latter is reflected in companies like Cellnex selling assets and focusing on core assets rather than expanding and buying new assets.

One of the key questions when discussing future towerco growth in addition to BTS, is the tenancy ratio and whether and by how much it can be increased. According to Cabre, some investors are hesitating which reduces the attractiveness of investments.

During Meetup Europe we heard from the CEOs of some of Europe’s largest multi-country present towercos who said that their companies will be focusing on improving operational efficiency and maximising tenancy ratios. We heard a comparison of the average tenancy ratio in Europe being 1.4x versus 2.3x in the USA meaning more can be done. According to Aldo Cardoso, Managing Director at DTCP European towercos “need to demonstrate to the market that they need to be tower operators as opposed to M&A houses”. He also added that private investors are in a better position to drive M&A going forward because they are able to perceive elevated risks and elevated rates environments into their valuations and still be competitive. Cellnex’s sale of Irish assets to PTI saw 24x being paid for towers which has not shown there being a major multiple erosion on the continent.

Irrespective of the macro backdrop, deal making continues, albeit at a slower pace signalling investment interest is there.

According to Khazer Almajali, Principal at Actis, “the deals that will be done in this inflation-conscious generation of transactions will probably account for what's happening with interest rates and inflation. Making sure that that indexation to inflation captures more versus what might have been perceived as long-term inflation prior to these last couple of years will define them.” Almajali added that when Actis think about where they're investing, which is Central and Eastern Europe, it’s still behind in terms of growth and development, and so we still see room for growth, we still see room for co-location expansion, and it makes it quite an interesting place to invest. We've seen the TAWAL transaction as well as our transaction recently, and hopefully continued interest in doing more carve-outs and transactions in this part of the world.”

Europe and its markets have still to grow in terms of 5G population coverage which is at around 75% at present. The contractual BTS commitments guarantee this continuing for the foreseeable future. Almajali shared that there are markets in CEE where market players are building up the full territory with 4G which presents additional growth prospects in Europe as a whole. Cardoso added that data growth, especially in CEE brings another growth potential long term which comes with its own challenges. A market where we have many MNOs and is subject to MNO consolidation which could threaten tenancy ratios increase and towerco growth. Carlos Winzer, SVP Corporate Finance at Moody’s Ratings added that the objective of the European regulator is to preserve the same number of competitors in each one of the countries, not have them reduce from three to four. He gave Spain as an example with the consolidation of MasOrange and the package of remedies that was imposed by the regulator in order to support MVNO Digi to become the fourth operator in the country.

The high interest rates which are expected to be around for longer, will affect towercos and MNOs servicing their debts and could perhaps motivate them to start selling more assets or at least minority stakes, according to Cardoso. According to Xenia Sarri, Managing Director Debt Capital Markets at DigitalBridge, we’ve been in an ultra-low interest rate environment for more than a decade, and it's been an adjustment, not just for towercos, but for all borrowers out there in the past 12 months. She added there has been a lot of volatility caused by both higher inflation and constant interest rate raises but we’re now in a more stable market and players are re-adjusting.

In terms of new sources of financing, the panel discussed Asset-Backed Security (ABS) in the digital passive infrastructure space in Europe. According to Winzer the ABS market is still at a relatively initial stage of development and there needs to be an evolution for MNOs and towerco to access the ABS market. Xenia Sarri added that the digital infrastructure securitisation market is a well-trodden path in the US, giving an example with DigitalBridge doing the very first tower ABS in the USA almost a decade ago. Today its portfolio companies account for 25% of the whole digital infrastructure ABS market in the USA. According to Xarri one of the reasons that ABS is not as readily available in Europe is the variety of jurisdictions and different countries, which makes it a lot more challenging, like cross-border ABS transactions are very rare in any asset class. A second reason she pointed out is that Europe doesn’t have the scale in terms of the issuers within one jurisdiction that there are in the US. For to issue an ABS, you do certainly need scale. Thirdly, there is different treatment for capital for some of the investors that invest in these issuances, especially insurance companies. According to Xarri that's made it a lot more challenging, but the investor is hoping to see one of the first ones very soon that keeps the market open.

And although it's difficult to imagine it getting to the same level as the US market, DigitalBridge is hoping that it will become more readily available to issuers, especially as we've seen so much more volatility in the financing market, it would be great to have another pool of capital that we can access.

The panel concluded with the experts discussing what we will see next. Suggestions included Cosmote monetising its Greek towers (once carved out), Telenor Towers and BT.

While the majority shared there is no likelihood of MNOs buying back towers due to them being behind on meeting 5G coverage obligations, focusing on operational excellence and profitability, Winzer stated that this might not be the case. According to him MNOs are reconsidering the sale of towers, and some of them regret, on both sides of the Atlantic, having sold towers in a 5G highly dense scenario were keeping control of towers in a high inflationary environment seems to be an important factor, particularly as the cost control and leases are going up. Therefore, he added he wouldn't completely disregard the possibility of MNOs attempting, in some way, shape, or form, maybe using financially engineered structures to try to regain control of towers together with, in cooperation with the towercos.

A few weeks later Dutch MNO KPN and pension fund ABP announced the latter investing in forming a towerco with the former with KPN having a majority stake in the new structure. While the deal follows the trend to create towercos to unlock efficiencies, it also gives the MNO control of the towers and control over contracts.

Only time will tell if this deal will be an isolated case or if will we see more transactions of this kind take place in Europe.