Read this article to learn:
- Details of Cellnex’s deal with Arqiva
- The profile of the acquired portfolio and why it was an attractive target to Cellnex
- Who now owns the UK’s towers and how this could change
- Organic and inorganic growth opportunities for Cellnex in the UK
- A history of Cellnex’s acquisitions across Europe
Cellnex have announced their sixth inorganic expansion in 2019 with the acquisition of Arqiva’s telecoms division. The transaction which involves the acquisition of c. 7,400 Arqiva owned sites and the rights to market 900 further sites adds scale to the towerco’s UK operations. TowerXchange examine the implications for Cellnex and the UK market.
On 8 October, Cellnex announced that it had reached a deal to acquire 100% of Arqiva’s carved out telecom business for a consideration of £2bn. The deal includes c. 7,400 Arqiva owned sites as well as the rights to market an additional c. 900 sites and the concessions to use street infrastructure for telecom locations in 14 London boroughs. The transaction is expected to be funded through a £2bn syndicated loan facility and cash reserves with Cellnex’s Board of Directors having approved a capital increase of €2.5bn to support the deal which is expected to close in the second half of next year.
The transaction marks Cellnex’s third deal in the UK following the acquisition of Shere Group in 2016 and the signing of a long-term collaboration agreement to operate and manage 220 tall towers for BT in the country in June of this year. When the Arqiva deal closes, Cellnex will own 8,008 UK sites with the rights to market a further 1,120 sites in the country.
For Arqiva’s investors, the sale of their carved-out telecom business will take a significant and welcome chunk out of the company’s £2.9bn debt pile and help provide a robust capital structure for the remaining NetworkCo business, focused on terrestrial broadcast TV, radio, digital platforms, satellite products and M2M platforms. Around 1,700 broadcast sites will remain in the Arqiva NetworkCo business.
Speaking on the transaction, Cellnex’s CEO, Tobias Martinez said “The Arqiva Telecoms division acquisition is a key milestone for Cellnex. Its strong UK asset-base, revenues and financial profile, combined with its long history at the heart of UK digital infrastructure, make it a perfect addition to our operations… The UK has always been a core component of our inorganic expansion plans. This agreement further demonstrates our commitment and confidence in the UK market as we look ahead to further opportunities.”
Simon Beresford-Wylie, CEO of Arqiva said “This agreement provides both stability and a focus for our future as we concentrate on the provision of broadcast infrastructure, end-to-end networks and connectivity solutions for our TV and radio customers, international content owners, data network providers and utilities.”
A closer look at Arqiva and the portfolio Cellnex acquired
Arqiva has over 60 years’ history in UK broadcast infrastructure with roots going back to the Independent Television Authority. Through a series of mergers and acquisitions in the early 2000s, Arqiva added former BBC broadcast towers and National Grid Wireless infrastructure to its ITA portfolio, developing a total tower portfolio of around 16,000 sites, of which around half were active cellular sites and a further 1,500 broadcast transmission sites (much of the balance of inactive sites not being dedicated telecoms infrastructure, e.g. electricity pylons). Labelling themselves as a communications infrastructure business, in addition to managing a portfolio of telecom towers, Arqiva is responsible for UK television and radio broadcasting, acts as a reseller of satellite capacity and runs a significant M2M division, winning the UK government’s smart meter tender for the North of England and Scotland.
The company has been through a number of changes in ownership and identity over the years (BBC, Crown Castle, National Grid to name a few) with the company currently being owned by a consortium of seven shareholders (figure one). Having amassed a significant amount of debt (with the company reporting £2.9bn in its latest financial results), Arqiva had explored both a strategic sale and an IPO back in 2017. The strategic sale had garnered the interest of a number of different parties, with a consortium led by Brookfield Investments entering into late stage negotiations, only for talks to falter. Targeting a valuation of £6bn at IPO, the process was pulled shortly after it was announced, suggesting a significant gap in Arqiva and the stock market’s expectations. Observers commented that complications in Arqiva’s debt pile and questions over the longevity of their broadcast core business may be at play.
Figure one: Arqiva’s shareholder base
The decision by Arqiva to separate out its telecom tower business from other units, provided a much simpler and cleaner asset for the stock market or a potential acquirer to value. Investors understand the towerco business model, and assets have been changing hands readily with no shortage of suitors for the right assets in the right market.
Of Arqiva’s 7,400 towers being transferred to Cellnex, 80% are ground based towers with the towers being primarily located in suburban and rural areas. In addition to the acquisition of 7,400 towers, Cellnex has secured the rights to manage and market 900 further Arqiva sites. Cellnex’s recently acquired portfolio has a tenancy ratio of 1.4x with Cellnex projecting a 2020 adjusted EBITDA and RLFCF of £170mn and £105mn respectively. The average contract duration is 10 years providing certainty for longer term outlook and whilst 4G rollout is nearing completion, growth opportunities exist as operators begin planning for 5G rollout. Arqiva’s lease rates are understood to be some of the highest in the UK market, a fact which along with a reputation for poor service delivery (which one must note has since dramatically improved following the introduction of a new management a few years back) had led to some disgruntled operators, leading observers to question whether such lease rates may be renegotiated under new ownership. There are also exist significant opportunities to bring efficiencies to the operations of Arqiva’s tower portfolio, with the improvement of operational efficiencies being something that Cellnex is particularly adept at.
In addition to macro-towers, Cellnex has inherited Arqiva’s concessions to use street infrastructure in 14 London boroughs. Arqiva report hundreds of small cells to be deployed across the capital with three of the four UK MNOs having deployed small cells on Arqiva managed assets. Cellnex’s growing expertise in this field will help promote further expansion.
Speaking to TowerXchange, Cellnex said “The Arqiva Telecoms division acquisition is a key milestone for Cellnex. Its strong UK asset-base, revenues and financial profile, combined with its long history at the heart of UK digital infrastructure, make it a perfect addition to our operations. Moreover, it allows Cellnex to become a significant player within the UK telecoms market. This deal will not only add c.8,300 telecom sites to our portfolio but an experienced team that will further strengthen our capabilities in this market.”
Figure two: Cellnex’s acquisition of Arqiva in figures
The UK tower market and why it is a key target for Cellnex
The UK market has a unique structure with two joint venture infracos, Cornerstone (between Vodafone and O2 (Telefónica)) and MBNL (between EE (BT) and 3 (Hutchison)) owning over 70% of the country’s total stock of towers. Whilst infrastructure sharing businesses in their own right, Cornerstone and MBNL are the primary clients of UK’s towercos which include Wireless Infrastructure Group (with over 2,000 sites), Digital Colony (who acquired Spyder’s portfolio) and Britannia/Hibernian Towers alongside Cellnex and Arqiva.
Cellnex entered the UK market in 2016 with the acquisition of Shere Group and their 540 towers. They then bolstered their portfolio, securing the rights to market 220 high towers for BT. The acquisition of Arqiva’s telecom portfolio of 7,400 sites however brings significant scale to their UK operations with Cellnex set to own or operate 21% UK’s 42,492 cell sites (figure three).
Figure three: Who owns/operates the UK’s 42,492 active cell sites*?
As the second European economy in terms of GDP and with a sophisticated and dynamic telecoms market, Cellnex view the UK as a key market to be in. Speaking in June at the time the BT collaboration agreement was announced, Alex Mestre, Cellnex’s Global Business Managing Director, hinted as to the company’s ambitions for expansion in the UK commenting “This agreement demonstrates the Company’s commitment and confidence in the market as we look ahead to further opportunities in the UK.” Commenting on the Arqiva deal earlier this month, Cellnex’s CEO Tobias Martinez echoed this statement, saying “The UK has always been a core component of our inorganic expansion plans. This agreement further demonstrates our commitment and confidence in the UK market as we look ahead to further opportunities.” suggesting that Cellnex’ plans for UK expansion are not yet done.
The deal propels Cellnex into being a significant player in the UK market and allows the towerco to deepen its relationship with the country’s operators, offering a portfolio of urban as well as rural sites which will be key as the UK looks towards 5G rollout. Cellnex’s technical capabilities on top of their increasingly large portfolio and strategic relationships with operators and cities will enable the towerco to play a role in major projects going forward. One key initiative in Cellnex’ crosshairs is the Transport for London connectivity project in which the towerco is a shortlisted bidder. The complex project involves the provision of an integrated solution combining radio, fibre, edge computing and virtualisation, equipping London to become a truly digital, 5G-enabled city, with all the technological possibilities that this would bring. Speaking to TowerXchange about organic growth opportunities, Cellnex said “[in addition to the TfL project], there are other projects being assessed too and we do feel that the Arqiva deal as far as it reflects the kind of commitment and long term perspective that Cellnex, as an industrial player, is willing to play, does strengthen our potential to continue to capture organic growth opportunities in the British market.”
In terms of inorganic growth, whilst the rollup of other towercos in the market could be on the cards in the future, the towers that everyone is watching are those of Cornerstone and MBNL after three of the four operators involved in the joint ventures announced plans to carve out and potentially monetise their towers. In July 2019, Hutchison, owners of 3 who are joined up with BT’s EE through the MBNL venture, announced plans to carve out their 28,500 European towers into a captive towerco, CK Hutchinson Networks by the end of the year. The same month, Vodafone (whose towers are held in Cornerstone with those of Telefónica’s O2) announced plans for the carve out and monetisation of its 61,700 European towers [Vodafone since merged their 11,000 Italian towers into TIM’s INWIT]. Then in September, Telefónica announced it planned to accelerate the monetisation of some of the 50,000 towers held outside of its Telxius infraco unit.
Figure four: A history of Cellnex’s tower transactions
As to what strategy the MNOs will follow for the monetisation of their towers, it remains to be seen, with the operators hinting that they are exploring different options. For Vodafone and Telefónica, their towers are held on Cornerstone’s balance sheet and it is widely expected that a majority or minority stake in Cornerstone will come to market next year. Cellnex’s acquisition of Arqiva’s towers will likely preclude them procuring Cornerstone’s portfolio of 16,500 sites with operators unlikely to want such a high concentration of towers being held by one party. In the case of MBNL, the towers remain on the balance sheets of Hutchison’s 3 and BT’s EE. Should Hutchison pull their towers out of the JV as part of their towerco carve out process, BT may seek an alternative party to manage their assets and with Cellnex having a significant presence in the UK and already managing 220 BT high towers , the towerco could be one likely candidate to take on this role.
Cellnex remain highly acquisitive, with 2019 having been a record year for the company, having signed deals which will add c. 24,000 sites to its portfolio (assuming the completion of transactions and the full deployment of build to suit programmes) and TowerXchange closely watch their next move in the UK market.