Read this article to learn:
- The footprint of Vodafone’s towers
- How Vodafone Procurement Company adds value to a sale
- What options are open to European MNOs
- The pros and cons of carve out towercos
- Likely bidders for Vodafone’s assets
Vodafone are the latest in a snowballing number of European MNOs to state their interest in monetising their towers, hoping to reduce their €31bn debt burden through the sale of a stake in a new ‘virtual towerco’ encompassing 58,000 towers across the continent. They follow European MNOs Altice, Sunrise, Bouygues, KPN, Telefónica, Deutsche Telekom, Turkcell and Telecom Italia in seeking to monetise their tower assets. With several different monetisation models already in place, we look at the options available to European MNOs and anticipate which route Vodafone might choose for their assets.
What has been proposed?
Vodafone’s CEO, Nick Read, put the cat among the pigeons by mooting potentially the biggest tower sale in European history in September 2018. Vodafone owns 110,000 towers across Europe, of which they directly control 58,000, which have been valued at around €12bn by Barclays.
Speaking at the Goldman Sachs conference in New York, Read, who took the reins in October, opened up the possibility of reversing the stance of his predecessor Vittorio Colao and selling the tower assets if the right deal could be struck.
Vodafone has struggled recently, with a debt pile of €31bn and disappointing Q118 results, the company’s share price has dropped by 20% over the last 12 months and led to activist investor Elliott Management acquiring a stake in the operator.
Read’s proposals were then updated in November 2018, when he stated that Vodafone was in the process of carving out a ‘virtual towerco’ of 58,000 towers with a dedicated management team. This would open up Vodafone to the possibility of selling the towers, selling a stake to investors, an IPO or a partnership with an independent towerco.
Read’s suggestion of selling their towers will no doubt have been bolstered by Altice’s recent tower sales in France, Portugal and the Dominican Republic, which raised around €2.7bn and, as part of wider restructuring, have seen the flagging operator’s fortunes stabilise. Vodafone also has recent experience of monetising towers in India, agreeing to merge their 42% stake in Indus Towers with Bharti Infratel, and selling 10,200 towers to American Tower India for US$592.9mn. Despite these recent deals, there is no doubt that Vodafone has been well aware of the option to monetise their towers for many years – they had hitherto simply seemed disinclined to do so.
What we know about Vodafone’s tower portfolio
Although Vodafone owns 110,000 towers in Europe, they have been proactive in seeking to increase efficiency through the creation of tower joint ventures in many of the countries in which they operate, as well as actively pursuing co-locations and commercial tenancies across their network, most likely resulting in a tenancy ratio above the industry standard for MNO-captive towers of ~1.1x. While their higher tenancy ratio will present more potential cash flow to a prospective buyer, there will be complexities to overcome in unpicking multiple partnership agreements and the opportunity to lease up further may be limited.
Vodafone operates their towers directly in Albania, the Czech Republic, Germany, Hungary, Italy, Malta, the Netherlands, Northern Cyprus, Portugal and they also operate the majority of their towers in Turkey.
Vodafone macro towers in Europe
Vodafone infrastructure joint ventures and infraco activities
A joint venture with Telefónica (O2 in the UK) created in 2012, CTIL owns and operates some 16,000 towers in the UK. Vodafone and O2’s sites are pooled on the CTIL balance sheet. It is believed that CTIL is already being restructured, possibly with a view to a carve-out or sale.
Created in 2013 as Ovidiu Telecommunications, and rebranded to Netgrid in 2014, this joint venture between Orange and Vodafone in Romania was expected at launch to generate savings of ~€10mn over 16 years.
Netshare was created in 2012 as a joint venture between Vodafone and Three in Ireland, incorporating around 2,000 sites. Ownership of Netshare shifted wholly to Vodafone following the merger of O2 Ireland with Three in 2015.
A joint venture between Wind Hellas and Vodafone Greece, VICTUS Networks manages around 7,000 sites in Greece.
Universal Services Project
Mandated by the Turkish government, Stage ii of the Universal Services Project is nearing completion as Turk Telecom and Vodafone roll out 2,500-3,000 rural sites in Turkey to push towards the government’s aim of 100% coverage by 2022. Although Vodafone has built and is managing these towers, ownership will ultimately revert to the Turkish government on completion of the project.
Some of Vodafone’s joint ventures may make it harder to sell their towers. CTIL in the UK, for example, which sees Vodafone and Telefónica working closely together, would take a significant amount of work to unpick, but Telefónica has not shown itself to be averse to commercialising its towers, with various tower sales around the world as well as the creation of Telxius in Spain and Germany.
Netshare in Ireland is already effectively operational as a towerco and wholly owned by Vodafone, so may become one of the first assets brought to market, with towers in Portugal, France, Germany and the Netherlands all likely to find interested buyers already in situ.
Vodafone Procurement Company
One advantage that Vodafone has over other MNOs looking to carve out their towercos is the existence of Vodafone Procurement Company (VPC), a huge resource of telecom supply chain management experience which is responsible for a €25bn annual spend for Vodafone and selected third parties. VPC has around 250 procurement, technology and category management experts who buy everything from handsets, to what Vodafone call “Network Site Infrastructure” (NSI), which breaks down into nine categories including power supply, cabinets and shelters; antennas; cables; batteries; towers; air condioners; civil works; generators and renewables, as well as accessories and consumables, which includes safety equipment such as fall arrest systems and personal protective equipment.
VPC focusses on the Total Cost of Ownership (TCO), with technological and commercial due diligence, meaning Vodefone already has a very disciplined and holistic approach to their towers compared to many European MNOs. Their processes for robust contract management, supplier performance management and active demand management are already in place, meaning if Vodafone chooses to sell an equity stake and retain control of their towers, this relationship with VPC could drive growth and financial performance beyond that of their carved out peers over the next few years, particularly as operational excellence becomes a priority in terms of network resilience and 5G rollout.
What options are open to Vodafone?
So far 2018 has failed to see any sale and leaseback deals of scale between MNOs and European towercos, despite four deals (although two were between Cellnex and Bouygues) in 2017 and three in 2016. The much anticipated deal of 2018, that of Altice’s towers in France and Portugal, resulted in the carve-out and creation of two new towercos and major investment from large funds, rather than a consolidation of tower stock by towercos in key European markets.
Infrastructure funds and sovereign wealth funds are attracted by towers’ stable growth and bond-like contracts, but their long holds mean they are often able to accept lower returns than those sought by towercos or smaller private equity investors. Where European towers are forecast to generate ‘infrastructure-type’ returns, we are increasingly seeing infrastructure funds more able to close deals than strategic buyers.
Over the last few years we have seen several MNOs carve out towers, creating a roadmap of options for subsequent MNOs:
Carve out and IPO: Telecom Italia’s INWIT has been the only towerco to do this successfully, raising €870 through a listing in 2015. Subsequently Turkcell’s Global Tower and Telefónica’s Telxius have attempted to IPO parts of their business but without success.
Sale of an equity stake: Following an unsuccessful IPO attempt in 2016, Telefónica sold 49.9% of their infrastructure business Telxius to KKR for €1.275bn. Altice followed a similar model in 2018, creating SPVs in France and Portugal with KKR, Morgan Stanley and Horzon Equity Partners to raise €2.5bn.
Sale and leaseback: Cellnex has been the major buyer of MNO towers assets in Europe recently, acquiring (or securing BTS contracts for) a total of 4,100 towers from Bouygues in 2016 and 2017 for €1.2bn and 2,339 Sunrise towers in 2017 for €430mn. American Tower and FPS (themselves acquired by American Tower) have also acquired portfolios of MNO towers in Europe in the last five years.
Carve out and retain: Deutsche Telekom’s Deutsche Funkturm was created in 2002 and has remained 100% owned by DT ever since, now announcing plans to expand into the Netherlands and other European countries. Similarly, Global Tower, the infrastructure arm of Turkish MNO Turkcell, remains 100% owned by the parent company and has expanded into a further three geographies (Ukraine, Belarus and Northern Cyprus). However, as successful as this model may be in terms of growth, both MNOs have tried several times to sell a stake and/or list their tower arms, only choosing to retain the assets after taking the temperature of the market. Both MNOs are believed to be reviewing their options again as we go to press.
What is driving the increase in operator-led carve outs?
With an increasing number of infrastructure funds keen to put their capital to work in communications infrastructure, the profile of investors in telecoms infrastructure has changed dramatically over the last three to four years. Towers, more than any other kind of communications infrastructure, commands high multiples and has access to a low cost of capital thanks to long-term contracts with credit-worthy tenants, which has drawn infrastructure funds to the asset class through investment in towercos and partnerships with MNOs.
The European market is seen as mature and even overbuilt, with a lower proportion of ground based towers and a higher proportion of rooftops with a finite load capacity exacerbated by EMF regulations. This capacity to drive tenancy ratios from the standard MNO 1.1-1.2x to perhaps 1.6-1.8x with a small amount of organic build alongside adds up to infrastructure-like returns in the low double digits. Whereas towercos and private equity investors are looking for returns of around 17x-22x, infrastructure funds are looking for infrastructure-type returns in a mature market.
The prevalence of Infrastructure Funds in European towers is further illustrated by the fact that American Tower’s European business is a joint venture with Dutch asset manager PGGM, which acquired 49% of the venture in 2016.
With infrastructure funds driving up multiples and MNOs retaining their leased up towers, the carve out model is becoming increasingly popular, with operator-led towercos owning 52.4% of the world’s towers compared to 12.8% being held by pureplay independent towercos (although it must be stated that this number is skewed by China Tower Company, without which the operator-led proportion stands at 8.8%).
However, there are several concerns about the longevity of carve out towercos. While they will continue to tick over, and will achieve some commercial lease up, there will often be strategic hub sites, or sites which represent a critical competitive differentiator – sites which would offer the market the greatest benefit from being shared – which are held back from co-location by the parent company. The chequered record of operator owned towerco IPOs shows they’ve generally valued at about half what pureplay towercos are worth on a global basis. Bharti Infratel trades at around half the value of American Tower’s shares, while IPOs from Telxius and Global Tower failed, and China Tower halved their asking price to the point where some analysts suggested it was ‘too cheap to ignore’.
Operator-led towercos, even with a 30-40% equity stake from an infrastructure fund, may not be creating value of the same magnitude as a pureplay independent towerco, and the difference is in the small print: the amount of reserve space the parent MNO hangs on to, discounts when extra tenants are added to a tower, smaller increases in lease price when additional technologies are added by an existing tenant (amendment revenue), and escalators which may apply only to energy and maintenance, rather than the whole lease. All of these factors can combine over the term of a lease to add up to a significant suppression of cashflows and margins. Investors recognise this and discount valuations appropriately.
Vodafone’s dilemma is no different – will they choose to retain control and majority ownership at the expense of maximising the value in selling? A balance sheet re-engineering exercise which carves out the Vodafone towers across multiple markets won’t yield anything like the yield, debt relief, or warchest for 5G rollout that a sale and leaseback would yield as pureplay towercos create the most value, so attribute the most value to the towers they buy.
We could be reaching the peak of MNO appetite for tower carve out, as they realise the significant difference in the value of the two business models, but the early movers in carving out towers will still gain an advantage in a European market where many MNOs have not yet moved to capitalise on their tower assets – 40.5% of Europe’s towers are still owned by a single MNO. Time will tell how successful the carved out towercos are in the long term, and whether they will become established in their own right or are seen purely as an interim step for MNOs to build value before selling their infrastructure.
How could the sale look and who will bid?
With 55,000 towers across as many as 14 potential markets, Vodafone are unlikely to find a buyer with the digestive or operational capacity to buy them all in one transaction. We would expect to see the towers coming to market in tranches, and most likely sold on a market-by-market basis, with established and proven tower markets such as Italy, Germany and the Netherlands at the top of the list. There will be no shortage of towercos interested in towers in these markets: Vodafone Italy is the co-locating tenant on a significant proportion of INWIT’s towers, so they already have a strong relationship with Vodafone. Cellnex would doubtless be interested in leapfrogging INWIT to acquire another ~9,000 towers in the Italian market, particularly with a solid anchor tenant and at a time when Iliad’s Free is looking to pursue further rollout.
Likewise in the Netherlands, where Cellnex already has almost 800 towers (the majority acquired from Shere Group, Protelindo and Alticom), there may be room for further consolidation. In addition, Germany’s Deutsche Funkturm has just expanded its reach into the Dutch market, carving its towers out of the recent merger with Tele2, and is seeking further growth in Europe (although there are also rumour circulating that Deutsche Telekom may be looking for a buyer for the asset, which would offer buyers a wealth of choice in the Dutch and German markets). American Tower’s presence in the German market would make them a very strong contender should Vodafone Germany’s towers come to market.
In addition, investors like Digital Colony and Brookfield, with capital at work already in the European market and the expertise to commercialise the towers, will be keen to take a look. U.S. towercos such as SBA and Crown Castle, who have been known to look at European assets in the last couple of years, may also be interested in specific markets – if the terms on offer enable their business model.
Carving out either several country-specific towercos, or one international entity would entail a huge amount of work, but Vodafone will benefit on this front from their exceptional existing supply chain management and investment in innovative technologies across their portfolio. Finding a buyer, or consortium of investors, for a stake in new European towercos may be the preferred option for MNOs who wish to retain control and monetise their assets, but the risk of towerco saturation in several of Vodafone’s key markets, combined with the longer term valuation implications for carve out towercos, could encourage Vodafone to consider a straightforward sale and leaseback with a reliable counterparty for at least some of their portfolio.