Independent telecoms tower operators across Europe are looking to grow market share. Infrastructure funds are increasingly buying into the strong, low risk returns these tower companies offer.

Telecommunications companies (telcos) still hold about 90% of the towers in Europe that they built, but this number is on a downward trajectory.

Herbert Smith Freehills partner Nick Elverston said: “Outsourcing to independent tower operators started in America first, then the emerging markets especially Africa and Asia, but the trend has now reached Europe.”

In the US the independent tower operators (towercos) have a roughly 30% share of the market. Expected IPOs of towercos in Africa are unlikely to entice conservative infrastructure investors, but Elverston commented: “Infrastructure funds are desperate to enter into towercos in Europe, where there is manageable country risk.”

Tower spin-offs

For mobile and broadcast companies, revenues are declining as consumers take advantage of cheap wireless internet packages, rather than, say, making calls or watching broadcast television. Yet they must spend on new generations of technology and spread their networks.

The last year has seen several major carriers in Europe siphoning off their tower assets into separate towercos and selling down stakes in these assets in order to focus capital on core business. Institutional investors have, to date, been able to buy into four listed towercos in Europe.

Telecom Italia for example created Inwit, a portfolio of 11,500 towers, of which it then floated 40% to institutional investors this June for €875 million ($993 million).

Spain’s toll road operator Abertis has decided to focus its business again on roads and in May 2015 listed 66% of its mobile towers portfolio, Cellnex Telecom. Cellnex owns around 15,000 towers.

Italian state broadcaster Rai floated its portfolio of 1,800 towers as subsidiary Rai Way last November. EI Towers with 2,800 towers is the fourth listed towerco in Europe, part-sold by broadcaster Mediaset.

The majority stakes that telcos still hold onto are likely to sell at some point.

The UK has not seen the listing or sale of towercos yet, but there has been some bundling of the assets.

The UK’s largest towerco Arqiva previously has come to market, but at too high a price, IJGlobal understands. Vodafone and O2 in 2012 bundled their towers into a joint-venture called Cornerstone Telecommunications Infrastructure, which means they can share networks. Three and EE did the same, establishing MBNL.

Elverston said: “If a UK towerco came up for sale now, such as Cornerstone or Arqiva, I think it would excite a lot of infrastructure funds.”

Infrastructure funds

AMP Capital has now invested in three listed European towercos, since investing in EI Towers two years ago.

Giuseppe Corona, portfolio manager for global listed infrastructure at AMP Capital, said: “By separating the broadcasting infrastructure from fully integrated broadcasting companies, you appeal to different types of investors. We are infrastructure investors and only care about the hard assets and the financial benefits of owning them.”

Infrastructure funds are buying into unlisted portfolio tower companies too.

Antin Infrastructure Partners acquired 100% of France’s FPS Towers, which owns 2,000 towers, from Bouygues Telecom in two stages in 2012 and 2015. Now Antin’s Spanish portfolio Axion is rumoured to be next on the market.

InfraVia acquired a 300 mobile tower portfolio in Ireland from state company Coillte in August.

Over the last year Brookfield Infrastructure, PSP Investments, Arcus Infrastructure, APG and Predica have bought out the unlisted capital of TDF’s French tower business with close to 7,000 sites.

Attractive returns

Towercos meet an infrastructure investor’s key desire: long-term, stable returns. But the gains beat other asset types. “The average equity internal rate of return (eIRR) is circa 10%... Cash flow conversion for these companies tends to be north of 50%,” Corona said.

Mobile carriers or broadcasters pay a lease to the towerco for host space on its tower, and these inflation-linked contracts tend to be for seven to 10 years.

Construction is minimal unless a towerco seeks to grow its network, especially into rural areas.

Larger portfolios benefit from game-changing economies of scale. They arise in large part because independent operators can rent out a single tower to multiple carriers.

There tends to be multiple towers in the same location, previously built by competing telcos. Decommissioning takes time and capital, but does deliver savings.

However Elverston raised a potential impairment: “I think the impact of consolidation in the telco markets is a serious challenge to the towerco business model.”

Towercos seek efficiency from raising the number of tenancies per tower. But tenancy in the US is typically in the range of just 1.5 to 1.9 per tower. “There is room for more tenancies per tower, but if you look at the UK with O2/Vodafone and 3/EE sharing their networks, that halves the number of towers they require,” he points out.

Competition step up

As towerco sales rise in popularity, prices will rise.

Corona explained that two years ago the valuation multiples to earnings before interest, tax, depreciation and amortisation (ebitda) were about 10x in Europe. More recently the multiple has risen to the mid-teens. AMP Capital reduced its investments in US tower companies around that time two years back, when US valuation EBITDA multiples were reaching 17x, even 20x.  

Three independent giants own 30% of tower assets in the US: American Tower, SBA Communications and Crown Castle.  

Listed independents are already making bids for each other’s portfolios. Telecom Italia is seeking to sell its 60% stake of Inwit and Cellnex is bidding against infrastructure fund F2i it emerged last month.

Corona commented: “In Europe, I think the first trend will be the wireless carriers spinning off more tower assets. The second will be consolidation of tower companies eventually.”