Arqiva seeks £1.5 bn IPO for quick debt fix after failed sale

UK digital tower company Arqiva’s bid to raise £1.5 billion ($2 billion) by selling 25% of its shares as part of a £6 billion IPO looks like a desperate bid to fix its finances after two years touting around for a private buyer. To a greater extent than elsewhere in Europe this reflects the long-term decline and inevitable ultimate demise of digital terrestrial transmission (DTT), even though demand for DTT services is holding up quite well at present. This move comes amid uncertainty in Europe amplified by Brexit and other factors such as the current instability in Spain, making IPOs look risky. Other European tech companies such as O2 owner Telefonica and financial software firm Misys have recently called off plans to list for these reasons.

Arqiva has in fact been doing well for revenues in recent years with a further annual 6.8% rise to £944 million for the year ending June 30 2017. The problem has been interest in debt and high infrastructure capital costs which transformed pretax profits of £467 million into an overall loss of £427 million for the year. This is worse than the previous two years and is the main reason Arqiva had been seeking a private buyer to heal its complex finances, which have continually confounded efforts to regain overall profitability. This dates back 20 years to when Arqiva was effectively part of the BBC before being spun out and after various transactions ending up owned by Australian bank Macquarie and the Canada Pension Plan Investment Board by around 2009.

These two accumulated debt to invest in the infrastructure, but then sought to erase that through a private sale which was described erroneously in the financial press as attracting lots of potential buyers. In fact there was little firm interest, because although revenues were still rising, long term prospects for a company so dependent on broadcast infrastructure were poor. This private sale effort finally collapsed when a conglomerate led by GIC, Singapore’s sovereign wealth fund, pulled out from the auction after expressing concerns over declining TV audiences, as reported by the Sunday Times.

Naturally enough Arqiva has been eager to talk up its activities on the cellular front and present itself as a 5G infrastructure pioneer, but this is unconvincing at this stage. Its claim to fame there is a London trial with Samsung, featuring an ultrafast 5G based Fixed Wireless Access (FWA) broadband network using the 28GHz millimeter wave radio spectrum band to demonstrate stable two-way downlink speeds of around 1Gbps at the CPE.

However this was only a trial between two buildings, using technology that could feasibly be located on lampposts or street objects and does not exploit Arqiva infrastructure at present. In any case 5G services when they do roll out are likely to run at lower frequencies for greater coverage, except possibly in some dense urban environments.

More relevantly Arqiva had shored up its management team ahead of this planned £6 billion flotation, with Mike Darcey, former News International chief executive, and Paul Donovan, former chief executive of Odeon, appointed to its board, along with Frank Dangeard, former France Telecom deputy chief executive.

Events at Arqiva are being watched with interest across the channel in continental Europe, with a sense of déjà vu in France. The nation’s transmitter company TeleDiffusion de France (TDF) had succeeded where Arqiva has just failed by completing the sale of its assets to a consortium comprising Brookfield Infrastructure, PSP Investments, APG Asset Management and Arcus Infrastructure in April 2015. This sale comprising around 6700 towers and 5000 Kms of fiber backbone raised about €3.6 billion ($4.1 billion). A further €800 million was then raised in April 2016 through a 10-year bond issue.

Investment of some of this cash has sparked a revival for TDF as capital expenditure on infrastructure soared 33% to 25% of the €673.9 million 2016 revenues, bringing the inventory up to 11,856 operational sites. This growth was also boosted by the October 2016 takeover of its smaller infrastructure rival ITAS for about €100 million, bringing on 400 sites and adding around €45 million to annual revenues.

This new-found strength has also helped TDF bolster its presence on the ground, with a notable coup being its successful tender to provide optical fiber throughout the Val d’Oise region as part of a program to provide ultra-high-speed broadband in sparsely populated areas. This project entails deploying around 85,000 fiber outlets over the next three years in 116 communities.

At the same time DTT itself remains the country’s most popular medium of reception, according to a Perceptiva Labs commissioned by TDF itself. It found 45% of homes have DTT as the means of distribution on their main TV set, followed by ADSL (33%), satellite (16%), fiber (11%) and cable 9%.

This situation is mirrored in Italy, where again DTT has been bolstered by the fact that cable has never been authorized there, and its’ almost complete absence of IPTV. This is reflected in Italy being the only significant European country with a pay DTT platform of any note, RTI’s Mediaset Premium, which has almost 20% of the country’s pay TV market with a range of premium content, including pay per view football matches. (There are also declining DTT paid services in the Netherlands, Sweden and Spain).

With a 70% share of primary TV sets and high viewing figures, DTT is more important in Italy than in any other major European market. This has led to high investment and taken Italy to the coal face of DTT innovation and deployment, for example in being first to launch a second-generation DVB-T2 multiplex in 2010. This was enough to maintain two major rivals in infrastructure provision both owned by commercial broadcasters, Mediaset’s EI Towers and Rai Way, in which RAI holds 65%.

But even Italy is not immune to the gathering storm around DTT and so there have been persistent efforts to merge EI Towers and Rai Way, but so far without any success.

Meanwhile in Europe’s other major market, Germany, the main story has been the recent migration from DVB-T to the second-generation DVB-T2, which resulted in some loss of households to rival media. About 11.5% of the former DVB-T households moved to satellite because their commercial channels were already freely accessible there, while 7% went to cable and only 3% to OTT. This loss can be attributed to a period of stagnation for Germany’s tower provider Media Broadcast, which had been owned by France’s TDF.

Deutsche Telekom had originally sold Media Broadcast to TDF for €850 million in 2007. But then TDF decided to exit Germany at around the same time it sold its French assets. This led to German mobile communications company Freenet acquiring Media Broadcast through its subsidiary Mobilcom-Debitel for €295 million. This was described as part of a strategy to become a complete digital services provider to the home and means that Germany’s DTT infrastructure is attracting investment again.

The fall in the value of the German asset, is an adverse indicator to how valuable Arqiva is today.