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30 September 2019

Telefónica follows Vodafone with plan to offload its tower assets

The trend for mobile operators to offload their towers intensifies. Vodafone recently announced plans for an €18.4bn ($20.3bn) spin-off, following the example of MNOs in the USA, China, India and many other markets. Now, Telefónica is pursuing a similar plan, and analysts believe that, if its assets are valued in the same way that Vodafone is claiming for its towers, the Spanish telco could achieve a price of €7.2bn ($7.9bn).

Vodafone has argued strongly that mobile infrastructure is very undervalued and that it would expect an enterprise value, for its European assets, of at least 20 times EBITDA – even allowing for some valuation drops if a large number of towers suddenly comes to market. Telefónica is considering “monetization” options for about 50,000 towers and its EBITDA is about €360m ($397m).

Telefónica is the majority owner of a towers business called Telxius, with about 18,000 sites in six markets in Europe and Latin America. The 50,000 now under review are owned by other units within the Spain-based group including 19,000 in Germany; plus about 7,000 that are part of Telefónica’s 50:50 UK joint venture with Vodafone, Cornerstone.

It is possible that the company will move some or all of the 50,000 sites into Telxius, which would be similar to the ownership structure Vodafone is adopting, with a future IPO, or the sale of a minority stake, possible next steps. However, Telefónica only has 50.01% of Telxius and will not want to lose control, so it may be less risky to keep the new towers in a separate entity. The telcos says it is examining many options and has seen interest from “both public and private market participants”.

Also like Vodafone, the operator will need to firm up any active network sharing deals in order to be clear on all its options for the passive infrastructure. The increasing trend for European MNOs to offset high costs and debt by sharing more assets is spreading from towers and transport into the active RAN, as Cornerstone shows. As well as Cornerstone, Telefónica has some active sharing agreements in place with new entrant Drillisch in Germany and with Spain’s Másmóvil. It may now look for other, larger partners to improve the economics of its 5G roll-out. “We are prepared to work closely with competitors willing to invest in network expansion,” said Valentina Daiber, chief legal officer at Telefónica Germany.

Given the rising interest in offloading towers, it was predictable that Deutsche Telekom’s CEO, Timotheus Höttges, was asked about the issue on a recent call. However, he was cool on the idea, saying: “This business provides assets and is profitable and 100% of this business belongs to our shareholders already now. There is huge growth potential because with 5G microcell structures will allow us to further expand these sites, and so it is really good if 100% of this growth in these towers belongs to our shareholders.”

But he added: “There could be a point in time when we try to realize some of the value of this asset … through partnerships or divestiture or an IPO. I have trust and confidence in my finance people and they will ensure we find the right time and place.”

Vodafone is blazing the trail here and plans to create “Europe’s largest tower portfolio” by placing its 61,700 towers, spread over 10 countries, into a new towerco, which will operate from May 2020 with its own management team and balance sheet.

There will be three steps in Vodafone’s process. First, to enable it to explore all options in its bid to monetize towers better at country level, it needs to legally separate the towers from the operating company in each of its European markets. For instance, that would make it easier to sell stakes in national tower businesses to other towercos or to equity firms.

“We want to establish those because it is important you reach agreement at a market level first so that when you do monetization you are not locked into an excessively high number of sites,” said group CEO Nick Read when the plan was unveiled in August. Country-level activities include new or refreshed sharing deals with O2 UK, Orange Spain and TIM in Italy.

This phase will be completed by May 2020 and then Vodafone will set up a European holding company for all its European tower assets, including stakes in existing tower ventures such as Cornerstone in the UK and Inwit in Italy.

Thirdly, after about 18 months, it will consider other monetization options such as an IPO or selling a stake to a third party, although Read has ruled out selling more than a minority stake in the European holding company. There might be bigger disposals at country level. “It comes down to whether there is a good supply of towers in a market,” he said. “Is control a strategic imperative or is there lots of access to towers, in which case we may be open to a majority sale?”

Divesting or sharing passive infrastructure can make a big difference to the finances. The new towerco is targeted to bring in annual revenue of €1.7bn and EBITDA of €900m, through internal and external site rentals, which will help Vodafone to reduce debt. The main locations of its towers are the UK, Germany, Italy and Spain, which together account for 75% of the sites. Spain and Italy are already competitive markets with neutral host towercos such as Cellnex in operation, and Telecom Italia has placed its towers into an independent unit, Inwit.

Vodafone said its forecast revenues and earnings were based on market benchmarks for anchor tenant lease rates, its existing third party revenues and the attributable cost base. But it is also considering “a variety of monetization alternatives” to boost those figures in future. It said it had already received “several offers” for parts of its tower portfolio, which would “command an attractive valuation” because of its “superior asset quality, strong market positions and higher anchor tenant credit rating”.