Vodafone has expanded and refreshed its network sharing deal with Telefónica O2 in the UK, and will also 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.
This sees Vodafone following a now-common trend for MNOs to offload their towers, either into arm’s-length subsidiaries, or with sales to third party tower operators. This removes the high operating costs from their balance sheets and is a first step to separate infrastructure and services businesses, allowing them to address the very different financial norms of those two markets independently, and generate more shareholder value as a result.
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. 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”. It is also considering selling shares in the towerco with an initial public offer (IPO), and will assess all these options over the coming 18 months.
“Building on our position as Europe’s largest converged operator, we are now creating Europe’s largest tower company,” said Read. “Given the scale and quality of our infrastructure, we believe there is a substantial opportunity to unlock value for shareholders while capturing the significant industrial benefits of network sharing for the digital society.”
The bigger picture behind the formation of the towerco is Read’s aggressive program to reduce net debt. When he took the helm last October, he cut the dividend by 40% to try to bring down the debt mountain, which was €27bn at the end of March 2019.
Although he has gone ahead with the €18.4bn acquisition of Liberty Global’s central and eastern European business, otherwise his focus is on reducing cost and debt with increased sharing of assets with other operators, as well as the ongoing migration to automated, cloud-based architectures to support 5G – a transformation which should reduce operating costs and staff levels in future.
Over time, many operators are likely to go a step further and place active infrastructure, especially the RAN, into joint ventures (Vodafone and O2 UK already do this) or into the cloud, maximizing efficiencies on the network side while leaving the core business primarily focused on a services business model.
Vodafone has initiated or expanded active and passive network sharing agreements in Italy, Spain and the UK in recent months and is looking at similar options across its European footprint.
In April, Vodafone extended a deal with Orange in Spain to share active network equipment, including 5G, in any city with a population of fewer than 175,000 people. Their previous agreement had covered towns of between 1,000 and 25,000 people.
In Italy it has just signed a deal with incumbent TIM to extend their passive network sharing agreement with Inwit and to extend their alliance into active RAN sharing. The latter, which is comparable to its agreement with O2 UK, will not only reduce cost but help to accelerate 5G roll-out outside urban areas (where Vodafone has pulled back from network sharing because it says the capacity requirement will be so high in the 5G era that each MNO will need its own infrastructure).
The two operators will extend a previous deal to share 10,000 sites and place all their combined 22,000 towers in Telecom Italia’s Inwit towerco subsidiary, over which they will take joint control. They will also share the active 4G and 5G RANs used at these sites. They will take stakes of 37.5% each in Inwit, which will be Italy’s largest towerco, with the option to reduce these to 25% after three years. Vodafone’s stake will also be part of its new pan-European towerco. It will also work with TIM to upgrade their respective fibre mobile backhaul capabilities.
Both companies will continue to manage spectrum assets and network quality and functionality independently to preserve service competition and differentiation.
“Completion of this transaction is key for the country’s infrastructure and technological development and will enable us to further accelerate the deployment of 5G,” said Luigi Gubitosi, CEO of TIM. “Thanks to what will from today become Italy’s biggest tower company, we will be able to offer households and businesses privileged access to the technological revolution that has just begun.”
The two operators expect to generate synergies worth a total of over €800m each over the next 10 years from their multiple cooperations, and to add €200m a year to the new Inwit’s EBITDA by 2026 via “synergies, commitments and new potential opportunities”.
The transaction, which needs regulatory consent, will also allow TIM to cut debt by more than €1.4bn over time.
“5G has a key role to play in modernizing the country,” said Aldo Bisio, CEO of Vodafone Italia. “Network sharing reaps the benefits of 5G and at the same time reduces the impact on the environment and lowers rollout costs, allowing more investment in services for customers.’’
Meanwhile, Telefónica O2 and Vodafone have agreed to share 5G active equipment on jointly owned towers across the UK, looking to accelerate 5G deployments, especially in rural and suburban areas where it is hard to achieve return on investment on high capacity infrastructure roll-out.
However, the UK’s 23 largest cities (representing 2,700 sites, or 16% of the MNOs’ total) have been excluded from the deal since Vodafone believes capacity demands will be too high to justify sharing in the 5G era. These 2,700 locations are in addition to London, which was already declared a city for autonomous network operations last year. With London, the number of autonomous sites amounts to 25% of the total.
This deal extends the operators’ existing 4G agreements, which include their 50:50 tower joint venture Cornerstone (CTIL) and an active network sharing and management deal, called Project Beacon, which saw Vodafone deploying a shared network in the western region of the UK, plus the southern half of London; and O2 doing the same in the eastern UK, and northern London.
Under Project Beacon, they deploy their own base stations and each operator is responsible for upgrading masts in their ‘zones’ while duplicate sites have been eliminated. In total, 18,500 sites were upgraded under this program by the end of 2018 – a process which involved replacing everything but the tower. This deal has helped the two operators to expand or upgrade their networks, and roll out new services, more quickly and cost-efficiently than going it alone. This has been important to keep them operationally competitive with BT/EE and Hutchison Three, which have their own network sharing venture called MBNL.
However, in 5G, active sharing will be removed from the larger cities, meaning Vodafone will have to build a network in northern London again. It has already been working with Ericsson on Massive MIMO 5G sites for the UK capital.
Cornerstone will take on additional responsibilities for the deployment of both networks in order to improve operational efficiency. In addition, Vodafone and O2 will now explore potential monetization options for Cornerstone, mainly renting space on its towers to third parties.
O2 CEO Mark Evans said: “This agreement will enable us to roll-out 5G faster and more efficiently, benefiting customers while delivering value for our business. It also importantly allows us to utilise the spectrum we acquired in the last auction very effectively.”
“We’re driving our 5G roll-out forward with this agreement, and taking our customers, our business and the whole of the UK with us,” said Vodafone CEO Nick Jeffrey. “Greater autonomy in major cities will allow us to accelerate deployment, and together with active network sharing, ensures that our customers will get super-fast 5G in even more places more quickly, using fewer masts. We can boost capacity where our customers need it most so they can take full advantage of our new unlimited plans.”
The rush to offload towers is partly about reducing cost and allowing service businesses to behave with greater agility. But it is also a move for telcos to take advantage of the high valuations and margins that currently accrue to infrastructure businesses which achieve scale and efficiency. While Vodafone’s European EBITDA margin in 2018 was 31%, towercos can achieve twice that – Cellnex, Europe’s largest independent towerco with 45,000 sites, reported a 67.5% EBITDA margin for the first half of 2019, on revenues of €489m (about half of what Vodafone’s TowerCo expects to bring in).
Last June, French-based Altice Europe sold a 49.99% stake in a newly created company, SFR TowerCo, to investment firm KKR, valuing the business at €3.6bn, or 18x EBITDA. That unit will house the 10,000 towers operated by Altice’s French MNO, SFR.
At a similar EBITDA multiple, Vodafone’s new TowerCo could be worth over €16bn, hence Read’s eagerness to give it the freedom to be fully monetized. He said on the analyst call that he did not feel the tower assets are “appropriately valued” today and that current demand signifies an enterprise value of at least 20 times annual EBITDA, which would result in a valuation of €18bn ($20bn) or more.
Some are tipping Deutsche Telekom to be the next European major to form a towerco. It has 28,000 towers in its home market of Germany and about the same number again in other parts of Europe, and has sometimes talked about the potential opportunity to monetize these more in the 5G era, when denser networks will create new demand for sites.
Vodafone UK calls for new regulations on towers and fiber:
Vodafone believes it can largely stick to its current network grid of sites for 5G, offsetting the lower range allowed in higher frequency spectrum with improved antennas. But this will require the regulator to allow it to build higher towers than are currently legal. Without this change, the operator says service quality may suffer, or it will have to incur additional costs because it will need to add more towers.
Vodafone also wants regulatory change with regard to BT’s wholesale unit, Openreach, the main source of fiber for backhauling mobile networks. Like O2 and Three, Vodafone wants access to BT’s dark fiber in order to gain more control over the cost and quality of backhaul connections , but although regulator Ofcom has progressively separated Openreach from BT since the latter became a mobile operator itself with the purchase of EE, it has not insisted on complete break-up, nor has it mandated that BT should offer dark fiber.
“We have to buy fiber products that are expensive and, worse, we have to put their network equipment on that fiber to get it connected to our base stations,” said Vodafone UK CTO Scott Petty. “That creates power issues that are difficult to solve.”
Towerco deals are happening outside Europe too:
- Reliance Jio (see separate item) has signed a deal with a consortium led by Brookfield Asset Management, which will invest INR252bn to take a 51% in its tower unit, Reliance Jio Infratel. Subject to approvals, a second phase of the deal will see the consortium repay INR120bn to Jio and “certain existing financial liabilities of Reliance Jio Infratel”, to take full control of the tower arm.
- CK Hutchison has moved its telecoms assets in Hong Kong and Europe, including the Three operators, into a newly-formed holding company, and then plans to transfer 28,500 towers into a separate subsidiary. The new division plans to refinance €10bn of external debt related to Italian MNO Wind Tre, which is now under Hutchison’s full control after buying Wind from Veon last year.
CK Hutchison Networks will house its 28,500 European towers but there is also the option to add the 9,300 towers it owns in Asia at a later date. The creation of the tower company is expected to be completed in late 2019 or early 2020. In a statement, CK Hutchison said: “The new organization structure and the refinancing transaction will allow the group to generate significant financing cost savings from 2020 onwards, as well as rationalize its investments in light of the expected need for harmonization of network, IT platform, and infrastructure configurations to meet new trans-national business opportunities going forward.”
- Vodacom has begun talks regarding a network sharing deal with Telkom in South Africa, after its revenues were hit when Cell C abandoned it in favour of rival MTN. Sources told Bloomberg that Vodacom (a Vodafone joint venture) lost around $71m of annual revenue when Cell C transferred its roaming agreement to MTN earlier this year. A Telkom deal would give both companies improved ability to offer fixed/mobile connectivity and to reduce cost by sharing passive infrastructure and fiber.