Some telcos continue to sell off their towers to pay down debt, while others are looking for a piece of the same action that has attracted the investment community

Telecoms is a cash-intensive business, which doesn’t always make it a top choice for investors, particularly in Europe, where top line growth is often flat but capex requirements remain high as operators roll out fibre and plan for 5G mobile services.

But while industry watchers for the most part focus on retail services and customer connections, the investment community has its eyes on passive infrastructure, telecoms towers in particular. And the telcos themselves are keen to benefit from the potential of their towers portfolios, one way or another.

There hasn’t been much growth in telecoms in Europe, with any positive figure seen as an achievement, Arnaud Burger, managing director, global co-head of TMT finance, at Societe Generale, said at Total Telecom Congress last month.

In real terms, "you’re actually declining," because growth is lower than inflation, he warned.

However, "you will find pockets of growth," he said, highlighting the towers space and pure infrastructure businesses, which "investors love."

Indeed, private equity firm KKR this week exercised an option to buy an additional 15.2% of Telefonica’s infrastructure arm Telxius, which owns 16,000 cell towers and manages an international network comprising 65,000 km of submarine cable. KKR agreed to pay €484.5 million for the stake, taking its holding in the business to 40%.

Towers specialists also believe they can extract value from telcos’ towers businesses.

American Tower on Monday inked a 78.5 billion-rupee (€1.03 billion) deal to acquire over 20,000 Indian towers from Vodafone and Idea Cellular; the operators are divesting their towers businesses – there is reportedly a separate deal underway for their respective stakes in Indus Towers – as they seek to pay down debt ahead of their planned merger, which is due to close next year.

American Tower said it expects the telcos’ tower assets to generate around INR21 billion in property revenue and INR8 billion in gross margin in their first full year as part of American Tower.

While there is value in towers assets for a firm like American Tower – the Economic Times this week cited an unnamed source as saying it is considering more deals in India, incidentally – they are a useful asset to monetise for operators under pressure from a leverage perspective, Credit Suisse’s Burger pointed out.

Passive infrastructure is simply viewed as a non-core asset by some telcos, but others are keen to tap into the market’s potential.

Pakistan’s Competition Commission last week gave the go-ahead to Axiata’s planned acquisition of Pakistan Mobile Communications Ltd’s (PMCL’s) Deodar towers unit, according to a local press report. Axiata’s own towers business edotco partnered with Pakistani investment conglomerate Dawood Hercules on the deal; the pair agreed to pay US$940 million for Deodar and its 13,000 towers in August.

Japan’s Softbank, a telco with a track record of tapping into investment opportunities that its peers would view as outside their remit, is also expanding in the towers market.

Last month, Softbank partnered with Australian infrastructure specialist Lendlease Group to launch a U.S. towers joint venture that will include the telecoms towers owned by Softbank’s U.S. mobile operation Sprint. The companies each committed US$200 million in equity to the venture and said they will seek to add new capital partners in future. Growth will come from both development and M&A, they said.

Elsewhere in the U.S., telcos are looking for new models.

AT&T and Verizon have partnered with Tillman Infrastructure to build and share hundreds of new cell towers, with construction due to begin in the first quarter of next year.

Both telcos indicated that the deal would help them to lower costs.

AT&T’s SVP of global supply chain Susan Johnson said the current model is neither cost-effective nor sustainable. "We’re creating a diverse community of suppliers and tower companies who will help increase market competition while reducing our overhead," she said. Meanwhile, Verizon Wireless’ chief network officer Nicola Palmer added that "it is imperative to reduce operating costs."

In the U.S., though, the investment case for telecoms is stronger than it is in Europe, in no small part due to the top line growth operators can achieve and a more favourable regulatory climate. That, though, is a story for another day.

Friday Review 17 November 2017