Bloomberg interview: Tower sector may see M&A ‘turmoil’

Yesterday Bloomberg contacted me in relation to what has been a strong day for the shares of the European listed tower companies. On the back of take-over rumors Cellnex and INWIT closed the day up +4.2% and +4.7% respectively. Find here our view on what we expect to happen next.

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Communication tower operators, for which growth is not necessarily linked to global GDP, are arguably less volatile than other infrastructure companies as the long-term contracts are usually inflation linked. However, investor sentiment has been driven by news flow about consolidation, rather than underlying operational performance…

The sector has to grow up

Only c.38% of the 600k European communication towers are currently owned by independent/semi-independent tower operators. Abertis Telecom (Cellnex) has been building its broadcast portfolio since 2002, TDF (France) privatized its portfolio in 2002 and Dutch KPN has sold parts of its portfolio since 2008. EI Towers was the only listed company until Rai Way, Cellnex and INWIT were listed at the end of 2014 until mid- 2015.

We believe that we are still at the very beginning in terms of seeing structural changes in the (listed) tower landscape, whereby the independent tower operators will grow their market share. Telco’s will continue to focus on the core business as balance sheets are highly levered, pressure on revenues and margins continues, and investments to enhance 4G coverage are required. 
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Towers on the move - crystallizing value

In addition, the telco’s or PE owners could crystallize the high(er) valuation of tower portfolios. As such, we were not surprised to see KKR acquiring a stake in Telxius, ATC Europe acquiring FPS in France and Cellnex buying Bouygues towers (France) and the Sunrise portfolio (Switzerland). This only marks the start of an extensive process, in our view, in which the (semi-)independent tower sector will continue to grow. With transactions such as Deutsche Funkturm, Arqiva and Hutchison pending, we believe that the listed sector could play a leading role in this process.

Consolidation makes perfect sense as communication towers are akin to a commodity business where improving operating efficiency and reducing the cost of capital is key. However, a large chunk of the deal economics often ends up going to the target, especially as listed tower company’s seem eager to grow. Still, investors should consider opportunity costs as consolidators tend to structurally outperform, while majority shareholders and government involvement make deals more uncertain.

US peers and RE companies utopia or reality for European tower sector?

Although we acknowledge the need to improve efficiency via acquisitions and become more relevant in terms of size, the primary focus should be on operational performance and organic growth of the tower companies. We believe that property companies and the American peers could reflect the potential of the European tower sector as both have comparable characteristics, yet are more mature. Given the mandate of ATC's EMEA CCO and its €3.5bn war chest, we would not be surprised if ATC Europe or its peers continue to seek further opportunities to gain a decent European footprint…

Happy to discuss our views and insights in more detail!

Albert

Albert Pranger is a member of the Kempen Infrastructure Team. He is specialized in the European Tower Space, and advises investors about the listed and non-listed market.

This article was originally posted on LinkedIn. 

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