AlixPartners discusses tower M&A strategies

As Mobile Network Operators (MNO) are looking to increase value from their infrastructure assets, new strategies are emerging to adapt to a changing market environment. John Miles, director at AlixPartners, speaks to Lucía Camblor at TMT Finance and discusses the major trends that are shaping the industry.

 A shift in towers´ ownership

While historically many of the large MNO groups were not interested in divesting their ‘family silver’, now there has been a shift in the mindset around ownership of towers. The latest wave of spectrum investment and the technology rollout that 5G requires among other factors are challenging traditional attitudes.

“Operators are looking at that quite differently. Interestingly, while in Europe, many operators sought to pull the network sharing lever as opposed to a tower divestment lever, the imperative of the opportunity of cash generation from tower sales has very much changed the mindset. So, operators are now very much looking for how they can best drive value from their towers whilst retaining a sufficient level of operational control that allows differentiation in network where required,” says Miles.

“The TowerCo model fits very nicely with this change of mindset,” adds Miles. “It´s a simple operational model that investors like. Some of the valuations seen recently are a tantamount to that. Investors understand the long-term value of the asset and the opportunity that gaining scale across multiple acquisitions can drive. There've been some very successful examples of this, actually outside of Europe, obviously with the likes of American Tower and China Tower Corp, which are looking to be replicated now by the likes of, again, American Tower and Cellnex in these markets.”

Players in the ecosystem

Tower operators’ desire to gain footprint and scale in particularly larger markets in Europe, like the UK and Germany, is being challenged by infrastructure funds, which are looking to establish a strong presence as well.

“In competition with towercos, to some degree, and in combination with them in others, financial investors, both infrastructure funds and private equity firms are looking to get involved in the whole market and are interested in different levels of ownership and operational control. Key trends we'll see is actually infrastructure funds becoming more aggressive at looking to compete with the pure play towercos,” states Miles.

New network sharing deals

Some advanced joint ventures had already been developed notably in Scandinavia, UK and into some of the Eastern European markets like Poland, or Southern European markets like Greece.

Networks sharing will remain high on the agenda as a result of mobile market´s revenue stagnation and ongoing cost proliferation. Especially as 5G comes in, any operators that still have not got deep arrangements will be looking at extending them, explains Miles.

“However, the models could be changing. Previously, the most advanced network sharing models have been these which are a 50/50 partnership nationwide, like the one of O2 and Vodafone in UK -CTIL or Cornerstone- all technologies and looking to drive as much operational and upfront cost synergy from that,” says Miles.

Currently, metropolitan areas like London and Manchester could be less appealing for operators. “When you look at and compare these joint ventures to other sharing agreements in other markets like the Czech Republic, where Prague was never part of the agreement, and in Greece, the Victus Networks sharing agreement, Athens was never part of it. I think it's a becoming received wisdom that sometimes the dense urban areas are a step too far,” says Miles.

“On the flip side, these joint venture agreements are not the most efficient for very rural locations. We´re seeing that they announced in the UK the operators coming together for 5G open network sharing in rural areas. But that could be a direction of travel that these joint ventures belong in the space that sits between very dense and very rural.”

Different models of fibre deployment

Infrastructure on the fixed side differs from the mobile side deployment, and diverse geographies hold their own strategies.

“There's some interesting contrast in different markets as to what we expect to happen. The starting point on this is really how aggressive the incumbent has been on building out fibre, and most notably in Europe. BT and Deutsche Telekom have traditionally taken an approach to maximise the speeds and value that they can get from a non-fibre network through technologies like vectoring,” Miles tells TMT Finance.

“This has led to fibre deployment being relatively low in these markets, whilst cable has taken a certain footprint, there's still remains a lot of the market that is not very high-speed broadband in comparison with markets like Spain and Portugal, where the penetration is much higher,” adds Miles.

“In the UK it is a bit of building frenzy at the moment. We´ve seen the likes of many different players looking to be first to market in different cities, outside of the cable footprint primarily, to be the first to have fibre deployed. That, like the case of towercos, is a model that investors understand and are interested in getting involved at. More and more infrastructure funds and private equity firms will be willing to invest in assets like that.”

Looking ahead

Currently, it is a prime time in the telecom towers market for divestors and investors. AlixPartners works with MNOs, towercos and financial investors throughout the lifecycle of divestment, from opportunity assessment through to real value creation.

Their analysis suggests that in the next 12 to 20 months the space could see deal activity involving assets worth more than US$10bn in Western Europe, including those of European powerhouses Vodafone, Deutsche Telekom, and Orange; and a further US$10bn in Eastern Europe, including Russia.

“Operators will be eager to consider different models, leading towards less direct ownership. We´ve seen the evolution from a set-up of a separate subsidiary like TIM’s INWIT or Telefonica’s Telxius to actual divestment or indeed co-ownership with a private equity or infrastructure fund, partly owning it,” says Miles.

“I think towercos will continue to be aggressive and, and certainly the traditional players or rather the more established players will be looking to increase their footprint in market. I expect the emergence of new players and I would also think that private equity will be keen to take an interest.”