Cellnex Telecom SA [CLNX: BME] – Mkt cap as of 19/10/19: €12.24bn
Arqiva – not listed
Introduction
On the 8th of October 2019, Arqiva announced the sale of its Telecoms business (TowerCo) to Cellnex for £2bn, which Arqiva will use to reduce its leverage, currently standing at a debt-to-equity ratio of 1.9. The operation will be financed through a £2bn syndicated loan facility and available cash reserves.
Acquiring 7,400 sites and the rights to roughly 900 more, the Spanish company will expand its tower network to more than 50,000 sites across Europe. This will make Cellnex Britain’s biggest independent wireless tower operator and a central player in the country’s rollout of faster 5G mobile technology.
About Arqiva
With a long history in the field of United Kingdom digital infrastructure, Arqiva is one of the most important players. Serving different clients ranging from mobile network operators to independent radio groups and major broadcasters, the firm is an independent provider of telecom towers, with around 8,000 active licensed sites, as well as traditional broadcasting masts.
The company is split into two subsidiaries: TowerCo, the telecom business which will soon be acquired by Cellnex, and NetworkCo, the media network businesses. The terrestrial broadcast, satellite and media services, remaining in Arqiva, accounted for around 61% of total revenue in FY 2019.
In the same financial year, revenue was up 2.7% from £964.2m in FY 2018 to £990.4m mainly due to growth in core telecoms tower business, as the number of sites increased, and larger revenue from the M2M business. Furthermore, EBITDA made a 1.5% jump from £519m in 2018 to £527m in 2019 primarily because of higher revenue, generated by stronger program delivery and greater efficiency in cost savings. However, significant depreciation and amortization expenses together with exceptional charges caused a 1.5% drop in operating profits from FY 2018 to FY 2019.
About Cellnex Telecom SA
Headquartered in Barcelona, Cellnex Telecom (BME: CLNX) is a Spanish company providing mainly telecoms infrastructure and broadcasting services to mobile network operators, broadcasters and other public and private companies. With sites in the UK, Ireland, Spain, Netherlands, France, Switzerland and Italy, the company is Europe’s leading independent infrastructure operator for wireless telecommunication.
Cellnex’s two main markets are Spain and Italy, where it generated respectively 44% and 32% of its total revenue in 2018. Expanding its presence across the continent, the company acquired around 10,000 sites across Europe in the last three years reaching a total of 53,000 sites owned. It became an important player in the consolidation of the telecom infrastructure sector, with €393m invested in M&A operations in 2018.
In the same year, the company revenue reached €898m growing 14% with respect to 2017, mainly due to the expansion of income originated from services for mobile network operators. Adjusted EBITDA jumped by 18% up to €591m from €500m in 2017, while net profit dropped down to negative €26m from €19m last year primarily because of increases in amortization and amortization (+14%) and financial costs (+40%).
Industry Overview
The telecom tower industry is gearing up for a frenetic deal-making season. This sale is the latest in a streak of telecom tower deals as telecom companies seek to sell their assets to infrastructure funds and specialist companies. These big buyers, interested in the stable returns and cash flows the towers offer, are pushing up the value of the assets further and tower consolidation in the UK is expected to dramatically increase during the next few years. Telecom towers have become an attractive asset over the past few years, achieving much higher valuations than the operating arms of telecommunications companies. That has led many, including industry giant Vodafone, to divest their telecom towers. Indeed, Vodafone is aiming to spin off as much as €20bn in the next 18 months to help reduce the company’s €31bn debt.
Facing little to no growth, mobile network operators are finding their cash flows under growing pressure. Additionally, telecom companies are being pressured to further invest in order to improve the speed and reach of fiber deployments. With the sources of revenues increasingly disassociating from the sources of costs, telecom companies need to make some readjustments. Until recently, many operators guarded their telecom tower assets to obtain better coverage and speed differentiation. However, 5G deployment is set to be rather different from previous iterations of mobile technology, as operators seek to differentiate and monetise through focused B2B use cases, rather than mass consumer deployment. Indeed, as technological innovation continues to thrive, all businesses need to strengthen their technological and digital solutions to stay competitive and relevant. Bain & Company predicted that the market for B2B in the Internet of Things services could reach $300bn by 2020, which is twice as much as the projected $150bn consumer market. This shift challenges Telecoms to rethink the economics of owning a tower.
Several reasons are explaining the decision to sell off the telecom towers. First and foremost, companies need that precious cash to support additional investments that are decoupled from growth curves, resolve debt issues on the balance sheet and shoulder the cost of 5G deployment. Moreover, many analysts feel like markets are undervaluing telecom companies’ assets and by spinning off the towers, there is the chance to realise up to three times the valuations they have under mobile network operators’ ownership. This difference in valuation could be explained by a series of motives that drive the valuation of these assets higher when they are managed under telecom tower operators. First, the management focus would be improved leading to greater efficiency. Secondly, by controlling solely the towers, a firm’s business model would be much simpler and would generate more stable revenue flows than those of an operator. Thirdly, the ability to monetise the asset would be better by charging subsequent site tenants the same price as the first, something which operators cannot do.
The UK telecom tower industry is dominated by two big players: Cornerstone, a joint venture between Vodafone and O2, which operates more than 20,000 tower sites, and MBNL, a joint venture between BT and EE, which operates around 14,500 tower sites. By acquiring 7,400 of Arqiva’s sites, Cellnex will position itself as the third-largest player in the UK market, having around 8,000 sites in the UK and 53,000 sites in the seven European market it participates. Cellnex is the largest independent tower company by sites in the UK and Europe. The few thousands of telecom tower sites remaining in the UK are managed by a handful of sub-thousand tower competitors.
Deal Structure
Cellnex is set to acquire 100% of the Telecom division resulting from an Arqiva’s assets-sale process for £2.0bn or €2.3bn. The deal involves the acquisition of Arqiva’s telecom business which includes 7,400 sites and the rights to market 900 sites across the UK. The acquisition is expected to be financed through a combination of a £2bn syndicated loan facility and available cash reserves. In addition, the Company has approved the launch of a fully-underwritten €2.5bn rights issue, to support this acquisition and Cellnex’s busy pipeline of future M&A activity. The consideration of the £2bn payable will be fully paid upon completion, subject to certain price adjustments relating to contract renewal of Arqiva’s clients.
According to Citi’s bankers, the Arqiva telecom towers were acquired at a lower price than their market value. Indeed, Citi calculated that Cellnex paid €240,000 per site compared with €316,000 when it acquired Iliad’s telecom towers. Megabuyte, the research company, said it was “perplexing” that the deal was struck at such low prices. Cellnex stated in a press release that by acquiring Arqiva, it “gains attractive conditions to invest in the UK and gain exposure to one of Europe’s largest economies” and that adjusted earnings before interest, tax, depreciation and amortisation are expected to be about £170m next year.
Antitrust authorities are examining the deal which is expected to close in the second half of 2020.
Rationale
Cellnex’s acquisition of Arqiva’s Telecoms division will strengthen Cellnex’s positioning in the UK. The UK market has always been at the core of Cellnex’s inorganic expansion plans, mainly due to its size and to the favourable regulatory environment, in which authorities are encouraging enhanced connectivity for both businesses and citizens. Following the transaction, with a total portfolio of around 8,000 sites, Cellnex will become the largest independent operator of wireless infrastructure in the UK. Moreover, the deal includes concessions to place telecom sites in existing street infrastructure in 14 London boroughs, an extremely relevant aspect considering the imminent 5G rollout.
Furthermore, this acquisition closely follows the recent agreement established in June 2019 between Cellnex and BT, in which the former received the rights to operate 220 high street towers located in the UK, another strategic move that clearly highlights Cellnex expansion plans in the country.
With a total portfolio of over 53,000 sites in 7 European markets, and with 82% of its revenues being generated outside Spain, Cellnex has confirmed the European scope of its project and its operations. This has significantly increased its earnings prospects and has been a core driver of the 90% increase in its share price from the beginning of the year. To give some perspective, during only 2019 the various M&A agreements Cellnex has entered, including this one, will add about 24,000 sites to its European portfolio, while the company recently stated that it is still evaluating €7bn worth of additional opportunities. More specifically, the company is looking to consolidate in the 7 markets in which it is already present while also turning to other European markets, in a period in which growth opportunities are expected to be brought about by the 5G infrastructure, fiber optic cables and small cell technology.
On the other hand, the deal will benefit Arqiva as well, which will retain its massive broadcast towers business. According to Arqiva’s CEO, this deal will provide great stability to the company, securing the sustainability and financial security of its operations. The company has declared that it will utilize a majority of the proceeds from the sale to reduce the debt amassed under previous private equity ownership.
Market Reaction
On October 8th, the day of the announcement of the transaction, Cellnex Telecom (CLNX.MC) listed on the Madrid stock exchange was up 4.6% in morning trading, later closing at €36.42 per share, corresponding to a 3.3% increase on the day before. Over the subsequent few days, Cellnex Telecom share price kept on rising, reaching the historical maximum of €41.33 per share on October 16th.
On the other hand, no information is available on Arqiva, which is privately held. The TV, radio and mobile phone mast company had planned to list on the London Stock Exchange in 2017, with an enterprise value of around £6bn including debt, but ended up pulling its flotation in November of the same year. While the company attributed the move to market uncertainty, it was also due to the company’s high leverage, which cooled investors.
Financial Advisers
AZ Capital and HSBC served as financial advisers to the Cellnex Telecom board. Clifford Chance LLP served as Cellnex Telecom’s legal counsel.
Lazard served as the sole financial adviser to the Arqiva Limited board in connection with the transaction.
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