Should CSPs be selling towers?

Deutsche Telekom became the latest European communications service provider (CSP) to sell some of its tower infrastructure when it agreed to sell 51% of GD Towers to infrastructure investors DigitalBridge and Brookfield in July, in a deal valued at around 10.7 billion euros.

But although selling passive infrastructure is lucrative, it is not without longer-term risk.

For a start, there is the question of future company valuation. When CSPs sell towers, they move from capital expenditure (capex) on infrastructure and towards operational expenditure (open) on leasing sites from third parties.

“Shifting capex to opex is quite unattractive from a valuation perspective given the tendency of investors to focus on EBITDA growth (or lack thereof),” according to Justin Funnell, Investment Analyst, Nextgen Research. “Telcos have sold tower deals despite this issue, due to the attractive price paid for tower assets (20-25x EV/EBITDA) versus the telcos’ own valuation multiple (5-7x EV/EBITDA typically).”

And when it comes to financial returns, cell tower infrastructure companies have managed to deliver higher five-year average annual total shareholder return (TSR) than telecom, wireless, or cable operators, according to BCG’s 2022 Value Creators report. BCG cites the example of Cellnex Telecom, which it says had an average five-year annual TSR of 40% from 2016 to 2021, whereas “by contrast, traditional telecom operators struggled to create value.”

Losing a competitive edge?

Then there is a risk that leasing sites could impact CSPs’ maneuverability in burgeoning areas such as edge computing. “It may constrain the telcos’ ability to innovate. For example, locating edge routers at the tower site may be a lot more expensive than if the telco had retained ownership of the tower,” says Funnell.

There is also the possibility that relinquishing tower assets could open up new opportunities for would-be competitors.

“Most concerning [for CSPs in Europe] would be that it may facilitate more competition by reducing barrier to entry,” notes Funnell. He points out that DISH is able to build its US network for only $10bn because it is making extensive use of co-location, which is cheaper than building from scratch. “Extensive towerco assets in the US has made it easier for T-Mobile US to catch-up.”

However, Funnell also makes the point that although the “European [towers] market is likely to continue to consolidate with at least one major asset owned by one of the US tower majors, “it differs from the US market. In particular, “several European four-player MNO markets need to consolidate down to three,” making it more difficult for a Dish-like new entrant to gain a foothold.

Differing tower strategies

Today, European CSPs’ tower strategies vary greatly. Telefonica, for example, sold its tower division in 2021 to American Towers Corporation for 7.7 billion Euros. Telia Company, meanwhile, sold 49% of its tower business in Norway and Finland to Brookfield and Alecta. Yet Orange and Vodafone view their tower companies, Totem and Vantage respectively, as sources of future business growth.

Orange, for example, says it “sees its passive infrastructure as an essential asset, which it wishes to retain control over,” according to Totem, with Totem “strengthening its position in the long term as a manager and operator of passive mobile infrastructure in order to benefit from new growth drivers”.

It states that “unlike some competitors who have opted, in part to sell to third parties, in order to free up cash to de-leverage or finance investments, Orange is seeking to keep control of Totem, in order to play a new role in the network infrastructure market in Europe.” Totem recently signed a deal to deploy a mobile indoor distributed antenna system to enable end-to-end 5G connectivity along 33km of a Paris subway line. In addition to building the infrastructure, Totem will commercialize the network to other mobile telephone operators.

Stick or twist?

Nonetheless, many factors shape CSPs’ decisions on whether to sell or keep tower divisions. Running a passive infrastructure company isn’t all plain-sailing and requires constant investment. BCG, for example, points out that “capital pouring into infrastructure companies is buoying their valuations. But rising interest rates could cause investment firms, pension funds, and other current and potential backers to look elsewhere for better returns.”

And some CSPs may favor an asset-light business model.

“Selling passive network infrastructure is obviously very lucrative for MNOs in the short term, but I think that is a happy by-product of a much longer-term strategy to fundamentally alter the configuration of some CSPs,” says Dean Ramsay, principal analyst, TM Forum.

“If we look at high-growth technology-centric companies outside of the telecoms industry, they are very often asset light, so their capital intensity is low,” according to Ramsay. “If MNOs were to split their current functions into three or four separate entities, this could potentially leave the services business as an agile, asset light factory for innovation, free from the burden of network operations.”

In this case it makes sense “to divest physical assets like the towers and lease them back from their new owners, turning a bulky capital responsibility into an as-a-service cost that tracks up and down with the MNOs’ needs without the need for costly unused overhead,” explains Ramsay.