(Bloomberg Opinion) — Pop quiz: What are at least 50 feet tall, within 10 miles of where you are now and have generated almost 23 billion euros in market value over the past five years?
The answer: cell towers. Since 2015, towers owner Cellnex Telecom SA has seen its stock climb 298%. In that same period, the Stoxx Europe 600 Telecom Index has fallen 0.8%. The company’s performance has prompted envious glances from the region’s mobile carriers. Yet those eager to replicate its success face some obstacles.
Take Vodafone Group Plc. The British company is reportedly planning to list its own Vantage Towers unit in Frankfurt early next year. Bloomberg News reported it’s seeking to raise about 4 billion euros in a deal that could value the business at around 20 billion euros including debt.
The logic is straightforward if you consider the anticipated rise of 5G networks. Towers companies are essentially in the real estate business: They lease space to mobile carriers to install their antennae. As carriers provide greater 5G connectivity, they will require more antennae and therefore more tower space. Rather than splash out to build or buy more of their own towers, carriers will increasingly share them.
Vantage currently averages 1.37 antennae per tower and aims to boost that to more than 1.5 apiece in the “medium term.” Cellnex currently averages 1.58 customers. The occupancy rate is only likely to increase.
Even as denser networks bode well for the tower business, Vantage is likely to trade at a discount to Cellnex. The reason is Vodafone itself. While there are advantages to having a reliable anchor tenant for one’s property, Vodafone’s controlling stake (it is likely to retain some 75% of the stock) may also make it difficult to imitate Cellnex’s growth trajectory and valuation if it restricts opportunities.
Consider Inwit, the towers unit of Telecom Italia SpA, into which Vodafone folded its own Italian towers in March and now holds a 33% stake. Its enterprise value of 24 times trailing Ebitda, an earnings measure, is a discount to Cellnex’s multiple of 30 times Ebitda. That’s no doubt because the two telecoms shareholders retain influence over Inwit’s decision-making, potentially to the detriment of other tenants.
It seems more likely that Vantage will trade in line with Inwit than with Cellnex, especially if Vodafone’s presence makes it harder to attract customers. Depending on the final terms of their agreement, Vodafone could claim as many as 10% of Vantage’s towers as “strategic sites,” giving it the right to block other carriers.
Cellnex’s growth has meanwhile also been driven by a $20 billion acquisition spree, including the 10 billion-euro deal it announced earlier this month to buy CK Hutchison Holdings Ltd.’s European towers business. Sellers seemed keen on Cellnex as a buyer because of the Barcelona-based firm’s independence. (Carriers usually sell the towers then lease back the capacity, so they want to feel confident about a subsequent customer relationship.)
Vantage may have a harder time winning bids. At any rate, Vantage’s CEO has indicated that he has just 1 billion euros of capacity for extra debt. So any larger deal-making would likely need to be funded at least partly by stock.
All of this means that if Vodafone wants Vantage to realize its full valuation potential, the telecom giant will likely have to reduce its stake. To be clear, I am not advocating Vodafone relinquish control. There may be good strategic reasons to retain control of the towers unit, just as Spain’s Telefonica SA has done with its tower division Telxius. Telefonica sold minority stakes to KKR Inc. and Inditex SA billionaire Amancio Ortega but still has the majority. That gives it tighter control over its network rollout, though it is considering an IPO.
Listing Vantage will nonetheless help Vodafone CEO Nick Read, not least because the IPO proceeds will trim the company’s 54 billion euros of net debt. But the towers unit will remain disadvantaged as long as the carrier is peering over its shoulder.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe’s technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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