Interest in European telecommunications infrastructure assets is expected to prop up the sector's M&A activity this year despite macroeconomic headwinds including rising inflation, higher interest rates and the war in Ukraine.
Some of the largest European telecom companies are actively seeking strategic alternatives for their non-core infrastructure assets as they look to reduce high debt loads and free up cash to fund ongoing 5G network developments. The promise of stable returns from telecom infrastructure is luring interest from private equity funds like Brookfield Infrastructure Partners LP and KKR & Co. Inc., as well as specialized companies like Spain-based Cellnex Telecom SA.
After a strong 2021, overall European telecom deals are trending lower in 2022. Excluding small deals under $50 million, the European telecom sector reported 11 transactions so far this year, down from 18 in the same period of 2021. The sector reported 36 such transactions for the full year 2021, the most in over a decade, according to data compiled by S&P Global Market Intelligence.
Of the large deals announced this year, more than half involved infrastructure assets like network towers, fiber and fixed-line networks. Recent comments from telecom executives indicate this part of the sector will continue to see M&A, partially offsetting falling deal-making activity elsewhere.
Vodafone Group PLC CEO Nick Read said on a May 17 earnings call that the company is seeking a "co-control situation" for its Vantage Towers AG unit. The U.K.-based telecommunications giant owns 82% of Vantage. While the company does not plan to sell its full stake, its goal is to take Vantage Tower off Vodafone's balance sheet and allow the tower company more flexibility going forward.
Deutsche Telekom AG is shopping its German towers, and CFO Christian Illek said on the company's May 13 earnings call that there is strong interest in a transaction. While Illek declined to offer an update on the status of deal talks, the executive noted that Deutsche Telekom had earlier targeted getting a deal signed this year.
Meanwhile, Telecom Italia SpA is making progress in combining its network with Open Fiber Spa, a fiber-based access network owned by the Italian state and private equity firms Macquarie Asset Management Inc. and KKR, to create a single broadband network in the country.
French company Orange has taken a different approach, spinning out in 2021 its towers into a wholly owned subsidiary named Totem, which will try to act as a consolidator and be a competitor for tower assets. Orange has not yet indicated whether it wants to bring in co-investors in the towers unit like Vodafone but said Totem will be independent of the parent.
"If you look at telcos, owning physical infrastructure is not necessarily their key focus. You can leverage it more [by separating it], as more people will use it," said EY Global Telecommunications Leader Tom Loozen, whose team provides strategic advice to telecom companies.
Public markets value infrastructure assets at a much higher multiple than traditional telecom companies. Pure-play European tower companies like Vantage and Cellnex trade at a total enterprise value of more than 25x EBITDA, versus the S&P Europe BMI Telecommunication Services Index average of 16.4x. Large telecom players like Deutsche Telekom and Vodafone trade at much lower multiples.
Spain's Telefónica SA sold its tower unit Telxius Telecom SA to American Tower Corp. in 2021 for a record multiple of 30.5x EBITDA, S&P Global Ratings analysts noted in a January report. High valuations and the desire for greater financial flexibility are likely to continue to drive such deals this year, the report said.
Still, such deals are not without risks for the sellers.
"The sale of fixed network assets could weaken our view of a company's business profile, depending on their scale and level of development, and the competitive differentiation they provided," said Mark Habib, an S&P Global Ratings credit analyst who specializes in telecom and tech, in response to an emailed question about the telecom sector's M&A outlook.
Towers have also outperformed the stock market. Cellnex has seen its shares surge more than 40% in the past three years. The Spanish infrastructure company has been on a buying spree since its 2015 initial public offering and now owns some 137,000 tower sites throughout Europe. Vodafone-controlled Vantage Towers, which began trading in 2021, saw its shares rise about 6% since its IPO. The S&P Europe BMI Telecommunications Sector Index, meanwhile, gained 3% over the same three-year period.
