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Why Telecom Towers are key in the 5G era

Why Telecom Towers are key in the 5G era

Main reason telecom towers are key in the era of 5G is that telecommunication companies are realizing it is cheaper to share and/or lend infrastructure than to start from scratch, and tower companies may offer the best deals.

Towercos are becoming increasingly relevant again, as the benefits of 5G networks require a raft of new infrastructure to operate. Not only does this mean than mobile network operators need to upgrade, but it also means that investors are keen to spot new opportunities, that can deliver quick returns in the world of 5G stocks. 

Last year was supposed to be the year of massive 5G deployment. Instead, it became the year of the COVID-19 pandemic and deployment plans came to a halt as drastic as it was unexpected.

However, during the pandemic telecoms have become one of the most essential industries and will most likely remain so for the foreseeable future. It is a sector with a major impact on all other sectors thanks to its crucial role as an enabler.

In fact, despite the exceptional situation in 2020, many sectors have continued to grow. According to a study by IoT Analytics, for the first time there are more connections between IoT devices than between non-IoT devices. This growth would not have been possible without a robust infrastructure to ensure connectivity between so many devices.

telecom tower with background

Burdened by high levels of debt and the prospect of costly investments to roll out 5G networks, telecommunications companies are realising they have been sitting on assets for which investors are willing to pay dearly: their towers.

Following years of sluggish revenue growth, the industry has warmed up to the idea of sharing infrastructure to cut costs. Some of the largest operators in Europe, for instance, are now rethinking their approach to tower ownership, possibly paving the way for a wave of mergers and acquisitions in a market where dealmaking is already well under way.

Several small European operators have moved to unload their tower assets in recent years: Frances’s Iliad, Switzerland’s Sunrise Communications Group and Ireland’s Eircom Group have all sold tower assets to specialist companies such as Spain’s Cellnex Telecom or Blackstone Group-backed Phoenix Tower International. Others have sold their towers to infrastructure or private equity investors.

Telefónica, for that matter, has recently finalized the deal that sold its Telxius Telecom tower division, comprising about 31,000 tower sites in Europe and Latin America, to American Tower. The $9.4bn transaction will make American Tower the second-largest independent tower company in Europe and is the latest in a string of deals in the sector.

Why towers are key

Now, larger European operators are also starting to see the appeal of separating out their tower assets. Vodafone Group has already set up its tower assets as a separate company called Vantage Towers, and is targeting an initial public offering in Frankfurt in early 2021. France’s Orange is in the process of carving out its tower assets into a company that will house its masts in France and Spain, while Deutsche Telekom is also weighing its options regarding its tower portfolio.

The latest moves show that the mind-set has been evolving, . “Some operators have understood that the better value creation opportunity does not come from an outright sale, but from carving out and developing the towers business,” an HSBC Telecoms analyst said. 

Of course, the motivation behind such moves has been debt reduction and the potential to exploit tower assets’ higher valuations.

Tower companies lease out space in their sites to wireless operators, usually under long-term contracts, which generate predictable revenue streams favoured by investors. Independent tower companies can host several tenants, which multiplies their earning potential – another factor that helps them command higher valuations.

Tower specialists like Cellnex or Inwit of Italy have significantly higher valuations than telecom operators, as measured by their ratio of enterprise value to earnings before interest, taxes, depreciation and amortisation. While Cellnex’s enterprise value stands at nearly 34 times ebitda, Deutsche Telekom has a ratio of 6.77 and Vodafone’s is 5.02.

Tower companies lease out space in their sites to wireless operators, usually under long-term contracts, which generate predictable revenue streams favoured by investors.

That’s why telecoms also have an opportunity like never before to monetize their assets and infrastructure.

Full value comes with independence

telecom tower key to 5g

A ‘captive’ towerco – one controlled by a telecoms operator – will always have a weaker growth potential than an “independent” towerco. So, the full value-creation potential may only come once operators accept that they should no longer control the carved-out tower business.

Vantage Towers, whose portfolio of 68,000 towers spans across nine European countries, has been operationally separate from Vodafone since May, and recently nominated an independent supervisory board chairman. Orange has also said its tower company, TOTEM, will be run as an independent business.

The launch of 5G networks is set to further strengthen the case for tower outsourcing. With the arrival of 5G expected to trigger a surge in data usage, operators will need more infrastructure. Tower companies are seen by many as the best placed to deploy it in a cost-efficient manner, meaning there could be many more deals to come.

As the construction of 5G networks continues at a rapid pace, the importance of telecom towers is growing, a fact reflected by operator moves to monetize their assets and by rising investments from third parties.

The brave new world won’t be possible without tower companies.


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