Infrastructure Deals Boost European Telecom Mergers & Acquisitions

CIO Review Europe | Saturday, June 25, 2022

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.

FREMONT, CA: As companies look to decrease heavy debt loads and release cash to support continuing 5G network upgrades, some of Europe's top telecom operators are actively pursuing strategic alternatives for their non-core infrastructure assets. Private equity firms are attracted to telecom infrastructure because of the prospect of consistent returns. Following a successful year in 2021, overall European telecom deals are expected to decline in 2022. So far this year, the European telecom sector has recorded 11 transactions, down from 18 in the same period of 2021. According to statistics published by S&P Global Market Intelligence, the sector reported 36 such deals for the whole year 2021, the highest in almost a decade.

More than half of the big transactions reported this year featured infrastructure assets such as network towers, fibre, and fixed-line networks. According to recent statements from telecom executives, M&A will continue in this industry, partially offsetting a drop in deal-making activity elsewhere. Vodafone Group PLC CEO Nick Read stated that the business is looking for a co-control situation for its Vantage Towers AG unit. The telecommunications behemoth from the United Kingdom owns 82 per cent of Vantage. While it does not want to sell its entire investment, the business's goal is to remove Vantage Tower off Vodafone's financial sheet and give the tower company more freedom in the future.  Deutsche Telekom AG is hoping to offload its German towers, and CFO Christian Illek noted during the company's earnings call on May 13 that there is a lot of interest. While Illek declined to provide an update on the status of the negotiations, he did say that Deutsche Telekom had hoped to clinch an agreement this year. Meanwhile, Telecom Italia SpA is working to merge its network with Open Fiber Spa, a fibre-based access network owned by the Italian government as well as private equity companies Macquarie Asset Management Inc. and KKR, to form a single broadband network in the country. Orange, a French corporation, has adopted a different route, spinning off its towers in 2021 into a wholly-owned subsidiary called Totem, which will attempt to operate as a consolidator and competitor for tower assets. Orange has not specified whether it plans to bring in co-investors in the towers company, such as Vodafone, although it has stated that Totem will be self-contained.

Infrastructure assets are valued in the public markets at a considerably greater multiple than ordinary telecom corporations. Pure-play European tower businesses like Vantage and Cellnex trade at more than 25 times EBITDA, compared to 16.4 times for the S&P Europe BMI Telecommunication Services Index. Large telecom companies, such as Deutsche Telekom and Vodafone, trade at far lower multiples. In a study conducted in January, S&P Global Rating analysts observed that Telefónica SA sold its tower unit Telxius Telecom SA to American Tower Corp. in 2021 for a record multiple of 30.5x EBITDA. According to the report, high valuations and a desire for more financial flexibility would likely continue to fuel such transactions this year.

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