Deutsche Telekom in no rush to join towers frenzy

Telefónica has sold them, Orange is spinning them off, Vodafone is preparing an initial public offering (IPO). And Deutsche Telekom? The largest of Europe's telecom superpowers seems in no hurry to do anything in particular with its towers, the masts that support mobile network equipment. "The fact we haven't made any decision doesn't mean the value has been lost," said Christian Illek, Deutsche Telekom's chief financial officer, on a call with reporters last week.

Possibly not. But Deutsche Telekom's options could be limited if it dallies much longer. Cellnex, a towers specialist, is building a European empire through takeover activity, energized by investor enthusiasm for infrastructure assets. Its latest deal in Poland, announced with Polkomtel Infrastruktura last week, would give it about 128,000 sites in a region that was home to fewer than half a million as recently as 2019. With 82,000, Vodafone's Vantage Towers is emerging as another powerbroker. The rise of these titans already limits the opportunity for everyone else.

If they were serious about towers, Deutsche Telekom, Orange or Telefónica would have snapped up much of the infrastructure that Cellnex has bought in the last couple of years. The Catalan firm's heft in some markets now makes it a formidable rival to anyone else courting telco tenants. After buying 7,000 towers from Polkomtel, it will control more than 20,000 in Poland. Data suggests it owns about half the towers in France and Italy.

That said, Deutsche Telekom is not active in most of Cellnex's Western European markets. In the Netherlands, the exception, it has recently caved, bundling its towers into a joint venture with Cellnex in which it will be the minority partner. The yawning gap in the Cellnex empire is Germany, where it lays claim to just 4,314 sites in its latest update. Deutsche Telekom currently owns 32,500.

"It is a growth sector in Germany, and we are open to increasing this value and leveraging it and there are different options – the IPO we are expecting in the first quarter at Vodafone, for example – but also you can work strategically with partners," Illek told reporters.

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Another option for Deutsche Telekom could be a tie-up with Orange. Stephane Richard, the French operator's CEO, sounds keener on alliances with his telco brethren than on selling assets to Cellnex. Totem, as Orange's new towers subsidiary is called, owns around 17,000 sites in France and another 8,000 in Spain. A merger with Deutsche Telekom's German business would own 57,500, boosting its appeal to Cellnex-like investors. Both operators also run networks in eastern Europe. Any tower assets they can include from there would push up the total number.

The downside is that Deutsche Telekom and Orange might have to settle for a large minority stake in the business, ceding control of important infrastructure. Unlike Telefónica, which recently sold 30,722 towers in Europe and Latin America to American Tower Corporation (ATC), neither has seemed willing to go that far. Vodafone looks equally determined to retain a majority stake in Vantage Towers.

Towermania sweeps Europe

How long can towermania go on? Telefónica's €7.7 billion ($9.3 billion) sale to ATC valued its towers at about 30.5 times their annual operating income, a multiple that has obviously caught Illek's attention. Cellnex is now worth more than Telefónica, even though it generates a small fraction of the Spanish incumbent's revenues. The soaring valuations explain the frenzy of activity. But frenzies do not last.

A worrying signal is the downward trajectory in the share prices of ATC, Cellnex and Crown Castle, another US towerco, since late 2020. Debts have rocketed at Cellnex and not everyone thinks the multiples it has paid can be justified. Deal-making will eventually run its course.

"Multiples have increased over the years and we're not facing a situation where we have to sell towers," said Illek. "We can take our time and do it as it suits us." Thanks to the performance of its high-flying US business, Deutsche Telekom does look in better earnings shape than its rivals. But its €120 billion ($144.5 billion) in net debt is an eyesore, and about €49 billion ($59 billion) more than Deutsche Telekom is worth. Whether time is on its side is open for debate.

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— Iain Morris, International Editor, Light Reading

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