5G and Beyond

Three eyes €10B towers sale to Cellnex in risky move

Europe's great towers sell-off shows no sign of ending soon. The region's operators are hanging for-sale notices over their masts like destitute landlords. It's a buyer's market.

The latest service provider that might abandon property ownership is Three. Its parent company, Hong Kong's CK Hutchison, is now in talks about a sale of European assets that would raise approximately €10 billion ($11.8 billion). And the prospective buyer is none other than Spain's Cellnex, a rising force and the region's most acquisitive towers company.

If it happens, Three's various European subsidiaries will become tenants of Cellnex, renting space on the towers they once owned. The terms were being hammered out this week, according to CK Hutchison's statement. Three wants Cellnex to commit to a "built-to-suit expansion program." Its hope is that a sale and subsequent tenancy agreement will speed up its 5G rollout.

The €10 billion would be welcome. CK Hutchison had a net debt of more than HK$206 billion ($26.6 billion) at the end of June, about 1.8 times its 2019 earnings. Like other companies with telecom exposure, its share price has fallen sharply in recent years. At HK$52.80, it closed up 8.9% in Hong Kong today on the latest news but has fallen from HK$106.70 at the start of 2018.

So far this year, its telecom performance has not been encouraging, either. Three Group Europe reported a 7% year-on-year drop in sales for the first six months, to HK$40.5 billion ($5.2 billion). Operating profit tumbled 23%, to around HK$7.7 billion ($990 million).

It had already hived off its towers, setting up a company called CK Hutchison Networks with about 28,500 of them in various European markets. The move, it said in its last annual report, would provide "optionality for CKH Group Telecom to rationalize and optimize capital efficiency going forward."

Losing control

But a sale is risky. It would remove Three entirely from the infrastructure market and leave it without control of assets that other service providers deem critical. While Vodafone has also spun off its towers, CEO Nick Read is currently determined to retain a majority stake in that business. No wonder the terms of the tenancy agreement with Cellnex are so important to CK Hutchison.

It is not the only operator that would be living dangerously on rented towers. France's Iliad has already sold thousands of towers to Cellnex in its domestic market as well as Italy and Switzerland. "Built to suit" was cited in those deals, as well. Last month, Cellnex agreed to buy a controlling stake in infrastructure that Iliad would acquire with its planned takeover of Play, a Polish operator.

Deals with Iliad and various other operators would give Cellnex an overall footprint of around 73,000 European sites, it claims. Add 28,500 sites previously owned by CK Hutchison and the number rises to more than 100,000.

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Size could matter in attracting tenants. And that makes Cellnex's seemingly unstoppable growth a worry for the region's other towercos. In its last update about Vantage Towers, as the infrastructure subsidiary is branded, Vodafone proclaimed it was Europe's "leading tower infrastructure platform," owning more than 68,000 towers in nine countries. If Cellnex seals a contract with CK Hutchison, it will be way out in front.

Cellnex's revenues have soared as it has bulked up, but its net loss for the first nine months increased sevenfold, to €84 million ($99 million). That does not worry the firm's deep-pocketed shareholders, which include an array of infrastructure investors, and shares have been on a trajectory that service provider CEOs must envy.

Trading at more than €57 this afternoon, its share price has trebled in value since late 2018. With a market capitalization of about €27.8 billion ($32.9 billion), Cellnex is currently worth about €2.3 billion ($2.7 billion) more than Orange, France's telecom incumbent. That should give CK Hutchison pause for thought.

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— Iain Morris, International Editor, Light Reading

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