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Cellnex's M&A spree boosts European cell tower portfolio

Cellnex Telecom SA's €2.7 billion tower-buying spree is set to boost the Madrid-based company's already dominant position in the European telecom infrastructure space.

In a series of agreements announced May 7, Madrid-based Cellnex will pay €1.4 billion for a 70% stake in French telco Iliad's 5,700-site TowerCo; €600 million for 2,200 sites in Italy; and €700 million for a 90% stake in Salt TowerCo., the management company of 2,800 sites in Switzerland used by Salt Mobile SA. All three transactions are expected to close in the second half of this year, subject to required regulatory approvals.

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Cellnex has made 12 tower acquisitions since 2016, including in the U.K. and the Netherlands, but the transactions announced May 7 would be its biggest in recent years. The tower market also is attracting interest from private equity firms, analysts note.

Cellnex's latest deals will broaden its tower portfolio in Italy, its largest base, to 12,009 sites, followed by France, with 8,918, according to data provided by Cellnex in a May 7 investor presentation. Spain would be Cellnex's third-largest market, with 8,817 sites. The company also noted that it may opt to build additional tower sites in Italy, France and Switzerland between 2020 and 2027.

Cellnex is aiming to drive efficiency through the sharing of passive infrastructure, making the towers it acquires accessible to all operators. Telecommunications experts said this should reduce market fragmentation and solidify Cellnex's dominant position. Historically, each telco built its own infrastructure, which resulted in "too many towers in the wrong places," said Giles Thorne, senior research analyst for European telecoms and satellites at Jefferies.

For Cellnex and other tower buyers, the assets bring long-term contracts with telecom operators that pay to rent the infrastructure, which means guaranteed income and a ready base of lenders.

"You need to be pan-European, ideally, because you need to persuade telcos [that you have comprehensive coverage]. So there is a portfolio synergy," said François Feuillat, a partner at Willkie Farr & Gallagher, who specializes in M&A. "Cellnex is really the only industrial play."

Private equity firms are also keen to invest in telco towers. Recent examples include Italy's F2i joining Mediaset SpA in the buyout of EI Towers SpA in 2018 and KKR & Co. acquiring a 40% stake in Telefónica SA's Telxius Telecom SA in 2017. Private equity will continue to eye towers assets, Feuillat said, as the combination of guaranteed rent and rising valuations makes them good investments. Return on capital tends to be in the high single digits, Thorne said.

On the seller side, telcos wanting to reduce debt see the disposal of noncore tower assets as a good option. Altice Europe NV executives, for instance, said the company's tower sales in France and Portugal underscored its "commitment to deleveraging and balance sheet management." Telefónica said its asset disposals complemented its goal of reducing debt.

Selling stakes in tower companies is often a dual-track process, in which a listing or sale is explored by advisers to secure the highest valuation, Feuillat said. Retaining a stake allows telcos to participate in the upside and keep some control over the maintenance of the infrastructure and its quality.

Sales and IPOs in this space are therefore set to continue, Thorne and Feuillat said. "There are obvious portfolios in every country," Thorne said. "Any one of them could come to market."

Deutsche Telekom AG CEO Tim Höttges said in February that the company could put its telecom towers business up for sale. In its full-year results announcement this week, Vodafone Group PLC said it would target debt leverage of between 2.5x-3.0x, partly through "non-core asset sales." CK Hutchison Holdings Ltd. is reportedly eyeing a sale of its Italian towers.