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Vodafone's cell towers spinoff plans welcomed by analysts

Despite several recent failed telecom tower IPOs, Vodafone Group PLC's decision to spin off its European mobile masts with plans for a stock market flotation is being met with optimism by analysts and industry experts.

The advent of 5G is among factors that could see Vodafone succeed where U.K. towers company Arqiva Group Ltd. and Africa's Helios Towers Africa Ltd. failed, analysts said. The two pulled London IPO plans in 2017 and 2018, respectively.

The towers sector is "hot property" right now due to 5G, according to Juri Zanieri, infrastructure research analyst at Kempen & Co. The next-generation network technology is expected to see tower owners raise rents for telcos leasing the infrastructure to provide phone signals and data to customers.

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Compared to 4G, 5G is powered by larger gear including massive multiple-input and multiple-output antennas, which increase the capacity of radio links. This allows tower cos to charge a premium for space, according to analysis firm Analysys Mason. European regulators have also projected a spike in rent prices due to the space 5G equipment requires.

Vodafone said its TowerCo — to be created by May 2020 — would generate proportionate annual revenue of about €1.7 billion, and €900 million EBITDA. The company will either float the firm or dispose of "minority or majority stakes at an individual country level" within 18 months from now.

Analysts expect the company to be valued at between €15 billion and €21 billion. They consider rival telco Telefónica SA's infrastructure arm Telxius Telecom SA and Telecom Italia SpA's towers business Inwit as comparable in terms of valuation.

Telefónica sold a 40% stake in Telxius to KKR for €1.28 billion, or 11.4x EV/EBITDA, in 2017. After Inwit partnered with Vodafone Italy, broker Citi said the shared network could trade at 16.4x EV/EBITDA.

The telco has already received offers "north of 20 times EV to EBITDA," CEO Nick Read said on a July 26 earnings call.

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Having bought 5G spectrum in Italy and Germany, Vodafone will use the IPO proceeds to reduce its debt, which amounted to €27 billion in its first quarter and is slated to grow now that it has completed its €18.4 billion purchase of Liberty Global PLC's German and Eastern European assets.

The acquisition saw S&P Global Ratings on Aug. 1 downgrade Vodafone's rating to BBB from BBB+. S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc. Vodafone's debt cutting measures have already seen it slash its dividend, sell off its New Zealand unit and strike up network sharing partnerships in Italy and Spain.

Vodafone's shares saw their biggest single-day gain in over a decade following its TowerCo announcement, which could inspire other telcos to sell their tower assets, analysts said.

"Some operators have sold or are already selling their towers," Robert Grindle, head of European TMT research at Deutsche Bank said. "So you have to look at the ones who still have towers left."

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As for potential buyers, if Vodafone chooses to sell a majority stake it is likely to attract strategic investors like tower co Cellnex Telecom SA, which has made €2.7 billion worth of tower purchases in Europe since 2016, or American Tower Corp., according to Kieron Osmotherly, CEO of TowerXchange.

Global players that lack a U.K. footprint may also seize the opportunity that TowerCo offers to enter the region, Osmotherly said. They include U.S.-based SBA Communications Corp. and Nigeria's IHS Towers NG Ltd.

A minority stake, meanwhile, could attract infrastructure funds such as Brookfield Asset Management Inc., KKR & Co. and Macquarie Group Ltd., who "all have experience in towers and an appetite for more."