Morgan Stanley
  • Research
  • Nov 7, 2019

European Telcos Build for Speed

Although European Telcos have endured a challenging 2019 thus far, investor interest has surged in one key area: wireless infrastructure needed to deliver on the promises of 5G technology.

Despite the rough ride European Telecommunications industry has had this year, we see increased—but selective—interest in the sector, particularly in the wireless infrastructure and towers needed for 5G technology to come online. 

Wireless towers offer compelling top-line growth, low capital intensity and, most importantly, trade on premium valuation multiples.

Since 2015, there has been strong M&A activity in this area and all signs point to a continuation of that trend as wireless operators weigh the value of their infrastructure assets with the high costs ahead as they roll out 5G service.

As we look ahead to 2020, here are three areas to watch in the towers and infrastructure space:

The Need for Towers

First, we expect the number of European wireless towers to increase from 350K at the end of 2018 to 450K sites by 2025. New sites are needed to fill in white spots—essentially holes in the network—and to meet greater bandwidth needs in cities, both for 5G and existing technology.

The coming 5G rollout will also require additional towers for two reasons. One, telcos will need keep up with the immense surge of data for such applications as fixed wireless, manufacturing automation and autonomous vehicles. In addition, 5G deployments will be on higher-spectrum bands with shorter travel distances. That  means Mobile Network Operators (MNOs) will need to smaller but denser cell sites.

All told, the total addressable towers market is projected to grow by more than 4% per year across Europe until 2025. A number of large Build-to-Suit projects are already underway across Europe including a 20,000 point-of presence roll-out in France. A German Telco market leader also plans to add 8,000 sites by 2022.

An Opportunity for MNOs

A second area to watch is an unfolding valuation arbitrage opportunity between MNOs and Tower Companies (TowerCos). Essentially, MNOs are trading at 7x EBITDA—earnings before depreciation, amortization, interest, and taxes—while TowerCos are trading at 22x EBITDA—three times the MNO valuation level.

Since MNOs are the biggest tower owners in Europe—with 80% of sites—they are potentially sitting on a large opportunity. Indeed, we have started to see MNOs highlight their tower ownership and value by carving out separate tower vehicles, IPOs, mergers or even sales to independent TowerCos or private equity.

Rise of the Independents

Finally, as MNOs consider selling some of their tower assets in an effort to manage debt and highlight portfolio value, the independent European TowerCos industry could also benefit, kicking off a 10-year land-grab and free cash flow accretion story.  

Although the TowerCos would pay premium valuation multiples--since the towers offer reliable, steady income streams in a yield-hungry world--these deals are free cash flow accretive for them since they typically can finance the debt at less than 2%, have capex/sales at 3% and pay near-zero cash taxes.  This playbook is similar to what the U.S. TowerCos have done since 2005, driving very strong share price performance.

So, while Euro Telcos are reporting near-zero revenue growth, and continue to under-perform the broader stock market, we continue to see wireless infrastructure as an exciting sub-sector. Towers offer compelling top-line growth, low capital intensity and, most importantly, trade on premium valuation multiples. Both Telcos and independent TowerCos stand to benefit. 

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