By James Muse, Omar Santos and Sean Salamante (Columbia University), Alexander Bergmüller, Haozhe Huang and Friedrich von Storch (IE Business School)
Overview of the deal
Acquirer: American Tower (NYSE: AMT)
Target: Telefonica (NYSE: TEF)
Total Transaction Size: $9.4 billion
Announce Date: Jan 13th, 2021
Expected Close date: April 30th, 2021
Acquirer Advisor: Bank of America, EA Markets, CDX Advisors
Telefonica subsidiary Telxius Telecom has reached an agreement to sell 30,722 telecommunication towers based primarily in Germany, Spain, Brazil, Chile, Argentina, and Peru to American Towers for 7.7 billion euros ($9.41 billion) in cash. Telxius Telecom is partly owned by Zara fashion brand owner Amancio Ortego and private equity firm KKR. American Tower plans on leasing the existing phone towers back to Telefonica, allowing current operators to continue providing their services. Financed by Bank of America, American Tower representatives said they intend to purchase the towers in a manner that preserves the current investment-grade credit rating. The telecommunication towers are in-line with American Tower’s strategy to expand into the 5G internet space and secure long-term revenue streams tied to increasing inflation expectations. American Tower CEO Tom Bartlett says the assets in Germany and Spain mix well with existing assets the company has in France. Telefonica reports capital gains of about 3.5 billion euros from American Tower. The transaction marks a key threat to competing telecommunications infrastructure company Cellnex Telecom SA and poises American Tower to continue increasing international market share.
"This is a deal that makes strategic sense within our roadmap. American Towers was our second supplier after Telxius...after this great operation we will continue to focus on our most ambitious objectives: the integration of O2 with Virgin in the United Kingdom, the purchase of Oi mobile in Brazil and the reduction of debt" -- Telefonica Chief Executive Officer Jose Maria Alvarez-Pallete
Company Details: (Acquirer - American Tower)
American Tower is a global real estate investment trust that was founded by Steven Dodge in 1995 and began as a subsidiary to American Radio before growing through acquisitions. The company owns, operates, and develops wireless and broadcast communications real estate and provides solutions through different systems and services that assist in speeding network deployment. (Source: American Tower Website)
Founded in 1995, headquartered in Boston, MA, USA
CEO: Tom Bartlett
Number of employees: 5,454
Market Cap: $98.7B (as of 21/01/2021)
LTM Revenue: $7.8B
LTM EBITDA: $4.9B
LTM EV/Revenue: 17.6x
LTM EV/EBITDA: 28.2x
Company Details: (Target - Telefónica)
Telefónica S.A. is a Spanish multinational telecommunications company headquartered in Madrid, Spain. It is one of the largest telephone operators and mobile network providers in the world. It engages in the provision of communication, information and entertainment solutions and it operates through the following brands: Telefónica, Movistar, O2, and Vivo. The company is also a component of the Euro Stoxx 50 stock market index.
Founded in 1924, headquartered in Madrid, Spain
CEO: José María Álvarez-Pallete López
Number of employees: 113.800
Market Cap: $24.11B (as of 22/01/2021)
LTM Revenue: $44.57B
LTM EBITDA: $15.27B
LTM EV/Revenue: 1.68x
LTM EV/EBITDA: 4.91x
Projections and Assumptions
Telefonica shares jumped almost 9% on Wednesday, Jan 13th 2021, after Telefonica announced that it entered an agreement with American Tower to sell its mobile phone masts in Europe and Latin America for $9.41 billion in cash (7.7 billion euros). Shares have since stabilized back to around the similar prices before the deal announcement (as of 1/22/2021).
American Tower is planning on leasing these phone masts back to Telefonica. This means that after the transaction, the only tower assets that Telefonica owns will be in Britain. Strategically, many of these towers currently have as few as one tenant which American Tower can take advantage of by adding other carriers.
Within the highly competitive European Telecom space, Telefonica has struggled to bolster its share price, and the completion of the American Tower deal will allow Telefonica to use the proceeds to cut its net debt by 4.6 billion euros that was accumulated through heavy investment in networks. According to a Bloomberg Telecom Analyst, “The deleveraging need justifies the sale, and the deal should reduce net leverage on an after-lease basis by 0.3x to 2.74x.”
Additionally, the deal immediately poses a threat to Europe's largest independent tower operator, Cellnex Telecom.
Sources: Reuters and Bloomberg
The wave of consolidation continues in the European tower sector. Towers were once considered vital to telecoms’ competitive standing but with more networks starting to share infrastructure to reduce costs and improve coverage, those masts became valuable assets to be monetized. Vantage Towers, spun off by Vodafone (approx. 6x EV/EBITDA), is eying an IPO. Other cash-strapped MONs (Mobile Network Operators) including UK’s Arqiva and Switzerland’s Sunrise have sold its tower sites to Cellnex (approx. 25x EV/EBITDA), the largest specialist tower company in Europe. But the market remains highly fragmented, telecom towers owned by specialist companies capture 60 per cent of the market in Europe compared to 90 per cent in the US. With an increasing demand for infrastructure investments, MONs will continue to utilize the cost-saving benefits of towers.
For Telefónica, American Tower was already its second-largest supplier of towers after Telxius. The transaction will help Telefonica’s to reduce its leverage ratio (Net Debt/OIBDAaL) by approximately 0.3 x. It will allow Telefónica to focus on its strategic restructuring, including the merger between O2 with Virgin in the UK, the purchase of Oi mobile in Brazil, and further reduction of debt. Following this operation, American Tower becomes Telefónica's leading supplier in both Europe and Latin America. On the negative side, Telefónica is exiting a business that is boosted by growing wireless penetration and the buildout of 5G.
For American Tower, the deal will make it the second-largest independent European Towerco, significantly growing its size in Germany, Spain, Brazil, Argentina and Chile. It has also committed $500 million to building 3,300 new sites in Germany and Brazil by 2025. The company will substantially increase organic tenant billings (AT has 1.9 tenants per tower site vs. 1.3 for Telxius) with an anticipated growth of ~6% through 2025. Adding tenants, equipment and upgrades will result in significantly higher returns, as revenue is added with minimal incremental costs.
Risks and Uncertainties
With this acquisition, American Tower is aiming to scale its presence in Europe’s fast-growing telecommunications tower industry and complementing its Latin American business. Although the deal enables AMT to capitalise on high-quality assets in strategically important locations, it does so at a cost. The $9.4bn paid by American Tower is very expensive relative to recent deals in the industry, most notably that of European industry leader Cellnex. In fact, the 30.5x sales multiple paid by AMT is considerably higher than the 12x - 15x multiple Cellnex paid in its recent transactions. To fund the acquisition, the company is expected to temporarily increase leverage above its stated Net Debt/EBITDA target range of 3x - 5x. Although American Tower has implied that it will raise an undisclosed amount of common equity to support the financing of the deal, Net Debt/EBITDA will still climb above 5x. Nevertheless, the rating agencies Moody’s, Standard & Poor’s and Fitch have affirmed that AMT will maintain its investment-grade credit ratings of Baa3, BBB- and BBB+, respectively, acknowledging the company’s stable growth prospects.
A further risk American Tower faces is the accelerating consolidation of telecoms globally. For instance, the merger between T-Mobile and Sprint in the US caused significant tower site overlaps for AMT. The tower operator now expects about 4% less total property revenues from 2021 - 2024 and a larger number of lost tenant billings. Also in Europe, a dealmaking boom among telecoms is expected as restrictions on telecoms mergers are predicted to be loosened following a recent ruling by the Luxembourg-based EU General Court, which annulled a decision taken in 2016 by EU competition chief Margrethe Vestager to block the £10.25bn takeover of the O2 network by Hong Kong’s CK Hutchison, opening the door for further consolidation.