Reaching for the Sky: Cellnex acquires Arqiva’s Telecom Towers for

£2bn

Cellnex Telecom SA [CLNX: BME] – Mkt cap as of 19/10/19: €12.24bn

Arqiva – not listed

Introduction
On the 8th of October 2019, Arqiva announced the sale of its Telecoms business
(TowerCo) to Cellnex for £2bn, which Arqiva will use to reduce its leverage, currently
standing at a debt-to-equity ratio of 1.9. The operation will be financed through a £2bn
syndicated loan facility and available cash reserves.
Acquiring 7,400 sites and the rights to roughly 900 more, the Spanish company will
expand its tower network to more than 50,000 sites across Europe. This will make Cellnex
Britain’s biggest independent wireless tower operator and a central player in the country’s
rollout of faster 5G mobile technology.

About Arqiva
With a long history in the field of United Kingdom digital infrastructure, Arqiva is one of
the most important players. Serving different clients ranging from mobile network
operators to independent radio groups and major broadcasters, the firm is an independent
provider of telecom towers, with around 8,000 active licensed sites, as well as traditional
broadcasting masts.
The company is split into two subsidiaries: TowerCo, the telecom business which will
soon be acquired by Cellnex, and NetworkCo, the media network businesses. The
terrestrial broadcast, satellite and media services, remaining in Arqiva, accounted for
around 61% of total revenue in FY 2019.
In the same financial year, revenue was up 2.7% from £964.2m in FY 2018 to £990.4m
mainly due to growth in core telecoms tower business, as the number of sites increased,
and larger revenue from the M2M business. Furthermore, EBITDA made a 1.5% jump
from £519m in 2018 to £527m in 2019 primarily because of higher revenue, generated
by stronger program delivery and greater efficiency in cost savings. However, significant
depreciation and amortization expenses together with exceptional charges caused a
1.5% drop in operating profits from FY 2018 to FY 2019.

About Cellnex Telecom SA

Headquartered in Barcelona, Cellnex Telecom (BME: CLNX) is a Spanish company
providing mainly telecoms infrastructure and broadcasting services to mobile network
operators, broadcasters and other public and private companies. With sites in the UK,
Ireland, Spain, Netherlands, France, Switzerland and Italy, the company is Europe’s
leading independent infrastructure operator for wireless telecommunication.
Cellnex’s two main markets are Spain and Italy, where it generated respectively 44% and
32% of its total revenue in 2018. Expanding its presence across the continent, the
company acquired around 10,000 sites across Europe in the last three years reaching a
total of 53,000 sites owned. It became an important player in the consolidation of the
telecom infrastructure sector, with €393m invested in M&A operations in 2018.
In the same year, the company revenue reached €898m growing 14% with respect to
2017, mainly due to the expansion of income originated from services for mobile network
operators. Adjusted EBITDA jumped by 18% up to €591m from €500m in 2017, while net
profit dropped down to negative €26m from €19m last year primarily because of increases
in amortization and amortization (+14%) and financial costs (+40%).

Industry Overview
The telecom tower industry is gearing up for a frenetic deal-making season. This sale is
the latest in a streak of telecom tower deals as telecom companies seek to sell their
assets to infrastructure funds and specialist companies. These big buyers, interested in
the stable returns and cash flows the towers offer, are pushing up the value of the assets
further and tower consolidation in the UK is expected to dramatically increase during the
next few years. Telecom towers have become an attractive asset over the past few years,
achieving much higher valuations than the operating arms of telecommunications
companies. That has led many, including industry giant Vodafone, to divest their telecom
towers. Indeed, Vodafone is aiming to spin off as much as €20bn in the next 18 months
to help reduce the company’s €31bn debt.
Facing little to no growth, mobile network operators are finding their cash flows under
growing pressure. Additionally, telecom companies are being pressured to further invest
in order to improve the speed and reach of fiber deployments. With the sources of
revenues increasingly disassociating from the sources of costs, telecom companies need
to make some readjustments. Until recently, many operators guarded their telecom tower
assets to obtain better coverage and speed differentiation. However, 5G deployment is
set to be rather different from previous iterations of mobile technology, as operators seek
to differentiate and monetize through focused B2B use cases, rather than mass consumer
deployment. Indeed, as technological innovation continues to thrive, all businesses need
to strengthen their technological and digital solutions to stay competitive and relevant.
Bain & Company predicted that the market for B2B in the Internet of Things services could
reach $300bn by 2020, which is twice as much as the projected $150bn consumer market.
This shift challenges Telecoms to rethink the economics of owning a tower.
Several reasons are explaining the decision to sell off the telecom towers. First and
foremost, companies need that precious cash to support additional investments that are
decoupled from growth curves, resolve debt issues on the balance sheet and shoulder
the cost of 5G deployment. Moreover, many analysts feel like markets are undervaluing
telecom companies’ assets and by spinning off the towers, there is the chance to realize
up to three times the valuations they have under mobile network operators’ ownership.
This difference in valuation could be explained by a series of motives that drive the
valuation of these assets higher when they are managed under telecom tower operators.
First, the management focus would be improved leading to greater efficiency. Secondly,
by controlling solely the towers, a firm’s business model would be much simpler and would
generate more stable revenue flows than those of an operator. Thirdly, the ability to
monetize the asset would be better by charging subsequent site tenants the same price
as the first, something which operators cannot do.
The UK telecom tower industry is dominated by two big players: Cornerstone, a joint
venture between Vodafone and O2, which operates more than 20,000 tower sites, and
MBNL, a joint venture between BT and EE, which operates around 14,500 tower sites.
By acquiring 7,400 of Arqiva’s sites, Cellnex will position itself as the third-largest player
in the UK market, having around 8,000 sites in the UK and 53,000 sites in the seven
European market it participates. Cellnex is the largest independent tower company by
sites in the UK and Europe. The few thousands of telecom tower sites remaining in the
UK are managed by a handful of sub-thousand tower competitors.

Deal Structure
Cellnex is set to acquire 100% of the Telecom division resulting from an Arqiva’s assets-
sale process for £2.0bn or €2.3bn. The deal involves the acquisition of Arqiva’s telecom
business which includes 7,400 sites and the rights to market 900 sites across the UK.
The acquisition is expected to be financed through a combination of a £2bn syndicated
loan facility and available cash reserves. In addition, the Company has approved the
launch of a fully-underwritten €2.5bn rights issue, to support this acquisition and Cellnex’s
busy pipeline of future M&A activity. The consideration of the £2bn payable will be fully
paid upon completion, subject to certain price adjustments relating to contract renewal of
Arqiva’s clients.
According to Citi’s bankers, the Arqiva telecom towers were acquired at a lower price than
their market value. Indeed, Citi calculated that Cellnex paid €240,000 per site compared
with €316,000 when it acquired Iliad’s telecom towers. Megabuyte, the research
company, said it was “perplexing” that the deal was struck at such low prices. Cellnex
stated in a press release that by acquiring Arqiva, it “gains attractive conditions to invest
in the UK and gain exposure to one of Europe’s largest economies” and that adjusted
earnings before interest, tax, depreciation and amortization are expected to be about
£170m next year.
Antitrust authorities are examining the deal which is expected to close in the second half
of 2020.

Rationale
Cellnex’s acquisition of Arqiva’s Telecoms division will strengthen Cellnex’s positioning in
the UK. The UK market has always been at the core of Cellnex’s inorganic expansion
plans, mainly due to its size and to the favorable regulatory environment, in which
authorities are encouraging enhanced connectivity for both businesses and citizens.
Following the transaction, with a total portfolio of around 8,000 sites, Cellnex will become
the largest independent operator of wireless infrastructure in the UK. Moreover, the deal
includes concessions to place telecom sites in existing street infrastructure in 14 London
boroughs, an extremely relevant aspect considering the imminent 5G rollout.
Furthermore, this acquisition closely follows the recent agreement established in June
2019 between Cellnex and BT, in which the former received the rights to operate 220 high
street towers located in the UK, another strategic move that clearly highlights Cellnex
expansion plans in the country.
With a total portfolio of over 53,000 sites in 7 European markets, and with 82% of its
revenues being generated outside Spain, Cellnex has confirmed the European scope of
its project and its operations. This has significantly increased its earnings prospects and
has been a core driver of the 90% increase in its share price from the beginning of the
year. To give some perspective, during only 2019 the various M&A agreements Cellnex
has entered, including this one, will add about 24,000 sites to its European portfolio, while
the company recently stated that it is still evaluating €7bn worth of additional
opportunities. More specifically, the company is looking to consolidate in the 7 markets in
which it is already present while also turning to other European markets, in a period in
which growth opportunities are expected to be brought about by the 5G infrastructure,
fiber optic cables and small cell technology.
On the other hand, the deal will benefit Arqiva as well, which will retain its massive
broadcast towers business. According to Arqiva’s CEO, this deal will provide great
stability to the company, securing the sustainability and financial security of its operations.
The company has declared that it will utilize a majority of the proceeds from the sale to
reduce the debt amassed under previous private equity ownership.

Market Reaction
On October 8th, the day of the announcement of the transaction, Cellnex Telecom
(CLNX.MC) listed on the Madrid stock exchange was up 4.6% in morning trading, later
closing at €36.42 per share, corresponding to a 3.3% increase on the day before. Over
the subsequent few days, Cellnex Telecom share price kept on rising, reaching the
historical maximum of €41.33 per share on October 16th.
On the other hand, no information is available on Arqiva, which is privately held. The TV,
radio and mobile phone mast company had planned to list on the London Stock Exchange
in 2017, with an enterprise value of around £6bn including debt, but ended up pulling its
flotation in November of the same year. While the company attributed the move to market
uncertainty, it was also due to the company’s high leverage, which cooled investors.

Financial Advisers
AZ Capital and HSBC served as financial advisers to the Cellnex Telecom board. Clifford
Chance LLP served as Cellnex Telecom’s legal counsel.
Lazard served as the sole financial adviser to the Arqiva Limited board in connection with
the transaction.