Nothing can stop Cellnex, the M&A machine

Since 2015 Cellnex has been buying every standing telecom tower until it owned a fifth of the entire telecom real estate. What is the reason for such a fast success and what does the future look like?

The humble beginnings of Cellnex

Just a small-town girl, living in a lonely world... And yet, it was right not to stop believing. A little over 5 years ago, a telecom infrastructure was thrown out of the Abertis group and valued at a very modest $3 billion valuation. After this very Oliver-Twisty start, the company was renamed Cellnex.

Fueled by cheap debt, the Barcelona firm was able to start an unbelievable ascension since 2015. Their strategy was buying telecom towers – tens of thousands of them – bought at a discount from cash-strapped mobile operators. Among them, we have Arqiva in the UK, NOS in Portugal, Sunrise in Switzerland, and Iliad in France. Their biggest deal to this date was the acquisition of almost 25'000 towers from CK Hutchison, which they bought for EUR 10 billion.

The bought towers are rented by telecom groups to carry out their phone operations.

 

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Cellnex's share price and major acquisition events

 

The art of the deal for Cellnex

Today, Cellnex made it to the club of Europe's top hottest telecom companies, quadrupling its share price to a valuation of EUR 24 billion. Only in 2020, the company carried out no less than 7 major acquisitions, bringing its total number of towers to around 100'000. In terms of market share, this means that the Catalan company controls about a fifth of the entire continent's wireless real estate. Its revenues and earnings went up 50%. Not bad Oliver Twist.

To be very honest, even Cellnex was surprised of its success, as  its CEO Tobias Martinez states: “We were able, if you want, to anticipate the opportunity and capture the momentum in Europe. I cannot say that we did anticipate the size of the scale of this momentum, but we were there and ready to act.” The Domino effect worked wonders, strategically placing winning bids on key infrastructure before buying out multiple adjacent players.

The secret to this success, according to Cellnex, is an agile management team – largely composed of former Abertis executives – that can move swiftly and make fast decisions regarding buying targets and deals. This fast-decision-making process is combined by a smart use of the equity market to fund its deals in addition to the debt market, whereas many major European telecoms were taken public before starting to drown in debt they could not manage. Indeed, Cellnex raised EUR 4 billion in equity in July, which made for the largest transaction in Europe last year.

The M&A strategy is also quite evident in its financial statements: in 2014, the company had a revenue of EUR 436 million and an adjusted EBITDA of EUR 178 million; in contrast, for the 9 first months of 2020, the company had a revenue of EUR 1.1 billion with an EBITDA of EUR 838. What a growth.

 

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Cellnex's stock (Source: Trading View)

 

Cellnex uses a scary leverage

Despite a high leverage, the investment grading rating delivered by Fitch allowed Cellnex to get access to relatively cheap debt. Their leveraged threshold was even relaxed in 2020, allowing more debt compared to their earnings with their investment grade status remaining unchanged. However, they managed to cross that line too when they acquired Hutchison.

Analysts at CreditSights estimate the company's net leverage at around 6.6 times - meaning that it has 6.6 times their earnings in debts. However, their debt went up from EUR 3.8 billion to over EUR 13 billion after the Hutchison acquisition. Things are fine if the company can keep up growth and earnings but missing a turn could result in a lot of unpaid credit.

 

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Cellnex's leverage is expected to lower but remains high for the industry (Source: FT)

 

The answer of the competition

Companies like Orange, Deutsche Telekom and Vodafone had to come up with plans to counter this monster swallowing up all the telecom towers. The issue is that these towers grow in value, a growth often hidden in Cellnex's balance sheets, using separate entities under their control.

Additionally, many are doubting that the prices paid for the masts are really justified. According to one, having many infrastructures is one thing, but one also needs to ensure that it is a good one.

The competition remains fierce for the left-over towers. Vantage towers, Vodafone's tower company, has EUR 1 billion of cash available for acquisitions and Blackstone, the US private equity firm, is backing up Phoenix Tower International which bought towers assets in Ireland. Stephane Richard, CEO of Orange, even suggested the idea of building an alliance of European tower owners, instead of selling everything to Cellnex.

 

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The investment case for Cellnex

According the Magellan group, Cellnex could make an interesting investment because it presents three attractive attributes:

  • Highly predictable and reliable cashflows: Mobile operators have typically long-term contracts (10-20 years) and often come with all or nothing renewable causes. These clauses impose very expensive switching costs, so companies would generally prefer to renew rather that change providers.

  • A rising demand for wireless services: A high wireless demand directly translates to a high demand for the towers providing it. We can thus expect network providers to invest in more capacity. For Cellnex, this demand can easily be satisfied by adding more active equipment on its existing sites, or by acquiring more – and acquire they shall. Increasing the number of tenants is also part of Cellnex's strategy, which can therefore easily improve its returns on investments.

  • Mobile carriers outsourcing more infrastructure in Europe: Contrary to the US, the "mobile tower owner" model renting their infrastructure is not so popular yet. This made it very easy for Cellnex to grow their asset base without much competition, and to continue to do so.

 

To conclude, we can say that towers are becoming a scarce resource. Analysts expect Cellnex to turn towards fiber deals and data centers, but one banker suggested that Cellnex could also make a great buying target for an American corporation such as American Tower, which is much bigger at a $100 billion market cap. American Tower is unendingly growing, in Africa for example, and claims to be bigger than the European market.

 

Sources:

Stock story: Cellnex Telecom, in the Magellan Group Core Series

‘M&A machine’ Cellnex reviews next move after tower dealmaking bonanza, in the Financial Times

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