More and more operators are looking at selling off passive networks. This underlines not only the value of such networks, but also the advantages of structural separation. However, these sale and lease-back constructions carry a risk: what happens at the end of the lease with the costs, given the new owner has a monopoly? Hindsight may show this can end up being a tragic mistake.
Each telecom operator is a combination of a network and a service layer. In fact, there are three layers: passive infrastructure elements, an active network (hardware) and service platforms (software) for various services (telephony, SMS, internet access,TV video, VPNs, etc.).
Investors buying passive networks
A recurring question in the sector is whether the operator needs to own the underlying network. The answer to this is gradually changing, as passive network elements are seen increasingly as real estate. There are multiple motives for vertically integrated operators to look at selling parts of the network: high debt, significant cash proceeds due to the high market values for infrastructure, extra cash for other network investments (5G, FTTP), services and software development, and paying dividends.
Investment funds are increasingly attracted to the telecom sector. They are starting new companies to take over assets from existing operators or take telecom companies private. Examples include the takeover and separation of TDC, EQT's expansion in multiple countries, and the many funds investing in fibre roll-outs and infrastructure, such as Antin, Arcus, Mirova, Primevest, KKR, Macquarie and the Highland Group.
Several operators are also in the process of separating and selling parts of their infrastructure:
- Vodafone plans to groups its European mobile towers in a new TowerCo and list a minority stake on the stock market. Telefonica is exploring similar plans to monetise its towers footprint.
- Iliad is selling 70 percent of its French towers and 100 percent of the Italian TowerCo. Swiss operator Salt (also controlled by Xavier Niel) sold 90 percent of its TowerCo to Cellnex. Iliad is also divesting 51 percent of French fibre company to investment fund InfraVia.
- Altice Europe has done a number of similar transactions with its towers and fibre assets in France and Portugal. It's also getting involved in consolidation of the fibre market.
- Orange Spain has sold part of its towers to Cellnex, the first step in a bigger plan at Orange group to separate towers infrastructure.
- T-Mobile Netherlands has separated its towers into the company T-Infra, part of Deutsche Funkturm, a unit Deutsche Telekom is considering selling.
Investors realise scale advantages
Investors are clearly ready to pay good money for passive infrastructure, a fact underlined by the performance this year of listed companies in the sector. This makes clear the value of structural separation: by separating passive networks, the infrastructure can be leased to multiple parties and the new owner can realise scale advantages. The passive network becomes an open network.
Negative consequences for telcos
Apart from the cash raised, the consequences of selling passive networks are not so positive for the telco. First, the remaining assets (active network, service platforms, subscribers, etc.) are valued less than the network assets. Second, the sale-leaseback constructions may reduce capex but this is replaced by higher opex. This may be value-neutral to start, due to the long-term nature of lease contracts. However, the contracts needs to be renegotiated at the end, and the new owner of the passive network is essentially a monopolist that can ask what it likes in terms of price. Hindsight may show that selling the network was a mistake - something the US operator Windstream can testify to.
Alternative methods
Notably some operators appear to stay away from selling passive networks, such as Liberty Global, Telenor or Tele2. Instead they exit countries entirely. Telecom Italia/TIM is taking a middle path, giving itself an option to reverse the sale if needed: its fibre company Intred and towers group Inwit are listed on the stock market, but TIM still has majority control. A listing gives the additional advantage of a new channel for raising capital, for example to support accelerated fibre roll-out.
Other operators favour network sharing, through a joint venture like Proximus and Orange Belgium plan. This allows the operators to benefit from the economies of scale without losing control of their assets.
