Selling infrastructure is a growing trend in the telecom industry, and more specifically, the passive infrastructure. This is a way to create value, as the infrastructure company can attract new customers and new entrants on the market. While the retail operator may face new competition, it can build on its brand and services and pursue geographical expansion. We look here at a few examples from Spain, Italy, the Netherlands and the US.
Vertical integration has its supporters and its opponents. Supporters are often traditional players with a background of vertical integration. They often don't believe in open networks (see VodafoneZiggo) or only somewhat (KPN). The former wants to keep competition to a minimum, while the latter uses wholesale to sell excess capacity and boost its position versus the former.
Opponents of vertical integration are more often the 'cowboys' of telecom (Xavier Niel, Petr Kellner) and financial players (Primevest, wholesale-only operators in Switzerland and Italy).
Separation of active and passive
In recent years a middle ground has emerged: the sale of passive infrastructure (fibre networks, mobile towers, data centres) to 'safe hands', such as financial investors or dedicated infrastructure companies. The operator holds on to the active layer and its role as service provider. This scenario opens the door to newcomers on the market; a few examples below.
- Macquarie bought FTTH lines from MasMovil, but not in a simple sale and lease-back construction. Macquarie bundled the assets in a new company called Onivia. The wholesale-only operator has MasMovil as anchor tenant and will work to attract other customers leading the infrastructure.
- T-Mobile Netherlands is another anchor tenant, on the FTTP network being deployed by Primevest and the masts owned by T Infra (Deutsche Telekom).
- Google Fiber is looking to expand again, after a pause of over four years. In West Des Moines, it's using the existing passive infrastructure developed by the city power company.
Retail company faces new competition, but can expand
Why do companies do this? What are the pros and cons? What are the long-term consequences?
First, the why. There are various reasons. They may not see any benefits from vertical integration and think value can be created by selling passive elements. Managing passive infrastructure does not have much to do with telecom and could better be handled by a real estate company. Operators can also cash in on the growing valuations for infrastructure assets - see the share prices of Cellnex, Inwit, Intred, Retelit, Equinix and Digital Realty. Crisis or not, the Cellnex share price is up almost 50 percent since the end of 2019.
As for the pros and cons, increased focus is one of the benefits. Each player focuses on what it's good at. In addition, the operator (e.g. Telefonica, Altice) can use the proceeds from asset sales to reduce debt. By holding on to the active layer, the operator keeps full control of services provision. The downside is an uncertain future. The operator (now retail provider) may face new competition on the infrastructure (see Macquarie above) and at some point the lease contract will need to be renewed (often after 15-20 years).
As for the implications, the 'asset-light' model (see Google Fiber, T-Mobile NL) is interesting, especially for brands looking to expand. Take for example the wholesale fibre operator Open Fiber in Italy. It's already attracted a very respectable list of ISPs: Tiscali, Go Internet, Vodafone Italia, Wind Tre, Sky Italia, Noitel, Melita, Fastweb, Irideos, Optima Italia and Iliad Italia. Companies such as Google or Deutsche Telekom (Telekom, Magenta) could bring their brands to the table, especially when they offer differentiated services (TV platform, content, smart home services, self-developed hardware, cloud storage).
Our conclusion is that selling passive infrastructure most often creates value. In other words, a vertically integrated telco likely has a conglomerate discount on its share price. New infrastructure owners can develop new sources of revenues with additional customers (see Open Fiber). The retail company may face additional competition, but can take advantage of its asset-light position to expand to new areas, building on assets like its brand name and specialised services. An example is Melita: a cable company in Malta and now also active on the Open Fiber network in Italy.
