Spanish masts company Cellnex said that the European towers market is now “pretty much closed”, as soaring inflation makes it increasingly difficult to finance new deals and the availability of assets dwindles.
“M&A activity is over,” said Tobías Martínez Gimeno, who has been chief executive of Cellnex since 2014, and has led the company through an acquisition spree that has built it into the biggest tower group in Europe. “Material, inorganic growth, for the next 24 months, is over.”
Cellnex said last week that it was seeking to improve its credit rating to investment grade from agency S&P, which will mean reducing its leverage from eight times earnings before interest, tax, depreciation and amortisation to below 7 times.
When interest rates were low and debt was cheap, mobile towers — the metal structures on which radio antennas sit — were some of the most attractive and valuable assets in telecoms, offering lucrative returns in an increasingly connected world.
But since June, the share price of most towers groups has tumbled as rapidly rising interest rates drove up the cost of capital for these heavily indebted businesses.
Negative interest rates over the past few years meant that “money was almost free”, Gimeno said, allowing Cellnex to snatch up 130,000 towers across 12 European countries.
But now “we have to face and beat inflation”, he said. “Inflation is the worst thing for everyone — individuals, societies, companies. It’s damaging the whole economy, and no one is escaping.”
In spite of being one of the most acquisitive groups in European telecoms, Cellnex was not involved in major recent deals involving towers assets, when two of the biggest European operators sold stakes in their masts to private equity groups that were able to offer attractive valuations.
In July, Deutsche Telekom agreed to sell a majority stake in its towers business to Brookfield Asset Management and private equity group DigitalBridge Group, valuing the business at €17.5bn, or 27 times ebitda.
And earlier this month, Vodafone agreed to sell up to 50 per cent of its masts business to KKR and Global Infrastructure Partners, bankrolled by Saudi Arabia’s Public Investment Fund, which valued the company at €16.2bn, or 26 times ebitda.
Gimeno said he was sceptical about the business model being adopted by private equity groups that have begun acquiring towers in search for steady, reliable returns.
“It doesn’t work, the business plan,” he said, adding that when they are buying at around 26 or 27 times ebitda now, they will struggle to sell the assets at a premium in five to seven years time.
“PowerPoint, Excel — they can be very creative,” he said, but “you have to deliver in the end, and the exam will come”.
“This industry is about capex, it’s about investing, it’s not about running the company and doing nothing,” he added.
Over the next two-year period, Cellnex will focus its attention on reducing debt and limiting capital expenditure, among other things.
Though the group has no debt due to mature until 2024, it said obtaining an investment grade rating would ensure that its bonds trade at a lower yield.
Two weeks ago, Cellnex’s bonds were trading at 6 per cent, while bonds of investment grade companies were trading at 4 per cent, Gimeno said, which means the company could be paying around €80mn to €90mn more per year.
Cellnex’s net debt rose to €17.1bn from €14.3bn in June due in large part to the acquisition of CK Hutchison’s European towers, which closed in the UK this month.