Telecoms tower. Picture: BLOOMBERG/SUSANA GONZALEZ
Telecoms tower. Picture: BLOOMBERG/SUSANA GONZALEZ

THE giant metal tripods that supply cellular services are an eyesore for some, but they are essential to everyday communication.

Cellular network towers are an increasingly important investment opportunity as a result, offering steady, fixed returns.

There has been a spate of deals in Europe in the past year as a growing number of tower portfolios were sold by operators trying to cut costs and raise cash.

Analysts at Macquarie say, "We are at a unique point in the European tower company business".

Mast-building is not the most glamorous part of the mobile industry, but it is essential. Cellular operators need to develop larger networks, better able to handle rising demand for mobile services.

More masts mean better mobile coverage, but the industry bemoans restrictive planning policies that mean there are too few towers, many are too short, and some are in the wrong place.

The need for better, shared networks that can help cut costs for the large cellular operators has led to a growing number of independent companies owning mast infrastructure. The tower owners are paid rent by operators using the masts, which generates returns akin to property for investors given the long-term contracts with anchor tenants.

Owning masts has become an attractive investment for private and public investors keen to move money into infrastructure-based assets with fixed long-term returns.

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THE model is well established in the US by companies such as America Tower, and is becoming popular in Africa where difficulties in building vast arrays of towers has led to the emergence of specialist companies such as Helios Towers. Telecom Italia launched an initial public offering of its Inwit towers business last year — following the 2014 flotation of Spain’s Cellnex — while VimpelCom sold more than 7,000 of its towers in Italy.

Telefónica of Spain is separating its mobile towers into an infrastructure business, which could one day be sold or floated. The group says that the new division, called Telxius, will be created to hold infrastructure assets such as telecommunication towers and its deep-sea fibre-optic cable network.

The Spanish group says it would aim to increase services provided to other operators to generate additional income, and possibly "incorporate third-party assets".

Similar deals are being mooted in the UK, where some investors hope that the proposed merger of cellular network operators Three and O2 could lead to the break-up and sale of the country’s two towers joint ventures.

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WIRELESS Infrastructure Group, a UK-based telecoms towers company, has become the latest to raise funds to exploit this opportunity. It aims to invest as much as £1bn building and acquiring infrastructure over three years in the rapidly consolidating European mobile market.

The company, which is backed by North American pension fund investor Babson Capital, has made unsolicited bids to British cellular groups to acquire masts ahead of a series of mergers and acquisitions.

The company already owns more than 2,000 shared communication towers in the UK, Ireland and the Netherlands, and helps to operate a further 1,000 for other mobile groups.

Scott Coates, the CEO of Wireless Infrastructure Group, wants to increase the size of the group significantly, having built an investment war chest of up to £1bn in cash and debt for either building new infrastructure or acquiring and upgrading masts from the network operators.

"We’ve made serious approaches to operators to … acquire their portfolios, invest in them and open them up for sharing," he says.

"We could also create joint ventures with mobile operators that could then be floated in a few years. There is a real economic advantage of sharing infrastructure."

Rival British private mast owner Arqiva is carrying out a strategic review that could lead to a sale or flotation of some assets, which again has attracted the interest of international tower companies such as America Tower.

The UK is behind many parts of the world in the move to independent infrastructure — more than two-thirds of global communication towers are independently owned and operated.

Coates hopes the mergers and acquisitions being worked on in the UK and elsewhere will lead to further tower sales, given the chance for regulators to encourage competition through shared infrastructure.

"Independent infrastructure unlocks huge investment and enables much better coverage, but the UK is lagging behind the rest of the world in adopting the business model," he says.

Macquarie sees this trend continuing as "more financially challenged mobile network operators will continue to divest tower assets in the near term". However, it noted that the more secure operators would be reluctant to part with infrastructure that supplied their services.

On a rainy January day, outside London’s Heathrow airport, the stark aesthetic of the modern mobile tower is all too clear. The 30m-high tripod structure, which is owned by Wireless Infrastructure Group and has a series of aerials nearer the top — the higher the better — is typical.

The economics behind towers is simple: the sites can cost from £200,000 to £400,000 to build, with annual running costs of about £10,000. Each mobile group that uses the towers pays a fee for the capacity that it uses.

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TOWERS generally launch with one user and low returns, but quickly become more profitable as other mobile groups are added. On this tower, all four major network owners in the UK — Vodafone, O2, Three and EE — are represented, as well as some smaller groups. This generates a 9%-10% return on capital for the tower owner.

A few miles away, in a more remote community, is an example of a rural mast — this time 42m-high and four-legged to carry the extra weight caused by its height.

At the bottom of the tower are two small buildings. One holds base stations and racks of telecoms equipment that push the mobile signals into the fixed-line network. The other houses a large diesel generator for emergency power.

This mast also provides back-up internet connectivity for a financial services company — a bank that can use the tower to access the internet if the fixed-line network fails, so that its traders can continue to work.

The newer aerials on both towers can be controlled remotely to angle them to where there are gaps in coverage. 3The calls come in through the aerials, down wires on the tower and into boxes that carry the signals through to the fixed-line network run by a broadband group.

© Financial Times 2016

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