American Tower today announced that it has agreed to a transaction to acquire Telxius Towers, from Telefónica, in a €7.7bn ($9.4bn USD) deal. Specifically, Telxius Towers comprises 30.7k tower sites, equating to an enterprise value per tower of $306k. Geographically, Telxius Towers has a presence in Germany, Spain, Brazil, Chile, Peru, and Argentina. In addition, American Tower will spend $500m to construct a build-to-suit (BTS) pipeline of 3.3k new tower sites in Germany and Brazil through 2025.

Currently, American Tower owns 183k tower sites, making it the largest tower company globally. Following the combination with Telxius Towers, American Tower will increase the size of its portfolio to 214k tower sites globally. Notably, Telxius Towers has an average tenancy of 1.3x, implying 39.9k tenants on the towers. In turn, the portfolio’s low tenancy ratio signifies that there is substantial existing capacity for incremental leasing of Telxius Towers by American Tower.

Overall, the Telxius Towers transaction broadens American Tower’s partnership with Telefónica. Specifically, Telefónica currently comprises 3.7% of American Tower’s total property revenue as of Q3 2020. Indeed, Telefónica is the anchor tenant for American Tower on the Telxius Towers portfolio, comprising 88% of its property revenue. Notably, Telefónica has committed to a long-term non-cancelable term of ~7 years, on average. The remaining 12% of property revenue is derived from wireless carriers Vodafone and Orange, amongst others.

Telxius Towers is majority owned by Telefónica, who has a 50.01% stake. Additionally, the remaining 49.99% ownership stake in Telxius Towers is held by KKR (40%) and Pontegadea (9.99%).

Telxius Towers Deal – Investment Rationale for American Tower

Telxius Towers positions American Tower as a leader in Europe and also scales its Latin America business. Indeed, the investment rationale of Telxius Towers, from Telefónica, for American Tower has underpinning from four key concepts:

  1. Attractive Markets: Germany, Spain and Latin America markets have solid economic, regulatory, and financial fundamentals
  2. Meaningful Scale: Opportunity for American Tower to secure meaningful scale in Europe and enhance Latin America presence
  3. High Quality Assets: Ideally-located, well-constructed sites with a strong, committed, investment-grade anchor tenant in Telefónica
  4. Strong Growth: Attractive organic growth profile, with the majority of future leasing activity to be driven by tier-1 wireless carriers

Telxius Towers Deal – Financial Impact for American Tower

American Tower expects the Telxius Towers assets to generate $775m in property revenue, $410m in gross margin (53% margin), and $390m in Adjusted EBITDA (50% margin), in their first full year in its portfolio. Notably, these financial metrics are pro forma for contributions from the build-to-suit (BTS) pipeline of 3.3k new tower sites.

Including both the purchase price for Telxius Towers of $9.4bn and the $500m cost for the 3.3k build-to-suit (BTS) tower sites, the total transaction value rises to $9.9bn. Indeed, this transaction value implies an Enterprise Value / Adjusted EBITDA multiple of 25.4x. Additionally, valuing only the Telxius Towers business, the implied multiple of OBIDAaL (operating income before depreciation and amortization after leases) is 30.5x.

Overall, American Tower expects the Telxius Towers transaction to be immediately accretive to its Consolidated Adjusted Funds From Operations (AFFO) per Share.

Telxius Towers Deal – Financing and Closing

American Tower intends to finance the transaction with a combination of debt and equity capital, in a manner that maintains its investment grade credit rating. Indeed, American Tower has already obtained bridge loan financing commitments from Bank of America of €7.5bn ($9.1bn USD).

Post-closing, American Tower anticipates temporarily increasing its net leverage above 5x EBITDA. However, the company intends to de-lever the business, over time, back to its 3x to 5x EBITDA target.

In terms of timing, the American Tower’s deal with Telefónica is expected to close in multiple tranches, beginning in Q2 2021.

American Tower – Europe Segment Transformed by Telxius

The Telxius Towers transaction with Telefónica is transformational for American Tower’s European business. Specifically, the company becomes the second-largest independent European tower company, behind Cellnex Telecom. Indeed, the deal gives American Tower a leading, scaled presence in Germany (14.9k tower sites) and Spain (11.3k tower sites), two of the largest European tower markets. Furthermore, American Tower will increase its portfolio in Germany to 17.2k tower sites, once its committed build-to-suit (BTS) pipeline is complete.

American Tower Telxius Telefónica

Overall, American Tower will increase its tower site count in Europe by 26k towers. Specifically, from 5k towers in Europe to 31k towers in Europe. To-date, American Tower has only maintained a small presence in Europe. As of Q3 2020, the company had 2.8k towers in France, 2.2k towers in Germany and 26 towers in Poland.

American Tower’s meaningful increase in towers from its combination with Telxius Towers positions the company to drive significant future lease-up. Specifically, American Tower will benefit from lease-up demand from tier-1 wireless carriers throughout Europe, as their 5G deployments accelerate.

American Tower – Europe Segment Financials

Financially, American Tower’s Europe property revenue will increase over 5x from $155m to $800m, once the Telxius Towers deal closes. In turn, Europe will comprise 20% of American Tower’s international property revenue. Furthermore, the company’s Europe gross margin will grow almost 4x from $124m to $460m, with the inclusion of Telxius Towers.

In aggregate, the European assets are expected to generate organic tenant billings growth of 9% over the next 5 years. Indeed, this growth rate is above levels American Tower currently generates in the United States of 6.2%, for Q3 2020.

American Tower – Latin America Segment Enhanced by Telxius

The Telxius Towers transaction is complementary to American Tower’s existing Latin America portfolio. Indeed, the deal gives American Tower an additional 5k tower sites in Brazil and 3k tower sites in other countries throughout Latin America, including Chile, Peru, and Argentina. Furthermore, the deal positions the company to drive strong long-term organic growth of 6% over the next 5 years.

Prior to the Telxius deal, American Tower was already the largest independent owner of towers in Brazil, with 19.1k towers. Therefore, this deal with Telefónica further strengthens American Tower’s position as the top tower owner in Brazil, with over 24k tower sites. Furthermore, American Tower is bulking up the remainder of its Latin America markets. Indeed, the company already owns 2.9k towers in Chile, 2.3k towers in Peru, and 120 towers in Argentina, as of Q3 2020.

Adam Simmons is the Founder & CEO of Dgtl Infra. He started his career with an S&P 500-listed big box retailer, in an operations management role. Adam's entrepreneurial "itch" led him to start a 5G-driven company, focused on innovative retail solutions using augmented reality and shoppable videos, which was eventually sold to an advertising and consulting group. After, realizing the potential of 5G, Adam shifted his efforts towards investing in the "building blocks" of 5G - known as digital infrastructure, completing a number of strategic investments, buying cellular towers, data centers and fiber networks.

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