Deutsche Funkturm (DFMG), Germany’s largest tower company and a wholly-owned subsidiary of Deutsche Telekom, has a portfolio of 32.8k total sites, making it the crown jewel within Deutsche Telekom’s GD Towers segment and its other consolidated sites. Specifically, Deutsche Funkturm’s portfolio includes towers, masts, rooftop sites, distributed antenna systems (DAS), and small cells.

Overall, Deutsche Funkturm’s sites have a ~1.4x tenancy ratio, implying 46k tenants with equipment on the company’s passive tower infrastructure. Additionally, Deutsche Funkturm’s sites are ~30% ground-based towers and ~70% rooftop sites.

Deutsche Funkturm – GD Towers – Deutsche Telekom

Deutsche Funkturm’s 32.8k sites in Germany form part of Deutsche Telekom’s 39.8k sites through its GD Towers segment. The remainder of the GD Towers segment represents Magenta Telekom Infra, which comprises the group’s 7.0k towers in Austria.

Notably, in January 2021, Deutsche Telekom sold a 62% interest in its towers in the Netherlands to Cellnex. As part of this transaction, Deutsche Telekom’s towers in the Netherlands were moved from GD Towers to a new joint venture company.

Financial Performance in Q2 2021

In Q2 2021, GD Towers reported revenue of €283m and EBITDA after Leases (EBITDAaL) of €170m (60% margin). Recurring rental revenues grew 3.3% organically year-over-year, while EBITDAaL grew 9.0% organically year-over-year.

Build-to-Suit (BTS) Programs

From 2017 to 2020, GD Towers built-out ~5.0k sites for Deutsche Telekom, implying a build pacing of 1.7k sites per year. Presently, GD Towers is building ~1.5k sites for Deutsche Telekom per year. Moreover, GD Towers has a commitment in-place to build a further ~4.0k new sites for Deutsche Telekom through 2024.

Incrementally, from 2022, Deutsche Funkturm will build additional sites in Germany for the purposes of white spot sharing. Specifically, Deutsche Telekom, Telefónica Deutschland, and Vodafone have agreed to roll-out, via tower companies, ~2.0k sites each.

Deutsche Telekom’s Strategic Review

At its Capital Markets Day in May 2021, Deutsche Telekom announced a strategic review of its 58k fully consolidated sites, which includes GD Towers, as well as sites in the Czech Republic and Slovakia.

European Tower Sites by Tower Company

European Tower Sites by Tower Company

Deutsche Telekom notes that GD Towers has been fully independent since 2017, providing it with transaction readiness.

Criteria

Deutsche Telekom notes four “major criteria” as it reviews its monetization options through its strategic review:

  1. Premium valuation – particularly given Deutsche Funkturm’s scale in Germany
  2. Balance sheet headroom
  3. Favorable master lease agreement (MLA)
  4. Retain exposure to the tower asset class (ideally)

Valuation

In aggregate, GD Towers’ sites generated €610m of EBITDAaL in 2020. In terms of valuation, Deutsche Telekom ascribes a multiple of 20x Enterprise Value / EBITDAaL for these sites, which implies a portfolio valuation of €12.8bn. Furthermore, deriving a weighted average trading multiple of ~24x Enterprise Value / EBITDA for Vantage Towers, INWIT, and Cellnex, implies a valuation for Deutsche Telekom’s sites of €15.5bn.

Timing

Deutsche Telekom views the timing of its strategic review as appropriate because the European towers market is “moving into the final phase” of consolidation. Indeed, Cellnex, Vantage Towers, American Tower (ATC Europe), and TOTEM (Orange) have all now established a scaled presence in Europe.

Partners for GD Towers and its ‘Crown Jewel’ Deutsche Funkturm

Deutsche Telekom has reviewed both an initial public offering (IPO) and partial monetization of its GD Towers portfolio. However, in order to secure a “premium valuation for a premium portfolio” the company will need to pursue more transformative partnerships. Specifically, the most likely route for Deutsche Telekom to extract a premium valuation for its ‘crown jewel’ Deutsche Funkturm, will be through M&A with tower companies such as Cellnex, Vantage Towers, TOTEM, or American Tower.

Cellnex – Independent TowerCo

Presently, Cellnex does not have operations in Germany, making an acquisition of Deutsche Funkturm strategically significant. To this end, the company stated on its Q2 2021 earnings call that it was “ready to assess seriously if there is an opportunity in Germany” to acquire tower sites.

A monetization of GD Towers to Cellnex would allow Deutsche Telekom to secure a premium valuation, while retaining a minority stake in the business. At the same time, Deutsche Telekom’s status as a “Tier #1” anchor tenant would allow Cellnex to raise debt on attractive terms to partially finance the acquisition.

To-date Cellnex has already partnered twice with Deutsche Telekom and its investment manager, Deutsche Telekom Capital Partners (DTCP). Firstly, Cellnex acquired towers in Switzerland from Sunrise Communications alongside Deutsche Telekom Capital Partners (DTCP). Secondly, Cellnex formed a joint venture with Deutsche Telekom called Digital Infrastructure Vehicle (DIV), as part of acquiring the majority of its towers in the Netherlands.

Vantage Towers – Captive TowerCo

As of June 30, 2021 (Q1 FY22) Vantage Towers had 19.4k macro sites, with a 1.21x tenancy ratio, in Germany. A transaction between Vantage Towers and GD Towers would most likely take the form of a merger whereby Deutsche Telekom would retain a significant stake in the combined business. However, a premium valuation would be more difficult to extract via a merger with Vantage Towers.

Importantly, since Vantage Towers is the second largest operator in Germany, market concentration issues may prohibit a combination with the Deutsche Funkturm business.

TOTEM – Captive TowerCo

Presently, TOTEM does not have operations in Germany. This makes a merger with GD Towers / Deutsche Funkturm more palatable from a regulatory perspective. Similarly, with a TOTEM deal, Deutsche Telekom would retain a meaningful stake but likely forgo a premium valuation.

American Tower – Independent TowerCo

Incorporating the recent closing of Telxius, American Tower has 14.7k sites, with a ~1.1x tenancy ratio, in Germany. Given American Tower’s recent entry into Germany, the company likely has other markets where it could scale its portfolio first. Check-out the article Who Will American Tower Acquire Next? for more.

Additionally, American Tower is the third largest operator in Germany, making market concentration issues an important consideration once again.

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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