DigitalBridge, through its investment management unit, and Brookfield Infrastructure, alongside its institutional partners, have agreed to acquire a 51% stake in GD Towers, which comprises Deutsche Telekom’s more than 40,000 tower sites in Germany and Austria, at a €17.5 billion ($17.5 billion USD) enterprise value, implying a valuation of 27.3x pro forma adjusted EBITDAaL (EBITDA after Leases) for 2021A.
Upon completion of the transaction, DigitalBridge and Brookfield will each own a 25.5% stake in GD Towers, while Deutsche Telekom will retain the remaining 49% ownership interest in its towers business. In terms of timing, the transaction is expected to close towards the end of 2022.
Ultimately, DigitalBridge and Brookfield fended off interest in Deutsche Telekom’s towers from i) another private equity consortium, consisting of KKR, Global Infrastructure Partners (GIP), and Stonepeak, ii) Cellnex, whom Brookfield previously was bidding alongside, and iii) Vantage Towers, which is majority-owned by Vodafone.
Transaction Overview – Deutsche Telekom Sells Stake in Towers
Deutsche Telekom is selling a 51% stake in GD Towers to DigitalBridge and Brookfield, financially deconsolidating GD Towers, but retaining exposure through a 49% ownership interest.
As of Q1 2022, Deutsche Telekom’s GD Towers unit held ~40,500 tower sites, including ~33,500 (83%) in Germany and ~7,000 (17%) in Austria. Together, this portfolio has a tenancy ratio of ~1.4x, implying ~56,700 tenants with equipment on the company’s towers. GD Towers’ two geographic units are known as:
- Deutsche Funkturm (DFMG): Deutsche Telekom’s towers business in Germany
- Magenta Telekom Infra (MTI): Deutsche Telekom’s towers business in Austria
The transaction represents a €6.5 billion deleveraging event (including leases) for Deutsche Telekom. At the same time, Deutsche Telekom preserves the ability to re-consolidate and regain control (i.e., >50.1% ownership) of GD Towers in the medium-term, providing the wireless carrier with strategic optionality.
In 2021, GD Towers generated €1.07 billion of pro forma revenue and €640 million of pro forma adjusted EBITDAaL (EBITDA after Leases). Therefore, GD Towers’ pro forma adjusted EBITDAaL margin was ~60% in 2021.
As shown below, GD Towers’ ~60% EBITDAaL margin compares favorably to its tower company peers in Europe: INWIT (~66%), Orange/TOTEM (~57%), Vantage Towers (~54%), and Cellnex (~52%).
EBITDAaL Margin Comparison of European Tower Companies
Additionally, based on GD Towers’ FY22 outlook, the company expects to generate €1.10 billion of revenue and €650 million to €670 million of EBITDAaL, implying a similar EBITDAaL margin of 60%, at the mid-point.
DigitalBridge and Brookfield are valuing GD Towers at an enterprise value of €17.5 billion. Therefore, the following valuation metrics apply to GD Towers:
- Enterprise Value / EBITDAaL: 27.3x pro forma adjusted EBITDAaL for 2021A and 26.5x EBITDAaL for 2022E, at the mid-point
- Enterprise Value per Tower: ~€432,000 per tower based on GD Towers’ ~40,500 tower sites
Deutsche Telekom notes that this transaction represents a premium valuation to the current public market valuations of its tower company peers in Europe, namely Cellnex, Vantage Towers, and INWIT.
Master Lease Agreement (MLA) with Deutsche Telekom
As part of the DigitalBridge and Brookfield transaction, Deutsche Telekom has established a revised master lease agreement (MLA) with GD Towers, whereby Telekom Deutschland and Magenta Austria are the anchor tenants. Between 2022 and 2027, the MLA contemplates cumulative growth capital expenditures of >€2 billion.
Furthermore, the revised MLA includes the following key terms:
- Duration: long-term, around 30-year lease agreements. More specifically, in Germany, the contract duration is structured as 3 x 8 years + 6 years (i.e., 30 years total), with an all-or-nothing renewal mechanism. These renewal rights are solely at Deutsche Telekom’s discretion and are for the entire site portfolio
- Build-to-Suit (BTS) Program: commitment by GD Towers to build 5,400 new macro sites for the anchor tenants through 2026, of which ~5,200 (96%) are in Germany and ~200 are in Austria. Including uncommitted macro sites, the total BTS program for anchor tenants rises to >6,500 new macro sites through 2026
READ MORE: How Much Does it Cost to Build a Cell Tower?
- Network Modernization Program: GD Towers will deliver network modernization of existing sites with ~57,000 upgrades and extensions until 2029, of which ~54,000 (95%) are in Germany. Also, Deutsche Telekom reserves prioritized access to free site capacity for future radio access network (RAN) upgrades through 2028, as part of this program
- Inflation: Telekom Deutschland and Magenta Austria’s contract has 85% CPI indexation, capped at +/- 3%. Therefore, if CPI exceeds 3%, these anchor tenants have protection, but the owners of GD Towers (DigitalBridge, Brookfield, Deutsche Telekom) will experience negative financial impacts. Specifically, at CPI levels above 3%, the tower company’s operating expenses would theoretically increase at a greater rate than revenue, leading to pressure on profitability and margins
Other Terms of the Revised MLA
- Pricing: revised pricing to the benefit of Deutsche Telekom
- Single-Site Termination Rights: 0.5% per annum, which are capped at 2.5% for a lease term of 8 years, with an MLA discount for non-utilization
- Golden Sites: protections for ~10% of total sites in Germany and Austria that are strategically critical, such as guaranteeing access and restricting colocation at these locations
- Buyback Rights: Deutsche Telekom holds a right of first offer (ROFO) on existing sites and event-driven buyback rights for both convenience and cause
- Operational Service Levels: industry benchmarked with most favored nation (MFN) status for Deutsche Telekom
Governance and Leadership
As part of the transaction, Deutsche Telekom keeps significant minority protection and veto rights, such as the right to appoint 2 out of 5 members of the board of GD Towers, including the initial Chairman. Furthermore, a joint governance structure ensures that Deutsche Telekom will be actively involved in material board decisions.
Additionally, GD Towers’ management will remain in-place for at least 3 years post-closing, meaning the current management team of Bruno Jacobfeuerborn (CEO) and Thomas Ried (CFO) will continue running the tower company after closing. Company-wide, GD Towers has around 800 total employees in Germany and Austria.
Deutsche Telekom’s financial advisor was Goldman Sachs.
DigitalBridge’s financial advisors were Perella Weinberg Partners, Evercore, and Barclays. Additionally, DigitalBridge’s legal advisors were Allen & Overy and Morgan Lewis.
Transaction Rationale – Deutsche Telekom, DigitalBridge and Brookfield
Below are further insights into the separate rationales for the sale and purchase of a 51% stake in GD Towers by Deutsche Telekom, as well as DigitalBridge and Brookfield.
Deutsche Telekom will receive ~€10.7 billion in cash proceeds from the sale of a 51% stake in GD Towers to DigitalBridge and Brookfield, which will be used to reduce its financial leverage by 0.2x EBITDAaL. In turn, this translates into a ~€6.5 billion reduction in net debt including leases, according to IFRS 16 standards, which will lower Deutsche Telekom’s net financial leverage by 0.1x EBITDA.
Additionally, Deutsche Telekom intends to accelerate its goal towards securing a 50.1% majority share capital interest in T-Mobile US (NASDAQ: TMUS). Deutsche Telekom can effectuate this through agreements it has in-place with SoftBank, which give it the option to purchase additional shares in T-Mobile US until June 2024.
Finally, because Deutsche Telekom is retaining a 49% ownership interest in GD Towers, it will participate in further value creation at the tower company, under DigitalBridge and Brookfield’s ownership.
DigitalBridge and Brookfield
DigitalBridge and Brookfield are providing long-term capital to pursue GD Towers’ strategic plans for enhanced value creation in its core towers business. These strategies include:
- Tenancy Ratio: increase colocation rate from ~1.4x, through both existing and new tenants
- Build-to-Suit (BTS) Program: support coverage needs and 5G roll-out requirements of wireless carriers. By utilizing its new balance sheet flexibility, GD Towers can address uncontracted / third-party BTS demand in Germany and Austria
Presently, GD Towers already has ~23% of its revenue deriving from third-parties (i.e., not Telekom Deutschland or Magenta Austria), which compares favorably to its captive and part-captive European tower company peers.
Third-Party Revenue Share for Captive European Tower Companies
As it relates to organic growth drivers, 1&1, a wireless carrier in Germany, is pursuing an aggressive 5G wireless network build-out across the country. To this end, GD Towers’ competitors in Germany, American Tower and Vantage Towers, have recently signed contracts with 1&1.
Also, post-transaction, GD Towers will have a more appropriate capital structure for an infrastructure business, enabling the company to pursue inorganic growth through M&A – meaning consolidation of tower companies in Europe. Specifically, M&A is enabled by GD Towers’ debt headroom, with the company having 6.0x opening leverage. Indeed, M&A was not possible previously, given the constraints of Deutsche Telekom’s balance sheet.
In addition to towers, Deutsche Telekom points to additional opportunities in adjacent digital infrastructure sub-sectors, referencing small cells, distributed antenna systems (DAS), and edge data centers.
DigitalBridge and Brookfield – Towers
DigitalBridge and Brookfield both have significant existing portfolio company exposure to the towers sector, both in Europe and globally:
- DigitalBridge: manages over 350,000 tower sites globally (not all of them owned) across 10 platforms. For example, DigitalBridge’s tower companies include Vertical Bridge, Vantage Towers (DigitalBridge owns a ~4% stake), Belgium Tower Partners (BTP), ÍslandsTurnar, Digita Oy, Mexico Tower Partners (MTP), Andean Telecom Partners (ATP), Highline do Brasil, and EdgePoint Infrastructure
- Brookfield: controls over 190,000 operational telecom towers & active rooftop sites. For example, Brookfield’s tower companies include Telia Towers, TDF Infrastructure, Wireless Infrastructure Group (WIG), and Summit Digitel Infrastructure