Orange SA today announced that it is creating a tower company called TOTEM, through a corporate carve-out, which will own and operate 25.5k tower sites across France and Spain. Orange expects to complete the carve-out and have TOTEM begin operations by the end of 2021. At this time, TOTEM will be run by an independent and dedicated management team.
TOTEM Tower Company – Orange France and Spain
Orange’s TOTEM tower company will have a scaled presence across both France and Spain, its two key markets of operation. Notably, Europe’s largest independent tower operator, Cellnex Telecom, has a presence in both France (26.7k tower sites) and Spain (11.1k tower sites). While Europe’s second largest towers operator, Vantage Towers, manages 8.8k tower sites in Spain.
Initially, TOTEM’s portfolio of towers will consist of 25.5k sites in France and Spain, the two largest countries where Orange is present. Firstly, in France, TOTEM will operate 17.6k tower sites, which will be 55% free-standing towers and 45% rooftop sites. Secondly, in Spain, TOTEM will operate 7.9k tower sites, split equally between free-standing towers and rooftop sites.
TOTEM’s 17.6k tower sites in France have a tenancy ratio of 1.18x. Indeed, this equates to 20.8k tenants with equipment on the company’s towers in France. Additionally, TOTEM’s 7.9k tower sites in Spain have a tenancy ratio of 1.59x. Indeed, this equates to 12.6k tenants with equipment on the company’s towers in Spain. Therefore, TOTEM’s total 25.5k tower sites have a blended tenancy ratio of 1.31x, equating to 33.4k tenants overall.
In France, Orange has experienced strong co-location demand, for the past several years. Indeed, with the high proportion of free-standing towers in its France portfolio, there is significant potential to increase its tenancy ratio from its current 1.18x. Additionally, in Spain, the operations will benefit from an existing network-sharing agreement between Orange and Vodafone, securing the future stability of the tower’s neutral host activities.
Beyond France and Spain, Orange will explore the possibility of integrating other passive mobile infrastructure assets from within Orange’s European footprint. Specifically, in Europe, Orange also operates in markets including Poland, Belgium, and Romania. Therefore, Orange could create additional value by adding digital infrastructure from these countries, to the TOTEM tower company.
Financial Metrics – Pro Forma
In 2020, TOTEM tower company’s revenues were €510m, with EBITDA, after leases (EBITDAaL) of €292m, representing a 57% margin. Specifically, TOTEM tower company generates 2/3rds of its EBITDAaL from France, with the remaining 1/3rd from Spain.
Currently, Orange has not indicated their expectations for the valuation of the TOTEM tower company. However, we base our analysis on recent tower company M&A transactions in Europe and trading multiples for Cellnex Telecom and INWIT S.p.A.
As a result, it is conservative to assume a 20x multiple on the €292m of EBITDAaL, which TOTEM’s tower assets generate. Therefore, a carve-out of 25.5k towers by Orange into TOTEM, results in an enterprise value of €5.8bn for the tower company. Indeed, this equates to an enterprise value per tower, on the 25.5k tower sites of €229k per tower.
Notably, Orange will retain a majority interest in TOTEM to benefit from the value creation of the towers over time. Therefore, any proceeds received from the carve-out of TOTEM from Orange will be for a stake of <50% of the company.
Corporate Structure and Governance – TOTEM Tower Company
TOTEM’s management and 200 employees will be completely independent from the retail operations of Orange, as a wireless carrier. Indeed, no member of the board of directors of Orange will be part of TOTEM’s board of directors. Furthermore, two independent board members will be appointed to enhance TOTEM’s governance.
Orange will transfer all core assets and functions to TOTEM to achieve full operational autonomy of the tower company. Indeed, this arrangement includes the transfer of all key passive mobile infrastructure assets such as tower sites, land, leases, and third-party tenancy contracts, from Orange to TOTEM.
Additionally, TOTEM will have in-house capabilities to run operations for anchor and third-party tenants. These include tower company activities, such as build-to-suit construction programs, turn-key tower roll-outs, and maintenance.
Master Service Agreement (MSA) – Orange and TOTEM Tower Company
TOTEM tower company’s Master Service Agreement (MSA) with Orange provides for an initial 15-year contract term. Additionally, there are two automatic renewals of 10-years each, securing long-term revenue visibility for TOTEM, with its main customer, Orange.
Overall, the agreement stipulates an all-or-nothing renewal clause, which would therefore cover the entire portfolio of tower sites. Additionally, in terms of rental escalators, Orange will pay rent to TOTEM tower company which is indexed to inflation, with no cap, and a floor of 0%.
Long-Term Plan – TOTEM and Orange in France and Spain
With respect to long-term targets, TOTEM forecasts its tenancy ratio for assets in France and Spain will increase from 1.31x in 2020 to 1.50x by 2026. Additionally, the TOTEM tower company plans to build up to 3.0k tower sites over the next 8 years for Orange.
TOTEM intends to be a neutral host, deploying new sites for Orange as well as for other wireless carriers. Indeed, TOTEM will focus on capturing industry demand drivers, which benefit tower companies. Specifically, these include areas such as 5G, the Industrial Internet of Things (IIoT), and smart cities.
Additionally, TOTEM plans to capitalize on inorganic growth (i.e., M&A) opportunities in Europe. To finance this growth ambition, TOTEM will issue new shares and/or raise debt financing.