Telstra, Australia’s largest wireless carrier, today announced that a consortium, managed by Morrison & Co and comprising the Future Fund as its largest investor, Commonwealth Superannuation Corporation (CSC), and Sunsuper, will acquire a 49% interest in the company’s towers business, called Telstra InfraCo Towers, for A$2.8bn.

Telstra will retain a 51% majority ownership in the business and thus consolidate the InfraCo Towers unit into its financials. Additionally, Telstra has entered into a 15-year master service agreement (MSA) with InfraCo Towers to secure ongoing access to existing and new towers.

Finally, the transaction is expected to close in Telstra’s Q1 FY22 (i.e., during the quarter ended September 30, 2021).

Telstra InfraCo Towers – Overview

Telstra InfraCo Towers owns and operates ~8.2k tower assets, including 5.5k+ wireless towers, making it the largest tower infrastructure provider in Australia. Additionally, the business has long-term volume commitments from Telstra for new tower builds to expand its portfolio further.

Tenancy Ratio

Currently, Telstra InfraCo Towers has a tenancy ratio of 1.34x on its wireless towers. While this tenancy ratio is low, Telstra notes that there exists physical limitations to increasing the number of tenants on its towers. Specifically, many of Telstra’s existing towers were built for only one tenant, being Telstra.

Additionally, once factoring-in reserved space for Telstra on these towers, only a modest amount of incremental lease-up capacity is available for third parties. Therefore, the company indicates that a tenancy ratio range of 1.4x to 1.6x, over time, is possible. Finally, for new tower builds, Telstra is targeting a 1.55x average tenancy ratio.

Rental Escalators

Telstra has contractual rental escalators built-in to its master service agreement (MSA) with InfraCo Towers. Quantitatively, these rental escalators align with InfraCo Towers’ projection of its ground lease cost increases over time. Dgtl Infra notes that contractual rental escalators typically range from 2% to 3% per year.

Management

Brendon Riley, Telstra’s InfraCo CEO, will be the Chairman of the board of directors of Telstra InfraCo Towers. Additionally, Jon Lipton, who has been the head of Telstra’s towers business since its inception, will become the CEO of Telstra InfraCo Towers. Notably, InfraCo Towers’ management plans to launch a new brand for the independent unit in the coming weeks.

Transaction Valuation – Telstra InfraCo Towers

Future Fund, Commonwealth Superannuation Corporation (CSC), and Sunsuper’s purchase implies a value for 100% of Telstra InfraCo Towers of A$5.9bn. Based on Telstra InfraCo Towers’ ~A$211m of FY21 pro forma EBITDAaL (EBITDA after leases), this corresponds to an EV/EBITDAaL multiple of 28x.

Notably, the 28x EV/EBITDAaL multiple represents a strong valuation compared to minority towers precedent M&A transactions. Indeed, given that the seller, Telstra, has retained control of the towers, the implication would be that no “control premium” would be incorporated into the valuation of this transaction. However, the 28x EV/EBITDAaL multiple compares favorably to both minority and majority tower transactions globally.

Capital Structure – Telstra InfraCo Towers

At completion, the InfraCo Towers entity will have no debt. Therefore, Telstra is not shifting any corporate-level debt into the tower company as part of this 49% stake sale.

Notably, the Morrison-led Future Fund, Commonwealth Superannuation Corporation (CSC), and Sunsuper consortium has raised debt at their holding company-level to fund a portion of the Telstra InfraCo Towers acquisition. Indeed, this debt will be held at the minority investor level and will not be consolidated on Telstra’s balance sheet.

Use of Proceeds – Telstra Corporation Limited

Upon completion of the transaction, Telstra will receive net cash proceeds of A$2.8bn for its 49% stake sale.

Capital Return to Shareholders

At the time of completion, Telstra intends to return ~50% of net proceeds to shareholders. During its full-year results announcement in August 2021, Telstra will provide further details about its capital return plan, which could take the form of a share buyback.

Debt Repayment

Telstra will apply all remaining net proceeds to debt reduction, which is crucial to ensuring the transaction is credit-neutral. Indeed, Telstra’s 15-year master service agreement (MSA) with InfraCo Towers creates a new obligation for the company post-transaction.

Regional Network Investments

Telstra will also invest A$75m of net proceeds to further enhance coverage and capacity in regional Australia. Specifically, the company will allocate its investments based on recommendations from Australia’s Regional Telecommunications Review Committee (RTRC).

Transaction Rationale – Telstra Corporation Limited

Telstra’s sale of a minority stake in the InfraCo Towers unit enables the company to unlock the value of its passive tower infrastructure at an attractive 28x EV/EBITDAaL multiple. At the same time, Telstra maintains control of the assets, under terms that secure Telstra’s future wireless network competitive differentiation.

Telstra will continue owning the active infrastructure of its network, including the radio access network (RAN) equipment and spectrum licenses. In turn, this enables the company to maintain its superior network coverage and capacity over competitors Optus and TPG Telecom.

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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