Telstra, Australia’s largest wireless carrier, today announced its timeline to monetize its InfraCo Towers division, which comprises 5.6k towers across Australia, exceeding A$4.0bn in valuation. Specifically, Telstra plans to commence the process for external strategic investment into InfraCo Towers around July 2021, with binding offers to be submitted before the end of 2021. Indeed, at Telstra’s Investor Day, in November 2020, the company first announced it was exploring strategic alternatives for its towers.
InfraCo Towers – Overview
Telstra’s 5.6k towers across Australia comprise the largest holdings of mobile towers in Australia. Specifically, 4.4k (79%) of these towers are located in metro markets and 1.2k (21%) are situated in remote areas. Additionally, the InfraCo Towers business is the largest builder of mobile towers across Australia, having built 1.0k towers over the past five years.
Overall, Telstra’s 5.6k tower sites have a low tenancy ratio of 1.34x, relative to industry standards. Indeed, this equates to 7.5k tenants with equipment on the company’s towers. In comparison, Telstra’s current tenancy ratio is below the tenancy ratio of new towers that it is building, which is 1.55x. Therefore, the company has the opportunity to increase tenancy ratios on its existing and new towers, which can support Telstra and other wireless carriers.
Passive vs. Active Infrastructure
Telstra’s InfraCo Towers division will own and operate the company’s passive digital infrastructure or physical mobile tower assets in Australia. Notably, this means that Telstra will retain all active equipment that it deems strategic. Indeed, these active components include radio access network (RAN) equipment on towers, spectrum holdings, and electronics or optronics equipment used to light-up the fiber.
InfraCo Towers – Financials and Valuation
At Telstra’s Investor Day, the company disclosed preliminary financials for InfraCo Towers. Specifically, the InfraCo Towers division generates A$306m of revenue and between A$193m to A$205m of EBITDA. For simplicity, we will assume the InfraCo Towers division generates A$200m of EBITDA, equating to a 65% EBITDA margin.
Using recent precedent M&A transactions for towers globally, Telstra’s InfraCo Towers division could conservatively reach an EBITDA valuation multiple of 20x. Therefore, applying InfraCo Towers’ A$200m of EBITDA results in an Enterprise Value of A$4.0bn. In turn, this implies an Enterprise Value per tower of A$718k per tower, on the 5.6k tower sites.
Transaction Structure – InfraCo Towers
Notably, the Enterprise Value of A$4.0bn represents the valuation for 100% of InfraCo Towers. However, Telstra will pursue a sale for only a minority interest in the InfraCo Towers business initially. Therefore, Telstra’s net proceeds when it monetizes its InfraCo Towers will be below A$2.0bn (i.e., <50%).
Rationale for the Sale of a Minority Interest in InfraCo Towers
Telstra is Australia’s largest wireless carrier, with a ~50% market share for mobile services. Importantly, Telstra’s tower assets form a significant point of differentiation for the company’s network coverage and capacity. Specifically, Telstra considers its network quality, and thus towers, as part of the reason that it dominates its key domestic competitors Optus and Vodafone Australia.
Given this background, Telstra wants to maintain control over its towers to protect its superior network. Indeed, the rationale for a minority interest sale in InfraCo Towers is two-fold. Firstly, Telstra will generate significant proceeds to help enable the company to pay-down debt. Secondly, the company will have a relevant valuation mark for its tower assets, which will, in turn, force a re-valuation of the company overall. Indeed, Telstra is aiming for this sum-of-the-parts re-valuation to be materially higher than where the company’s stock currently trades.
