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Digital infrastructure: Towers and fibre underpin the broadband revolution

Digital communication has proved vital for economic survival and success during the Covid-19 pandemic. Growing demand for fast and reliable internet requires an expanding digital infrastructure, creating new opportunities for investors.

The impact of the Covid-19 pandemic on the economy has been severe, but had it struck two decades ago its effects would have been even more devastating.

Fast and reliable internet access and mobile connectivity has enabled families to keep in touch via video calls and allowed multi-national companies to function in the “new normal”. Millions of people have worked from home and businesses have stayed open in cyberspace—even when their doors have been closed and international customer service centres have been replaced by networks of call handlers using laptops at their kitchen tables.

Digital transformation was already underway long before the pandemic began, but the crisis has shown just how vital it has become to all aspects of life. It has given the digital ambitions of companies and governments a new sense of urgency and highlighted the critical role of digital infrastructure: the mobile towers and fibre networks.

Eva Talmacsi, CMS partner, co-head of TMT in CEE and co-head of the firm’s Global TMC transactional practice, said: “Yes, the pandemic has had a serious impact, but 20 years ago it would have been catastrophic. Large parts of our economies have been able to carry on by switching to virtual mode. The trends in digitalisations are rapidly accelerating and have shown the need for development in digital infrastructure to keep pace.

Digital is the key to growth

In a study of ten countries—Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia—management consultants McKinsey predicted in October 2020 that digitalisation would deliver up to EUR 200bn in additional GDP by 2025. It also noted that in the first five months of Covid-19 lockdowns, the digital economy had captured 78% of the increase seen in the whole of 2019.

Those findings are reflected in CMS’s Digital Horizons report, published in October, which shows how Covid-19 pushed digitalisation up the corporate agenda in emerging Europe. Of those surveyed, 92% believed the pandemic would accelerate future digital change in their businesses and 45% said it had already accelerated projects.

The European Commission’s 2020 policy, Connectivity for a European Gigabit Society, set out objectives to boost fast connectivity by speeding up the rollout of fibre and 5G networks to generate economic growth, jobs and innovation.

Emerging Europe has benefitted from “last mover advantage” in that it did not have to invest in upgrading creaking legacy copper networks in the same way as the likes of Germany and UK. Instead, it has been able to focus on rolling out fibre and has achieved relatively high rates of fibre penetration in a short space of time.

Digital infrastructure is as essential for carrying and controlling data traffic as tracks and signalling systems are for high-speed railways. The mobile tower and fibre networks that underpin today’s communications systems will be required for 5G and technologies of the future such as the internet of things, autonomous vehicles, smart cities and immersive entertainment.

Eva Talmacsi said: “Installing and operating towers and fibre to meet this exponential growth in demand is incredibly expensive. The industry has had to find new ways of extending infrastructure in a cost-efficient way.

Telecoms companies and mobile network operators (MNOs) have been looking at how to reduce costs, improve efficiency and monetise these assets. The emergence of a wholesale business model, where capacity on the network is rented out, has prompted some to sell their infrastructure networks outright or bring in partners. The ability to create efficient capital structures has made the industry increasingly attractive to investors and lenders. For example, by creating a separate “towerco” or “fibreco”, they have been able to structure deals to attract long-term financial investors, which allows them to expand their footprint while retaining control and generating a long-term income stream.

Eva Talmacsi added: “Optimising their capital expenditure and balance sheet has become a top priority for operators, hence the increasing tendency to rethink strategy and restructure internally. By retaining all or part of the ownership, they can capitalise on any future increase in value.”

For investors, this restructuring and carve-out of assets has created an attractive sector, offering steady and predictable revenues from long-term contracts in an industry where demand is growing. It is an appealing combination that has led to a wave of M&A activity across Europe, including CEE, although those new to the sector should take care to work with partners and advisers who understand the industry and the potential risks.

Moving east

One of the pioneers in this radical shake-up of the tower sector is Barcelona-based Cellnex Telecom. With its roots in the Spanish broadcasting industry, it was listed on the Madrid stock exchange in 2015 and is now Europe’s leading independent operator of wireless telecoms infrastructure through an aggressive acquisition strategy that has put it on course for 103,000 tower and telecoms sites in 12 countries across Europe.

In October, Cellnex made its first move into emerging Europe when it reached an agreement with Iliad of France to jointly acquire a network of 7,000 towers and infrastructure sites in Poland owned by Play Communications, for which Iliad had launched a takeover bid. Cellnex and Iliad will jointly own a new company that will manage the sites and could invest EUR 1.3bn in rolling out 5,000 new sites over the next decade.

Vodafone of the UK plans to list its own towerco, Vantage Towers, on the Frankfurt stock exchange in early 2021. It operates 68,000 sites, the bulk in Germany, Spain and Greece, and has operations in nine countries including the Czech Republic, Romania and Hungary. With EUR 1bn of financial firepower, it has set out ambitious plans to grow by increasing tenancy ratios on its existing network, increasing efficiencies and adding additional services such as fibre. In a signal of what may be to come in the industry, Vantage said it would consider M&A opportunities.

Other telecoms companies in the region have been active. In Poland, Cyfrowy Polsat has been working on a possible sale of the digital infrastructure of Polkomtel which has generated strong interest from potential buyers, including major international funds. Options include a sale, partial sale, strategic partnership or joint venture, not only for its 8,000 mobile towers but also its fibre footprint. PPF Telecom Group of the Czech Republic established CETIN Group in July 2020 as a separate infrastructure provider from its retail business in the Czech Republic, Bulgaria, Hungary and Serbia.

Focus on fibre

Fibre too is going through a transformation that has led to a surge in interest and activity. Some of the world’s biggest investment funds have been investing in the region’s fibre networks.

Anne Chitan, CMS partner and global co-head of communications, TMC, said that although the build-up of fibre was strong, there were significant inequalities between states and regions, and some less-populated areas could be left behind. She added: “Add to this regulatory and legal local peculiarities, and the picture looks more like a jigsaw puzzle where some pieces are missing. There is therefore a lot still to do and we expect activity to remain strong, with the emerging new fibreco models driven by operators possibly being a game changer."

Once critical mass is reached, it would be interesting to see how the networks fit together and if this spurs on some cross border merger and acquisition activity.

In August 2020, Orange Polska, announced the possible sale of a minority stake in its “fibreco” to rollout fibre access to another 1.7 million households. Luxembourg-based Cube Infrastructure Managers has invested in fibre-to-the-home projects in Croatia, Slovenia and the Czech Republic.

The trends under way in Central and Eastern Europe are not unique. They are already under way in many parts of Europe and the experience in other countries is likely to provide a signpost to how the digital infrastructure sector will develop in the region. Macquarie Capital, part of global financial services firm Macquarie Group, has shaken up the Spanish broadband market by buying a fibre-to-the-home network to create the country’s first independent wholesale operator. Oliver Bradley, a managing director who leads Macquarie Capital’s digital infrastructure investments, suggests there are many parallels with emerging Europe. While fibre penetration in Spain was high, the wholesale model gives large operators and small broadband businesses the ability to reach more customers and increase competition. He added: “The model is replicable in other markets where operators have built fibre networks and are looking to monetise them. Central and Eastern Europe is an area we see developing, and from both a pricing and revenue point of view we believe it could normalise with Western Europe.

A key feature of fibre is that investment is heaviest at the start and returns are typically generated over seven to 10 years. This makes it potentially attractive to investors with longer-term outlooks such as pension funds, but there are complexities. Oliver Bradley explains: “We’ve been able to uniquely structure telecoms opportunities in a way that’s typically seen for more established infrastructure assets, such as schools, hospitals and power stations. Historically some investors wouldn’t have considered investing in telecoms, but the sector has seen somewhat of an evolution, as demand for both stable long-term returns and our dependence on connectivity continues to grow.

Accelerating the roll out

After the events of the past year, the digital genie cannot be put back in the bottle. According to CMS Digital Horizons survey, 65% of firms anticipate increasing their IT budgets in 2021 to support digitalisation.

For companies in emerging Europe, digital communication breaks down geographic barriers and enables them to compete with rivals, work with partners, and serve customers across Europe and the rest of the world.

Eva Talmacsi at CMS said: “Digital infrastructure creates a spider’s web that stretches across boundaries so that digital services can be accessed wherever they are needed. Covid-19 has been a catalyst and now we need to see investment in the networks stepped up to take connectivity to the next level.

Key contacts

Contact
Oliver Bradley
Managing Director, Macquarie Capital
Picture of Eva Talmacsi
Eva Talmacsi
Partner
T +44 20 7367 2435