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EuroTeleSites (VIE:ETS)

January 12, 2024

Type of situation: Recent Austrian TowerCo spin-off with significant undervaluation


Market cap: €651m – Share price at publication: €3.92


Why look at this?

Telekom Austria (VIE:TKA) has recently spun-off its tower business as EuroTeleSites AG (VIE:ETS) and listed it on the main board of the Vienna Stock Exchange on September 22, 2023.


As typical for spin-off transactions, the newly listed company sold off after listing as legacy investors of the RemainCo dumped their stock which they had received in the transaction. Shares are currently trading around 30% lower than their initial listing price and the indiscriminate selling has likely concluded.


Now could be the time to assess the newly listed tower business for the following reasons:


  • ETS trades at a very significant discount post spin-off in relation to all other (European) public and private tower companies/portfolios;

  • Its tower real estate portfolio is located in Eastern European geographies that are less transparent than Western European markets with infrequent comps;

  • The tower portfolio has significant potential for lease up activity as so far it has only had one tenant (Telekom Austria) and the lowest “tenancy ratio” of all listed peers;

  • Given the M&A activity over the past few years, a take-private or sale of the business to an infrastructure focused investor seems like a potential path going forward over the medium term;

  • The immediate forced selling action by legacy shareholders and index funds should have mostly taken place by now;

  • The stock is likely still undiscovered by many investors given its short history as a recent spin-off;

  • ETS has two major shareholders (one of which that holds the majority) that together control around 85% of the registry resulting in a very compact free float and low trading volumes.

Overview of the spin-off transaction

Shareholders of Telekom Austria AG, one of the largest telcos in the CEE region, on September 22, 2023 have received one EuroTeleSites share for every four Telekom Austria shares held. The spin-off saw the company’s cell tower portfolio be separated from the telecom operating business and transferred into a new stand-alone entity. EuroTeleSites owns 13,200 sites across seven countries, mainly in Austria (63% of EBITDAaL), Bulgaria and Croatia (each 11%), Serbia (8%), Slovenia (5%) and North Macedonia (2%).


Telekom Austria will remain the main tenant with 3 x 8 years lease terms as part of a Master Lease Agreement (MLA) with automatic renewal clauses, a CPI-indexed rent increase clause (though capped at max. 3% p.a.) and the optionality to cancel a maximum of 1% of leases in the portfolio p.a. While Telekom Austria may cancel the MLA after each term, ETS can only do so after 24 years. Telekom Austria is currently responsible for 95% of revenues.


The new company carries a rather heavy debt load of just over €1B or about 7.9x trailing EBITDAaL. ETS’s financing comprises of a €500m fixed-rate bond, a €500m floating rate term loan with a 5-year duration and a €75 revolving credit facility. The SpinCo has pledged to not pay any dividends for the first four years following “independence” and rather use cash to pay down debt to about <2x EBITDAaL.


The portfolio had revenues of €232m and EBITDAaL* of €127m in 2022 and expects these figures to rise by about 4-6% CAGR over the medium term.


Tower real estate business

The tower business seems a bit abstract when first encountering it so let’s have a quick primer on the sector.


Many telecom companies have sold or spun-off their cell tower real estate portfolio over the past decades. Cell towers are critical infrastructure for communications and usually consist of a tower structure on which cellular and telecommunications equipment can be attached to. TowerCos own the tower structure and power supply on the ground and either own or (most commonly) lease the land from third parties on long-term lease contracts. Tenants place their transmitting antennas on the top part of the tower and sometimes own further equipment that is located on the ground level in small shelters.

What makes the tower business so attractive is that capex is relatively limited and even with just one tenant, tower structures are highly profitable. Managing to attract even one additional tenant to a tower results in almost pure additional profit. This is quite different to any other kind of other real estate asset where usually to attract additional tenants, significant capex spent must be considered.


Discount to peers

The (listed) peer group of ETS is quite limited given that only two other tower co’s remain listed on European exchanges. Cellnex is Europe’s by far largest tower landlord with over 112k sites and an EV close to €50B. The company grew fast during years of zero interest rates by acquiring every tower portfolio they could get their hands on. INWIT is a spin-off from Telecom Italia with a tower portfolio situated exclusively in Italy. The company remains listed on the Milan stock exchange and rumors have circulated for some time whether it will be taken private. This happened in 2022 with Vantage Towers, a company that comprises of the European (ex-Italy) Vodafone tower portfolio. IPO’d in 2021, it was taken private again in 2023 by a consortium around KKR.



A common valuation metric in the tower real estate sector is a multiple valuation on EBITDAaL (whereas “aL” stands for “after leases”). This is used to adjust for the depreciation of right-of-use assets and for interest expenses on lease liabilities (essentially the leases for the ground / roofs where the towers stand on).


All listed peers have their portfolios located primarily in Western Europe and trade over 20x EBITDAaL on a forward twelve months basis. A recent private market transaction completed in 2023 between United Group BV, a leading telecoms company in the CEE region, and TAWAL, a Saudi-based TowerCo, changed hands for 20.1x EBITDAaL. This portfolio is located in Bulgaria, Croatia and Slovenia, all EU countries, whereas the ETS portfolio has about 10% exposure to non-EU countries of Serbia and North Macedonia. However, one would expect an Austrian portfolio to carry a lower yield than other portfolio countries (thus higher valuation), more than balancing out ETS’ non-EU portfolio portion from an aggregated valuation standpoint.


While other comps in this specific region are limited to the United portfolio, all recent tower portfolio transactions in private markets in Europe were sold significantly above 20x EBITDAaL, up to 27x for the Deutsche Telekom portfolio sold in 2022.




Compared to its peers in Europe, the ETS portfolio currently trades on a forward basis of around 12x EBITDAaL. Obviously, with the ETS portfolio, there are certain caveats such as the geographic focus, its high debt load and shareholder structure etc., but even after adjusting for those peculiarities, the portfolio screens very cheap.


Also, the portfolio screens cheap on a per tower metric, although this is explainable due to significantly lower rental incomes per site than peers.


To illustrate just how cheap the valuation of ETS’s equity value is, a sensitivity analysis shows how significant an upside there is if the portfolio re-rates just marginally towards that of its peers and relevant private market comps (obviously courtesy to its relatively high leverage):



Lease up opportunity for the ETS portfolio

Many tower portfolios started their life with low tenancy ratios as the only/major tenant was the telecoms company that had built the portfolio for its own use. Following spin-offs, TowerCos have then spent a lot of time and effort into “leasing up” the towers, essentially bringing in new tenants such as other telcos or other types of transmitting devices. What’s so attractive about the lease up activity is that even with one tenant, towers are very profitable with EBITDAaL margins often in the range of 30-40%. New tenants require almost no new infrastructure or improvements on the sites and are almost completely new profit. With this, tower companies can leverage their infrastructure and improve their profitability quite heavily even when the tenancy ratio only marginally improves.



As illustrated, the ETS portfolio boasts one of the lowest tenancy ratios in the industry. Currently, Telekom Austria is responsible for 95% of revenues. The stand-alone company has quite an attractive runway to increase their tenancy ratio from such a low figure and thus improve earnings quite a bit going forward.


Potential follow up transaction / take private / sale of company

Perhaps most interesting in the context of ETS is that there have been two other tower spin-off listings in recent years which were subsequently taken private/are rumored to be in the process of being taken private by infrastructure investors that were already mentioned in the earlier sector comparison, Vantage Towers and INWIT:


  • Vantage Towers (HAM:VTWR) was spun-off from Vodafone in March 2021 and was listed in Frankfurt at €24.1/share. The portfolio comprises of approx. 61.5k towers across Western European markets when including the company’s equity shareholdings in INWIT and Cornerstone (a private JV entity with Vodafone of its UK tower portfolio). Vodafone remained majority shareholder with an 81% stake in the tower co. In 2022, a consortium around KKR, Global Infrastructure Partners and Vodafone took the company private again at €32/share (+33% vs. IPO). Notable was the small free float of about 20% (remainder owned by Vodafone) during its time as a public company, similar to the EuroTeleSites situation. Vodafone (RemainCo) agreed to a 180-day lock-up period at the timing of the IPO. A tiny amount of non-tendered shares is still traded in Hamburg.

  • Telecom Italia (MIL:TIT) spun-off its data center and tower business as Infrastrutture Wireless Italiane or short INWIT (MIL:INW) in 2015 which saw the tower co list 36.3% of its shares in Milan at €3.65/share. In March of last year, private equity company Ardian was said to be in early stages of exploring a take-private offer for the tower company whose shares are currently trading around €11.77 (+223% vs. IPO). Telekom Italia (remain-co) agreed to a 90-day lock-up period at the timing of the IPO.


In the case of EuroTeleSites, the major shareholders of Telekom Austria will also remain invested into the spin-off. América Movil (BMX:AMX B), the Mexican telecoms giant, owns 57%, while ÖBAG, the Austrian state-owned holding company, has a 28% stake. The free float is therefore just comprised of the remaining 15%. The shareholder structure initially fully mirrored that of Telekom Austria. The two major shareholders, however, have signed a 10-year shareholder agreement with each other that will see their shares subject to a 5-year lock-up period and granting each other a right-of-first refusal in case the other one wants to sell their shares. This is in stark contrast to the much shorter lock-up periods of the other two TowerCo spin-offs VTWR and INW. While the 5-year lock-up period per the shareholder agreement prevents both parties from selling their shares individually, to my rudimentary legal understanding, there would be nothing that could prevent both parties to amend their shareholder agreement should a bidder for the entire portfolio emerge and sell it to them.


Size of portfolio well suited for potential infrastructure investors

Another point that can be made around the line of thinking of a potential take-out of the portfolio is that the portfolio is relatively small with a current EV of just shy of €1.7B. Given its relatively small size, one could see a large number of potential infrastructure investment firms being able to swallow such a ticket size.


Further, one might want to ask the question behind the motivation of the spin-off. While the “mothership”, Telekom Austria, was able to reduce its debt load by €1B as part of the transfer of liabilities to its new spin-off, for the majority shareholders of both companies, the debt position remained the same. I could see a path forward for America Movil and ÖBAG to be interested in potentially getting rid of the TowerCo as a way to realize value for themselves.


Indiscriminate selling likely over of an undiscovered stock

While the minority stakes in INWIT and Vantage Towers were sold through conventional IPO processes, the EuroTeleSites transaction is a classic spin-off where RemainCo investors received one share in the SpinCo for every four shares held of Telekom Austria. Shares of both prior IPOs rose following their listings and never returned to their IPO prices. Shares in the spin-off in this case were initially under some indiscriminate selling pressure from index funds as Telekom Austria is a member of the country’s largest indices.


Likely, the indiscriminate selling pressure has now concluded as volumes have dropped significantly, and the share price seems to have found a floor. This is also one distinct caveat to be taken into consideration: Volumes are quite thin currently with just about 40-50k shares traded each day (around €200k) while trading volumes were significantly higher following the spin-off in September.



As a rule of thumb, I like looking at spin-off transactions once the aggregated trading volume since the transaction roughly equals all outstanding (free floating) shares. This usually indicates that the majority of indiscriminate selling by legacy shareholders has concluded, and a potential re-rating and a more rational price discovery begins. In this case, however, given the very small float, the selling pressure seems to have ended a bit earlier as volumes have become thin. Until now, about 6.7m shares have been traded since spin-off, making up about 1/3 of all free float that is outstanding. One must note, however, that the company (even as small as it is) has been added to the ATX Prime Index, one of Austria’s leading stock indices. While not part of the ATX (Austria’s main index), index funds mirroring the ATX Prime had no reason to sell given that they had the same exposure to the SpinCo as to the RemainCo.


Given the relatively small market cap, a more or less obscure listing venue of Vienna, combined with its low free-float and low trading volumes, many (institutional) investors are currently not able to purchase shares in this potentially significantly undervalued company given their investment universe restrictions. Tower real estate is also not a very sexy business and not on the radar of many retail investors. Thus, I believe that the stock still fits the attribute “undiscovered”.


Conclusion

We are looking at a recent, likely still undiscovered spin-off due to various reasons with an attractive infrastructure portfolio that trades at a very significant discount to all available peers. Indiscriminate selling has likely taken place now and a gradual re-rating of the shares to about 16x-17x EBITDAaL seem a not unlikely scenario here. Coupled with potential M&A possibilities to realize value for its major shareholders, I believe we are looking at an attractive opportunity here.


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