Telefónica's €7.7 billion towers sale is good news for Vodafone

Telefónica has agreed to sell its towers portfolio in Europe and Latin America to passive infrastructure specialist American Tower for €7.7 billion.

The Spanish incumbent said it will sell Telxius Towers and its close to 31,000 sites in two separate transactions, one covering Europe and the other Latin America. The deal will enable it to pay down debt and focus its attention on other priorities.

“After this great operation we will continue to focus on our most ambitious objectives: the integration of O2 with Virgin in the United Kingdom, the purchase of Oi mobile in Brazil and the reduction of debt,” said Telefónica chief executive José María Álvarez-Pallete, in a statement.

O2 UK and Virgin Media agreed to merge last year and the deal is currently under review by the Competition and Markets Authority (CMA), while the three-way Oi deal – which will see Telefónica, America Movil and TIM acquire the Brazilian telco’s mobile assets – was announced in December.

The reduction of debt has been an ongoing battle for Telefónica over the past few years. Deleveraging efforts have seen it sell off non-core assets in Central America and reports are intensifying that most of its other Latin American business are on the block. The company itself has indicated that its future in the region will be centred on Brazil. The telco has also previously monetised its tower assets, offloading sites in Latin America and selling chunks of Telxius to private investors, including KKR; as it stands, Telefónica owns 50.01% of the business. Telxius took over Telefónica’s towers in Germany last summer, a move that provided some financial relief for the telco.

Telefónica’s net financial debt, not including lease liabilities, stood at €36.7 billion at the end of September, down by just over €2 billion from the end of 2019, but its debt-to-earnings ratio was slightly higher at 2.77x.

The operator will make sizeable gains from the Telxius sale, thanks to that healthy purchase price. It estimates its capital gain from the deal at around €3.5 billion. “Once the transaction is complete, the Telefónica Group’s net financial debt will be reduced by approximately €4.6 billion and the leverage ratio (Net Debt/OIBDAaL) by approximately 0.3 times,” it said.

Telxius generated an estimated OIBDAaL (operating income before depreciation and amortization, after leases) of €190 million over the past 12 months, Telefónica said. If that number is adjusted to reflect the full impact of the transfer of the German assets in June, the €7.7 billion Telxius price tag implies a 30.5 times multiple of pro forma OBIDAaL. That’s a good result by anyone’s standards, but it appears to be an accurate reflection of the way the broader market values tower assets at present.

There has been much speculation over the price Vodafone will obtain for Vantage Towers when it floats in Frankfurt this year. Analysts have predicted high teens to low 20s of billions of euros, and with Telefónica bringing in €7.7 billion for Telxius, those valuations look highly attainable.

Vantage Towers generated pro forma EBITDAaL of €742 million last year, including contributions from its Italian and UK towers. While its earnings metric is not directly comparable to Telefónica’s OIBDAaL, it gives us an idea of what we could be looking at. 30 times EBITDAaL would value Vantage Towers at €22 billion.

We’re champing at the bit for Vodafone’s IPO information…