Spinning off its towers business could prompt investors to reappraise the stock
Thursday 01 Aug 2019 Author: Ian Conway

Investors in mobile network operator Vodafone (VOD) received some rare good news last week, sending the shares up over 10% on Friday (26 Jul) and another 6% on Monday (29 Jul) to 154p, their best level in more than six months.

Chief executive Nick Read, who has been in the job less than a year, has proposed hiving off Vodafone’s European mobile towers interests into a separate legal entity called ‘TowerCo’ and possibly listing it on the London stock market within the next 18 months.

Phone masts are hardly glamorous but they generate significant cash flows and while listing them on the stock market may sound novel, tower companies have been popular with European and US investors for many years.

A flotation of TowerCo could not only be used to pay down some of Vodafone’s sizeable debt but valuations of European and US peers suggest that it could transform the company’s own market value.

Spain’s Cellnex Telecom, which gets two thirds of its revenue from renting its 45,000 towers to mobile phone networks, has an enterprise value (EV), or market capitalisation plus debt, of €14.1bn.

Analysts forecast Cellnex’s earnings before interest, tax, depreciation and amortisation (EBITDA) will reach €640m this year, which means investors are paying a multiple of 22 times EV-to-EBITDA in order to own the shares.

Vodafone’s TowerCo owns Europe’s largest portfolio of 61,700 towers across 10 markets and according to Read is capable of generating ‘potential’ proportionate EBITDA of €900m per year.

Putting a multiple of 22-times on TowerCo’s EBITDA would value the towers business alone at almost €20bn or £18bn against Vodafone’s market value of £35bn and EV of £68bn the day before the announcement.

Vodafone also announced last Friday that it had agreed to merge its Italian tower infrastructure with Telecom Italia in a deal which values the unit at an EV-to-EBITDA multiple of 24-times.

Finally, Crown Castle International, which owns a portfolio of US mobile phone towers, is valued at 22 times EV-to-EBITDA so a valuation of between 20 and 25-times for TowerCo would seem reasonable.

If Read can hive off the towers business with a big chunk of debt – its listed peers carry debt equivalent to between 40% and 75% of their market value – it could go some way to reducing Vodafone’s parent company indebtedness.

We should stress that none of the above is set in stone other than the plan to separate the towers unit. More detail will doubtless emerge at the analyst meeting on 19 August.

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