In the last 12 months, the wider infrastructure investment space has seen remarkable M&A activity both in volume and value, across a variety of core and non-core sectors. This has provided investors with significant long-term returns and in turn, a continued appetite for future investments. Brownfield infrastructure projects are just one example of this trend (below).

Specifically, one of the most active and growing sectors DC Advisory has seen is telecoms infrastructure. With increasing regulation, a focus on superior technology, and a consumer shift to cloud-based solutions, the telecoms infrastructure sector has experienced dramatic changes in both its operations and business models. The below graph highlights growth in global investment into the telecoms sector since 2015.

For investors attracted to the space, it’s crucial to understand how these assets operate and what is driving sector growth. DC Advisory’s global infrastructure team explores further >

DC talks telecoms

In recent years, telecoms assets have demonstrated highly attractive growth prospects for investors across the globe, resulting in high valuation multiples and the subsequent growth across the broader sector.

Telecoms infrastructure can be defined by three main sub-sectors, all with differing value propositions. So what are the key areas of telecoms driving this growth, and what’s making these sub-sectors flourish?

  1. Towers;
  2. Fibre; and
  3. Datacentres.

These unique assets come with distinctive characteristics, including recurring cash flows, barriers to entry and international demand, even during times of geo-political turbulence. But will these sectors remain attractive over the long-term?

The Fifth Generation & beyond: telecoms towers

In a world where video streaming, social media and connectivity motivates daily behaviour, it’s easy to believe that the infrastructure sitting behind this functionality is no longer fit for purpose. The traditional need for towers driven by historic demand for TV and radio broadcasting, has shifted – and the primary demand is for improved internet connectivity and increased bandwidth. This has resulted in most developed markets needing to upgrade tower technologies to remain competitive, and has subsequently driven M&A activity.

Currently, most countries are still optimising outdated internet technologies as they wait for providers to upgrade. In Europe, the EU has pledged it will implement its plans to build its ‘Fifth Generation’ (5G) telecoms systems by 2020. This upgrade will be the building blocks of the digital economy and societies[1], and aims to benefit both individual and professional consumers. This is driving significant activity across the sector in three ways:

  • Operators spinning off their traditional towers where capacity is too intense;
  • Operators selling their assets to access capital; and
  • Tower owners continue to pushing for upgrades.

5G telecoms systems have been coined the technology that will be the ‘eyes and ears’ of AI systems – enabling the collection of real-time data and analysis for businesses. In short, the demand for 5G will not slow down.

Consumers in parts of Asia are already benefiting from the built infrastructure, with South Korea having utilised 5G during 2019 whilst surrounding regions, such as China and Japan, follow closely behind. The US also implemented the new technology, with Trump bidding to “win the race against China”[2].

Across Spain, large operators such as Movistar and Vodafone have announced the launch of their 5G network, despite only having pilot tested the network in large cities to date. On the other hand, Orange have delayed their launch due to the ongoing development and testing of the technology. Political pressure continues to build in the region, with politicians focused on ensuring rural communities have access to the technology in places where independent, regional towercos have a stronger hold on the market. In these areas where the population and therefore demand is lower, there’s less necessity for operators to have their own network, therefore allowing independent operators to remain more relevant for rural clients.

 Similar activity has been demonstrated recently across Europe, with for instance Equitix (advised by DC Advisory) reaching an agreement to acquire a majority stake in Telecom CLM, the third largest independent regional towerco in Spain.

It’s expected that growth will continue in the global telecoms arena for the medium-term, as providers upgrade their infrastructure and subsequent service offerings. But what’s expected for the long-term, and what should investors do now to secure ongoing returns in future?

We expect to see advanced devices continue driving up total wireless capex spend. For providers who choose a colocation model over building their own site, economic incentives will remain in place. Additionally, there is significant time for the market to benefit from leasing premises on an existing tower space.

Tower sites will continue to be the best solution for tenants as they provide the most technologically-efficient and cost-effective options for coverage and capacity requirements, compared to other solutions such as satellite, DAS networks, Wi-Fi or small cells.

The rollout of 4G will also continue to drive long-term, solid demand for communication towers while the commercial launch of 5G continues during the next 12 months. As the lifecycles of each network technology is approximately 20 years, towerco investors who are able to add additional tenants, equipment and upgrades will greatly benefit from higher returns.

Telecoms fundamentals: Fibre

Fibre, the ‘future-proof technology’, is becoming a technological necessity for individuals and businesses alike. With an increase in consumption from homes and commercial properties, investment into fibre infrastructure now offers investors access to an asset that is expected to achieve significant growth over the short to medium term. But what is driving this growth?

As surging IP traffic and new digital services drive demand for network capacity, storage and data processing, providers are increasingly turning to new technologies to remain competitive. Technologies such as Fibre to the Home (FttH) have been proven to handle high capacity bandwidth needs, and is being deployed across several markets. Attached to the FttH model are strong market fundamentals, as well as large forecast increases in data traffic which continue to support further growth and investment into the sector.

Regulatory frameworks across the globe are transforming to ensure FttH continues on this positive trajectory. Recently, the EU founded the FttH Council – the body committed to deploying new fibre networks across Europe by 2025. Councils and bodies in other territories, such as the FttH Council Asia Pacific, FttH Council Americas and FttH Council Africa, have also been established to ensure that not only are regulation targets met, but that growth can continue and market penetration is optimised.

New regulations partnered with the increasing appetite from investors has led to a surge in M&A activity in the last 12 months. This activity can be highlighted with a very recent example –  the acquisition of bn:t Blatzheim Networks Telecom and SOCO Network Solutions, two German FTTC/H network operators and internet service providers, by UK-based Basalt Infrastructure Partners (both advised by DC Advisory). Furthermore, Canadian pension fund Fiera Infrastructure (advised by DC Advisory) acquired Islalink, the leading non-incumbent optic fibre submarine cable connecting Majorca and mainland Spain, from EQT in 2018. Overall investor activity has continued its strong momentum in the course of 2019 with a number of high profile transactions, including the acquisition of inexio by EQT in October 2019.

France was the first European state to launch a countrywide investment program – targeting 100% FttH coverage by 2025 across its territory. Total investment is estimated at €20 billion including up to €6.5 billion in public subsidies dedicated to rural areas. Specific regulations were developed to provide for long-term visibility to private investors, while ensuring open access to internet providers and minimising overbuild. Thanks to the program, several sizeable regional FttH players have emerged, such as Altitude, Axione and Covage to name a few. The scheme has also attracted infrastructure funds in a wave of M&A deals involving French FttH players – a trend we expect to continue.

With growth expected to continue across the global fibre market in the short to medium term, how should investors seek investment opportunities?

We expect to see the fibre market continue evolving, indicated by recent investments into the sector. The two distinct models, wholesale and retail, within the fibre market are influencing investments in both the mature and less mature regions.

The wholesaler, the sole network owner who outsources the supply to a third party, will continue to benefit from significant investment due to its stable and attractive prospects. Less mature markets such as Germany and the UK will continue to have a combination of both wholesale and retail models as they try to break into the mature space to secure stable cash flows and avoid customer churn.

France, whilst a developed market with a wholesale model in place, has unique ownership structures under its concession schemes – a structure we expect will remain.

To satisfy return requirements and maximise opportunities, it’s critical for investors to assess the variety of risk profiles, such as:

  • Fibre penetration by country maturity
  • Business model type: wholesale vs. retail
  • Ownership structure: pure ownership of network vs. concession scheme

With attractiveness in the sector expected to increase, we predict the less mature markets will work towards maturing in order to advantage from the appealing and stable structure.

What do­ Netflix, Spotify, the Internet and iCloud all have in common? Datacentres…

Consumer behaviour surrounding mobile computing, increased internet traffic, IT security demands and the use of cloud applications have resulted in exponential growth in the datacentre market over the last five years, with higher demand for data storage than ever before. The explosion of capacity demand, cloud computing, streaming and IT securities has resulted in the need for data to be physically stored in locations, and has subsequently led to increased investment across the space.

Data centre traffic has reached the zettabyte era and annual global datacentre traffic is forecast to triple by 2021. With this increased traffic comes significant investment opportunities, but are operators and investors aligned with long-term objectives?

The datacentre market has seen significant M&A activity and consolidation over the last few years. This activity has been caused mainly by operators experiencing pricing pressures, resulting in two key trends:

  • Operators selling their centres to access capital; and
  • Operators raising capital to build more datacentres to maximise growth.

This trend has been demonstrated recently following the acquisition by China-based Strategic IDC Limited (advised by DC Advisory / Daiwa) in UK-based data centre, Global Switch in 2018. This transaction represents the largest deal of this kind with an Asian-based investor coming into Europe. In addition, DWS (advised by DC Advisory) acquired NLDC from KPN and The Data Centre Group, two synergistic data centre operators in the Netherlands, which will be combined into a ‘national champion’ in 2019. The Spanish market has witnessed a rising interest in non-telco players trying to capitalise on their existing networks, a trend derived from the increasing investment attractiveness into the sector.

With these factors in mind and these trends set to continue, what should operators and potential investors do to remain ahead of the curve?

We expect to see solid drivers across the multi-tenant datacentre sector enabled by cloud onramps and software defined networking onramps, optimising and bridging mission-critical applications for key hyper-scale spenders, telecoms, and enterprises.

Following GIC’s joint venture with Equinix for hyper-scale data centres in Europe, we anticipate the trend of infrastructure funds growing new sources of datacentre capital.

Whilst the influx of data demand provides ongoing needs for datacenter operators, construction costs will become a top priority. For operators wanting to expand for additional capacity, the key will be able to attract new or expand key anchor tenants.

Investors in datacentres should bear in mind that multi-cloud adoption and 5G will reshape the industry. The robust growth of these connective technologies will require new datacentre infrastructure and capabilities in new locations across the globe.

Conclusion

The trends highlighted above will continue to influence sector growth and M&A activity. To capitalise on this growth, investors and operators in the sector should remain up to date with towers, fibre and datacentre activity and how these sub-sectors are shifting the landscape. Tactics include:

  • Monitor commercial trends across each sub-sector and the impact imposed by changing regulations;
  • Consider opportunities where customer value and operational synergies can be generated; and
  • Identify investment opportunities that can provide access to new markets, unlocking long-term growth potential.

 

[1] Towards 5G, European Commission 2019

[2] ‘The Race to 5G is a race America must win’, South China Morning Post 2019