Cellnex CLNX
March 29, 2020 - 12:28pm EST by
2020 2021
Price: 39.00 EPS 0 0
Shares Out. (in M): 385 P/E 0 0
Market Cap (in $M): 15,028 P/FCF 0 0
Net Debt (in $M): 3,709 EBIT 0 0
TEV ($): 18,737 TEV/EBIT 0 0

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Company Description

-   Barcelona headquartered Cellnex is Europe’s largest independent telecom tower platform with a portfolio of c. 43,000 sites[1]

§ The Company is the result of a spin-off from Abertis and was IPO’d in the Madrid stock exchange in May 2015 with a 15,170 sites portfolio

§ Cellnex has since nearly tripled its size acquiring more than 27,500 sites at accretive levels in terms of TSR[2]

-   Telecom tower operators lease strategically located land, upon which a tower is erected for the purpose of hosting transmission equipment for MNOs[3]. These telco tenants sublease vertical space on the tower, for which they engage in long term contracts with the tower operator (typically 10-20 years)

§ Cellnex leases site land plots and owns the tower structure (as well as equipment shelters, cables and base stations), whereas the telco tenants (MNOs) own the antenna equipment placed on their rented space (including microwave equipment) and shelter base station equipment

-   Company is expected to generate € 2.0bn Revenues / € 900m EBITDA / € 680m Levered FCF post closing of its latest acquisitions in 2019 & 2020[4]

§ Spain and Italy account for 23% of total sites each, whereas UK, France and Switzerland represent 18%, 17% and 12% of total sites respectively[5]


Investment Merits

-   Recurring long term revenue stream

§ Contracts are typically non-cancellable and generally include 10-20 years initial term with renewal clauses

§ Annual lease escalators linked to inflation

§ Low historical annual churn based on comparable peers’ experience[6]

§ Brand name tenancy occupants: Arqiva, Orange, Bouygues, Iliad, Salt, Telefonica, Yoigo and Masmovil are among its tenants

-   Superior pricing power with strong barriers to entry

§ Company’s portfolio is a result of sale & leaseback transactions with MNOs, which typically sign long term contracts including an ‘all or nothing’ renewal clause – telecom operators are not able to cherry pick certain towers and migrate partially to nearby competitors where it makes economic sense. The alternative, migrating its transmission equipment fleet in full to alternative tower platforms, entails high operational risk

§ Location-based business with significant zoning / environmental restrictions

§ Rational and disciplined supply of new telecom towers

o Capital and time intensive to build meaningful scale, giving an advantage to existing tower companies

o AMT built 20 new towers in the US from 2018-YTD[7] (vs. 40k owned sites), reflecting the industry’s disciplined approach to new supply

§ Favorable pricing dynamics have resulted in a cumulative c. 11% Return on Tangible Capital[8] and 18% Return on Equity[9]

-   Scalable business / economies of scale

§ Ability to add additional assets to existing markets without a need for significant increase in overhead

§ c. 4% PoP[10] organic growth and CPI indexed revenue contracts translate into stabilised c. 9-10% LFCF[11] growth due to operating leverage

-   Secular industry tailwinds driven by increasing wireless data demand and expected migration to 5G

§ Western European mobile data consumption is expected to grow c. 40% CAGR until 2022[12]

§ 5G is expected to require the deployment of macro and small cells to meet densification of networks and facilitate higher band spectrum[13]

-   High cash flow conversion given low ongoing capital requirements

§ Low maintenance capex of 2.5 – 3% of sales includes spending on lighting systems, fence repairs and ground upkeep

-   Increasing trend of MNOs across Europe outsourcing infrastructure / Best positioned consolidator in a large total addressable market

§ With 43,000 sites (of which 65% added during last 4 years), Cellnex is by far the largest independent European tower operator[14]. The European tower industry is estimated to be comprised of c. 500k towers (c. € 150bn) where 70% are still operated by telecom companies (only 10% of US towers are operated by telecom companies, the majority having already been sold to independent tower operators)

§ MNOs are looking for inorganic ways to de-lever on an accretive basis (towers are currently being sold at 15-20x EBITDA vs. 6-7x trading levels)

-   Aligned and strong management team

§ Since IPO in May 2015, Cellnex’ management team has delivered a 14% CAGR Levered Free Cash Flow accretion and 25% TSR CAGR

§ Management team’s LTIP is a function of both 1) Recurrent Levered Free Cash Flow per Share growth and 2) Share price growth (TSR)


Key Risks & Mitigants

-   Counterparty Risk

§ Cellnex’ counterparties are mainly large telco operators that are facing capex pressures[15] to keep up with the growing data usage and 5G migration, adding further uncertainty to debt repayment capabilities on already levered capital structures[16]

-   Interest Rate Risk

§ Cellnex’ valuation is highly sensitive to discount rate: every 100 bps widening in terms of exit levered yield[17] implies a 720 bps loss in IRR[18]

o At 4.5% assumed exit levered yield, incoming investors are already benefitting from an all-in 14% TSR after including c. 9-10% LFCF growth

§ Levered Return on Invested Capital is highly dependent on interest rates. Assuming 70% LTV on future M&A acquisitions (LTV levels based on historicals), a 50 bps increase in Cost of Debt results in 110 bps delta in IRR

-   Competition by New Entrants / In-house development of telecom towers by clients

§ Considerable operational risk of migrating to an alternative tower. Tower antennas are a critical component of telco’s service offerings and account for <1% of total Opex[19]

§ Higher competition risk vis-à-vis the second tenant of a tower, who can typically withdraw with 6 months notice. Churn is purely reliant on pricing

o Economics[20] driving decisions looks favourable for existing platforms such as Cellnex and supported  by low tower operators churn rate[21]

-   Capital Allocation Risk: Tighter and Smaller M&A Market due to Increasing Competition

§ Cellnex’ ROIC (including M&A) has been steadily decreasing from 12% in 2013 to c. 6% in 2019, reflecting tighter acquisition yields over time

o Management team’s LTIP incentivises them acquire assets only at levels accretive from a LFCF per share perspective

§ JVs present an alternative for telco operators to crystallize the value of their towers without the need to sell to tower operators at discount prices[22]

Incoming Metrics

-   At current trading levels of € 39.0 per share, we are coming in at a stabilised c. 5% levered yield post completion of already signed M&A in the context of a 9% stabilised levered free cash flow yearly growth, implying a Total Shareholder Return of 14% 2022E

§ Compares to Cellnex’ historical LFCF yield trading levels of 4.1 – 7.3% since IPO in 2015 and 3.7 – 5.7% LFCF yield range of American Tower[23] since IPO in 2011. AMT’s levered free cash flow is expected to grow at c. 10%[24], implying a TSR of c. 14% at current trading levels




[1]. Including all signed M&A transactions up to December 2019.

[2]. Cellnex has generated a 7% Incremental unlevered ROIC CAGR since 2013, whereas incremental ROE has been 13%. This compares to Cellnex’ historical trading levels of 4-7% levered yield. ROIC is defined as Unlevered FCF (pre-M&A and interests) / Invested Capital. Invested Capital calculated as Gross PPE + Goodwill + Intangible assets from telecom infrastructure services + Net Working Capital (Inventories plus Trade Receivables less Trade Payables).

[3]. Mobile Network Operators.

[4]. Cellnex has signed but not completed transactions that total c. 16,000 additional sites in addition to current portfolio of 29,000. The company has agreed to pay € 5.8bn upon completion in 2H19 and 2H20 and has already fully capitalised its structure through €4bn capital increase and available liquidity in the form of debt/cash. EBITDA and LFCF assumptions from recent acquisitions assumes a 10% haircut to Company’s guidance figures.

[5]. Including all signed M&A transactions up to December 2019.

[6]. Largest American tower operator American Tower’s (“AMT”) historical reported churn rate is c. 1-2%, whereas TIM’s tower platform Inwit’s churn rate is c. 2.5%.

[7]. AMT 3Q19 supplemental information.

[8]. Return on Tangible Capital defined as Unlevered Free Cash flow divided by Invested Capital. Invested Capital defined as Gross PPE (cost basis) plus Net Working Capital. ROE defined as Levered Free Cash Flow divided by Invested Equity. Unlevered Free Cash Flow defined as EBITDA less Cash Taxes Paid less Change in Working Capital less Maintenance Capex.

[9]. Invested Equity defined as Invested Capital less Total Financial Debt. Levered Free Cash Flow defined as Unlevered Free Cash Flow less Cash Interests Paid.

[10]. Each tenant on a given site is considered a point of presence (“PoP”). Refer to Appendix document for further details.

[11]. Levered Free Cash Flow defined as Unlevered Free Cash Flow less Cash Interests Paid. Unlevered Free Cash Flow defined as EBITDA less Cash Taxes Paid less Change in Working Capital less Maintenance Capex.

[12]. Source: Cisco VNI report 2019.

[13]. Company’s current portfolio is built of macro cells. Cellnex has started to deploy small cells (1.5k sites) in preparation for upcoming 5G requirements

[14]. Cellnex is the largest European independent tower operator with c. 43,000 run-rate sites, followed by Inwit with 23,000.

[15]. European Telcos face strict and potentially expensive 5G roll-out obligations until 2025 under EU Directive.

[16]. European Telcos are levered c. 2.7x (50% LTV) according to JPM as of August 2019.

[17]. Levered Yield defined as Levered Free Cash Flow divided by equity value.

[18]. Under Base Case.

[19]. Calculated from AT&T’s 2018 financial statements.

[20]. Typical cost for a second tenant is c. € 7-15k / telecom tower. The alternative to build a new tower requires a c. € 100,000 upfront construction investment for € 5,000 savings in terms of opex. The alternative to move to a cheaper tower offering a €10k rental fee (vs. current €15k) requires an investment of c. € 20-30k for radioplanning and nodes migration costs which also implies execution risk. Operational risk is high vs. economic savings in absolute terms.

[21]. American Tower’s historical reported churn rate is c. 1-2%, whereas TIM’s tower platform Inwit’s churn rate is c. 2.5%.

[22]Examples of tower JVs include MBNL (EE & Three) and CTIL (O2 & Vodafone) in the UK, Inwit & Vodafone in Italy.

[23]. American Tower is the world’s largest independent telecom towers operator with 170k towers worldwide, of which 44% in India, 24% in the US, 22% in Latam (mainly Brazil and Mexico) and the balance in Europe.

[24]. Citi Research as of July 2019.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


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