Description

INFRASTRUTTURE WIRELESS ITALIANA S.p.A. (INW.IM) – Long

Last Sale: €8.97/sh

Market Cap: €8.6b

TEV: €12.6B (€4.0b Net Debt)

30 Day Avg Daily Volume: ~1.6mm shares/day (~€15mm)

Investment Horizon: ~12-24 months

(all figures are in EUR)

Summary

Inwit (INW) is the largest cell towers player in Italy.  Approx 85% of sales are derived from its two anchor tenants – Vodafone (VOD) and Telecom Italia (TIM) – under long term inflation-linked contracts.  Trading at ~8% ’24 recurring FCF yield, the stock is attractively priced.  Furthermore, in a briskly consolidating European towers landscape, INW screens as a potential (if not probable) takeout candidate.

Business Overview

Inwit is the #1 cell tower operator in Italy, controlling about 23k towers.  The #2 player is CLNX, and the two combined control >90% of the Italian towers market.  

INW was established in April 2015 following TIM’s decision to carve out its Italian towers into a new and separate entity. This was followed by an IPO process, with INWIT’s shares listing on stock exchanges in June 2015 (note: IPO share price was EUR3.65).  In March 2020, INW merged with the tower assets of Vodafone Italy.

Investment Thesis

The core points of the long INW thesis include:

• INW is the #1 towers player in Italy (23k towers) and 6th largest player in Europe. 

• 85% of rev come from master service agreements with TIM and VOD.  These are some of the best contracts in the global towers space as the contracts are linked 1:1 to Italian CPI (which is running +9% now) – so escalator is equal to 100% CPI with a 0% floor. Contracts are “8+8” in duration.

• Rough rule of thumb: +1% inflation equals >5mm EBITDAaL

• Change in shareholder structure

• VTWR (VOD’s tower business) owns 33% of the equity

• TIM has been selling down their INW stake over the last couple of years as their balance sheet is a mess, they now own 3% (vs 30% two years ago)

• A PE consortium led by Ardian has completed two INW equity purchases (both of which were TIM sales) bringing their stake to 27%

• 2020 bought 15% at ~9.50/sh

• Aug 2022 bought 12% at ~10.75/sh (about 20% higher than where shares trade today)

• Given TIM selling down their stake, INW’s CEO and several board members resigned in August when the last Ardian transaction was completed – while this does not seem like a big deal it is something worth highlighting as a new CEO is set to be named in Ocotber.

• INW fundamentals are very good - mgmt raised short/med term guidance after Q2 thanks to higher Italian CPI. At the same time, mgmt lowered growth assumptions related to Iliad, a customer they have an ongoing dispute with re: remedy sites - by lowering Iliad-related growth assumptions this threat tto guidance has been mitigated.

• INW will fall below their targeted net leverage range in ’23 and will likely do some sort of capital return to shareholders – based on conversations with their mgmt. team we believe they are likely to do a special div as opposed to buyback (as they don’t want to decrease trading liquidity in the stock).  Overall – total divs in ’23 could amount to ~10% of market cap.

• 

• European towers is a quickly consolidating industry and INW is a clear takeout target

• In conversations with mgmt. we would categorize INW as much more of a seller than a buyer right now.  Moreover, their actions also speak to this view, as the company hasn’t done much M&A since the ’20 merger and their commentary indicates not much is on their deal plate today.

• Lots of dominos have been falling in European towers over the past couple of years, including:

• Telia sold towers to BAM for 28x EV/EBITDA (closed in June ’22)

• Jul ’22 Deutsche Telekom sold a controlling stake in its tower biz (GD Towers) to BAM/DBRG for 27x 

• VOD owns 82% of VTWR, and is looking to potentially sell down their stake to 51%... KKR, GIP, and others have been rumored to be bidding now

• Totem (owned by ORA.FP) is in the process of figuring out what they will do with their towers… strategic timeline is somewhat murky, however

• Outside of Totem there doesn't appear to be an asset that’s as sizable as INW that can be bought in Europe/NA (and a likely Totem deal prob would not be done for a control stake)

• Who buys INW?

• VTWR seems like the most likely candidate – VTWR mgmt. has expressed that they like the asset, and that they are not looking to divest their 33% stake and would consider consolidating it entirely. 

• PE – notably Ardian, though could also include a number of players such as BAM, GIP, KKR, etc.

• AMT – been getting more active in Europe and INW is an asset that could make sense for them

• Valuation is cheap to comps in Europe/US

• Trades at ~15x ’24 EV/EBITDA adjusted for leases (see below), or ~8% ’24 recurring FCF

• While we don’t think INW would get a ~27-28x EV/EBITDA mult in a takeout scenario given that it's an Italian asset (despite the fact it has great contracts), the asset should still fetch a healthy multiple in a takeout scenario.  That said even at ~20x mult yields a 13-14/sh takeout target.  This range also equates to a 5.0%-5.5% ’24 recurring FCF yield which feels fair.

• And, with a big reg/special div likely coming next year (~0.90/sh) downside is somewhat protected (and could act as a potential catalyst for a buyer to step up to the plate before capital is returned)

Key Risks

• Potential for consolidation from 4 to 3 mobile players in Italy could hamper the growth outlook

• RAN (active network; i.e. antennae) sharing

• European bond yields keep rallying

• Small cells & DAS

Catalyst

'23 capital return plans

Iliad resolution

Takeout