Aggressive Dealmaking Drives Europe's Most Expensive Stock
(Bloomberg) -- Combining two badly performing industries usually doesn’t make them any better. Yet that’s what’s underpinning Europe’s most expensive stock.
Spain’s Cellnex Telecom SA has become the highest-valued stock on the regional benchmark by serving as a landlord to the ailing telecom industry. While real estate and telecom are among the worst performers on the Stoxx 600 Index this year, Cellnex has soared after snapping up towers from carriers eager to convert their assets to cash, helping them keep up with network investments.
“They are in a very sweet spot,” Neil Campling, an analyst at Mirabaud, said by phone. “The only worry at the moment for me is that the stock has moved an awful long way in a very, very short space of time.”
The tower company model is fairly new to Europe, in contrast with the U.S., where American Tower Corp. and Crown Castle International Corp. began buying communication sites in the mid-1990s. Since its initial public offering in 2015, Cellnex has seized the relatively open field with aggressive dealmaking, spending 2.7 billion euros ($3.1 billion) just last month on more than 10,000 towers in Italy, France and Switzerland.
The company looks set to continue its acquisition spree -- it announced on Tuesday the issuance of as much as 850 million euros in a nine-year convertible bond to fund purchases. The company has increased the number of network infrastructure sites in its portfolio by six-fold to about 45,000 in the past 4.5 years, including ones it has agreements on building for clients.
Cellnex has gained nearly 60% in the first half, taking this year’s estimated price-to-earnings ratio to an eye-watering 131, according to data compiled by Bloomberg. That’s beyond such high-growth companies as the Dutch payments prodigy Adyen NA, or computer-games maker CD Projekt SA, which is about to publish its most-hyped title ever. Cellnex declined to comment on the valuation.
While Cellnex’s expected revenue growth is much slower than the other names at the top, the surveyed 12 analysts estimate its earnings per share to nearly double from 2019 to 2021. Tower stocks have showed up on investors’ radar thanks to their stable cash flows and good visibility: smaller Italian peer Inwit SpA has also had a good year with a 43% gain so far. Tower contracts are usually signed for a decade or two.
“There is a premium being paid for corporates that offer visibility,’’ Guy Peddy, an analyst at Macquarie, said by phone. “Cellnex is the only clear, European, free-from-ownership-issues, tower-focused operator.”
Cellnex’s biggest shareholder is Italy’s Benetton family, which owns about 30% of the stock via its investment company Edizione. The family is said to be backing former Telecom Italia SpA head Franco Bernabe to replace Marco Patuano as chairman, Bloomberg reported Monday, citing people familiar with the matter.
During the stellar run of the second quarter, Cellnex shares have mostly traded above the average price target, leaving analysts to play catch-up. The gap became the widest ever this week at 3 euros and currently implies a 4.8% downside to the stock, according to 27 estimates in a Bloomberg survey.
In Europe, the share of telecommunications infrastructure held by independent tower companies is low compared with other regions, according to an April report by accounting and consultancy firm EY and the European Wireless Infrastructure Association (EWIA). The share of independent tower firms was a mere 17% in 2017, compared with 67% in North America and 42% in the Caribbean and Latin America. Operators could free up 28 billion euros if that share grew to 50%, the report estimates.
Race to Buy
One risk to Cellnex’s tower campaign across Europe is competition for assets. The region’s emerging tower business is “not a one-horse race,” analysts at Kempen warned in a note last month, saying that Cellnex losing out on deals could lead to investor disappointment. In 2016, American Towers teamed up with Dutch pension fund PGGM Fondsenbeheer BV, beating Cellnex to win Antin Infrastructure Partners’ French phone towers.
While American Towers has been more focused on emerging markets since, there’s a possibility that a private equity firm such as KKR & Co. Inc. would join the party, Giles Thorne, an analyst at Jefferies said in a note on Tuesday, keeping his buy rating and raising his price target by more than 50%.
“The one candidate that has the assets and scope on paper to replicate Cellnex’s march across Europe is KKR,” Thorne said. “Its actions suggest it doesn’t see the regional synergy case for cross-border M&A. This may yet change.”
Additionally, some telecom carriers see network quality as an important competitive advantage and are reluctant to relinquish control of their top sites. Tim Hoettges, chief executive officer of Deutsche Telekom AG -- which is not a client of Cellnex -- has spoken of “golden sites” as a category of differentiating network infrastructure locations the company wouldn’t be willing to share.
Yet overall, tower companies are well placed to benefit from industry-specific drivers, including increased data consumption, Josh Sambrook-Smith, a thematic equity analyst at Sarasin & Partners, said by phone.
“You have all the other super exciting, long-term trends,” said Sambrook-Smith. “This is just a relatively safe way to play it.”
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