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StockBeat: Vodafone's Tower IPO

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·3 min read
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By Geoffrey Smith

Investing.com -- After a heady debt-fueled ride with Cellnex (MC:CLNX), investors in European telecoms can now enjoy the discreet charms of dullness with Vodafone (NASDAQ:VOD)'s towers spin-off.

The U.K.-based telecoms group finally set the price range for the IPO of its towers unit on Tuesday, a move that will free up capital and reduce its debt burden while reducing the cost – so it hopes – of building out 5G networks.

The deal, set for the Frankfurt Stock Exchange next week, will value the company at anywhere between 11.7 billion and 14.7 billion euros ($14-$17.6 billion), will allow investors a new play on the fast-consolidating sector of telecoms infrastructure, which has burgeoned as the continent’s big telcos – most already heavily indebted - have scrambled to raise cash for 5G upgrades.

Vantage, with its 82,000 towers across 10 markets, promises to challenge Spain’s Cellnex for leadership in the European market. The Spanish company has been on a buying spree in the last couple of years, making the most of a first-mover advantage while the less agile incumbents have had their hands tied by internal restructurings. Vodafone has needed the best part of two years to bring Vantage to market, and France’s Orange (NYSE:ORAN) only announced its plans for a separate towers company last month.

Cellnex, which was the top-performing stock in the sector for most of the last three years, hasn’t benefited from the prospect of such competition. Cellnex stock has fallen 25% since October. A slew of acquisitions at increasingly demanding multiples has created the impression that it’s having to try harder and harder to stay ahead of the pack. As a result, its balance sheet is now looking strained. It paid a little over 400,000 euros a mast for CK Hutchison’s European towers in January, but 500,000 for Altice’s towers joint venture last month.

Even though the ratings agencies have been appeased by capital increases, a BBB- rating leaves little room for mishaps on the earnings side, especially given that interest costs have swallowed the last three years’ operating profits.

Vantage, by contrast, is coming to market with dull but respectable free cash flow of around 500 million, and a dividend payout that equates to 1.9% at the top of the bookbuilding range.

A market value of 14.7 billion euros also makes Vantage look cheap relative to Cellnex at 20.5 billion. However, analysts point out that Cellnex ought to be able to extract more revenue from each mast given its independent status. Mobile operators using Vantage’s masts will always fear being second-class customers behind Vodafone itself, which will remain the anchor tenant.

For Vodafone, meanwhile, the news appears largely priced in: the bulk of its 1.9% move upward in European morning trading was due to uplift from the broader market rather than a pop in response to the news of the price range. The shares had fallen at the opening.

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