The future’s bright, the future’s private equity
The future’s bright, the future’s private equity
08 December 2020 | Alan Burkitt-Gray
Telcos might give stable returns on long-term infrastructure, but stock markets don’t seem to like the industry, writes Alan Burkitt-Gray. That’s why private equity investors and pension funds are stepping in
What’s the connection between 3i Infrastructure, Amber Infrastructure, AustralianSuper, Brookfield, I Squared Capital (ISQ), KKR, Macquarie Capital, Ontario Teachers’ Pension Plan, Polhem Infra, Warburg Pincus and UBS Asset Management?
They’re all pension funds or private equity investors that have bought or bid for telecoms operators over the past few months. Or, in a few cases, they have been named as potential bidders for carriers — though without a result.
It’s a significant change in the industry that marks out relatively new, dynamic companies that are attractive long-term investments for funds.
Traditional operators tend to remain in the conventional financial model. AT&T and Verizon in the US are publicly quoted; so are BT, Deutsche Telekom, Orange, Telefónica and Telia in Europe. Being quoted means having to make quarterly statements and face questions from investors and analysts every three months — as well as rumours from share tippers.
Look at the share price over the past five years of five of Europe’s major operators. Orange has dropped from €16.62 in late November 2015 to €10.86; and Telefónica fell to just a third of its value, from €11.64 to €3.76 in the same period. Deutsche Telekom’s shares fell less dramatically, but still fell, from €17.48 to €15.23. In Sweden, Telia dropped from 42.89 kronor to 37.06.
One of the worst records was BT’s, whose shares dropped from £4.99 five years ago to £1.23 — and if you look at the pound-euro conversion rate it’s even worse: from €7.10 in November 2015 to €1.37 five years later — less than a fifth of their value.
In the US, AT&T shares fell moderately from $33.57 to $28.99 over the five years, but Verizon stood out by increasing from $45.23 to $60.41.
So public markets don’t, on the whole, like telecoms; private equity investors and pension funds do. Of course, some of these private equity investors are themselves quoted. Sweden’s EQT, which is a major investor in telecoms infrastructure, listed its shares on the Stockholm branch of Nasdaq in 2019. Digital Colony — which this year bought Zayo for $14.3 billion in a joint acquisition with EQT — lists its shares on the New York Stock Exchange (NYSE).
Zayo was also listed on the NYSE until the Digital Colony-EQT acquisition, completed in March 2020.
Share price collapse
Share listing is not always friendly to a company’s management. Look at GTT Communications, which bought a bunch of infrastructure companies, including Hibernia Networks and Interoute, paying billions, only to see its share price collapse from $60.25 on 16 March 2018 to around $4 in late 2020. Its peak for 2020 was only $15.14 at the end of February 2020, a quarter of what it was two years before.
You don’t get that with private equity and pension funds. GTT put its infrastructure division up for sale, and a number of them were immediately attracted. There was a curious tale, that GTT released officially in September 2020, that it was talking to pension fund AustralianSuper and Australian bank Macquarie Capital, and the price would be $2.15 billion.
A few days earlier the Bloomberg agency had named those but added a third, the UK private equity fund 3i.
This was an intriguing set of tales, because only days before someone in the New York financial world told Capacity — on condition of anonymity — that GTT had a bid on the table of $800 million. Another told us: “Current shareholders will be upset if the price is below $1.9 billion.”
In fact everyone was wrong, more or less. The price was right, $2.15 billion, but the institution that is paying it is ISQ, based in Florida. That’s the private equity investor that already owns HGC Global Communications — see interview with CEO Andrew Kwok on pages 26-27.
Once the deal is complete, some time in the first half of 2021, the former infrastructure division of GTT, whatever it is called, will not have to face quarterly analysts or rumours from the likes of the Motley Fool and other share-tipsters.
ISQ partner Mohamed El Gazzar told me on the day that the GTT infrastructure deal was announced, in October 2020, that the investor had been interested in buying Interoute some years before, but was outbid by GTT, which paid $2.3 billion. ISQ is now looking for further infrastructure deals to add to its portfolio: “One thing we all acknowledge is the digital infrastructure world has been transformed. In enterprises today and in homes, bandwidth has become absolutely essential.”
This is very similar to what Marc Ganzi of Digital Colony said in March 2020, when he told me the background to the joint bid with EQT for Zayo. Infra-structure assets are a good, solid investment: “The assets are always the key to any deal in digital infrastructure.” Zayo has a “unique” footprint in the US and Europe, he added.
“It would be very difficult to replicate what Zayo has built over the last 13 years,” in terms of either replacement cost or opportunity cost.
“It would require a solid 10 to 15 years to build it ourselves. And there’d be no guarantee we could actually build it at the same cost that we were buying Zayo for on a route-mile basis.”
That’s the argument that has brought other investors into telecoms. Take Polhem Infra, a Swedish state-backed pension fund, which is to buy Telia Carrier from the Telia group for the equivalent of €900 million.
Stable and long-term owner
Mikael Lundin, CEO of Polhem Infra, says: “As an investor in Nordic infrastructure we will be a stable and long-term owner, committed to the company and its role in the transition towards sustainable and thriving societies globally. We will support the company with a thought-leading board of directors, and we will continue to invest in digital infrastructure, a core investment area for us.”
Polhem Infra is jointly owned by three Swedish pension funds that are required to manage the capital in order to maximise the benefit to the pension system. The mandate is to invest capital to achieve high returns over the long term at low risk.
The fund says its “strategy is to create value by investing in companies that own and operates infrastructure assets that provides essential services to society”.
And that sums up the rationale. Build a fibre network and, apart from having to renew the optoelectronics every few years, it’s there for years — like a motorway, or a dam, a bridge or a power station. Investors such as ISQ and Polhem Infra invest in that type of infrastructure; now they have recognised that telecoms networks are infrastructure too.
Those were conversations I have had during 2019 and 2020 while following developments with Zayo, GTT, Global Cloud Xchange (GCX) and other companies. Almost all of them were for background only — no names, no affiliations, no details to be quoted. But they all pointed to a trend in the industry. You have new friends, telecoms companies.
Look at what’s going on in Italy, where there have been rival attempts to build national fibre networks, not only long-distance but also fibre-to-the-home (FTTH) services. It’s coming to be thought as crazy as having rival sidewalks along the streets of Milan, or rival electric power distribution networks.
TIM, the former Telecom Italia, and its Swiss-owned rival, Fastweb, have their own joint network, FlashFiber. Private equity company KKR is investing in it as part of an evolution to a national network, FiberCop, that is expected eventually to merge with Open Fiber, which is an FTTH network half-owned by state investment company Cassa Depositi e Prestiti (CDP). The other shareholder in Open Fiber is Enel, the national electricity company, but Macquarie, the Australian investor, is planning to buy that stake.
Wholesale fibre network
It’s complex, but eventually it will see Italy — at some time in 2021 — have a single wholesale fibre distribution network, to which all retail telecoms operators will have access.
“A speedy resolution to the single network project was needed. This serves as a catalyst to provide a key foundation for future economic growth and productivity,” says Paolo Pescatore, at London-based analysis company PP Foresight.
“Italian digital infrastructure is thriving with significant investment in next generation networks such as fibre broadband and 5G. It feels like we are in a golden era of connectivity which promises to transform the way we interact and engage with devices in the future.”
And private equity is doing what nationally-backed fibre companies are singularly failing to do. Look at the UK, whose government has decided to scale back its plans to promote 100% FTTH. But this year Warburg Pincus, a US private equity company with a strong European presence, stepped in with a £400 million investment in Community Fibre, which is building FTTH in social housing blocks across London.
Olaf Swantee, former CEO of Orange, EE and then Sunrise, is its executive chairman: he’s been an adviser at Warburg Pincus since leaving Sunrise, a Swiss mobile operator, in early 2020.
Community Fibre is building networks capable of delivering symmetrical 1Gbps services into people’s homes, something undreamed of by Openreach, BT’s last-mile copper and fibre subsidiary, which has 60Mbps downstream on a good day, perhaps 15Mbps up.
René Obermann (pictured), former CEO of Deutsche Telekom, who is co-head of Warburg Pincus, says: “Community Fibre aims to close the digital divide and promote social inclusion. Affordable high-speed internet for London’s social housing, and free gigafast connection to community centres and libraries will create limitless opportunities in education, recruitment, and training, with one click of a button.”
Warburg Pincus has invested $4 billion in telecoms and technology infrastructure over more than 20 years. Recent examples include Inexio in Germany, Converge ICT in the Philippines, INEA in Poland, America.Net in Brazil, Airtel in Africa, and satellite company Inmarsat.
The future’s bright, the future’s private equity, as Orange didn’t say in its UK launch ads in the 1990s.
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