18 Jul 2022


Spark deals shows infrastructure is still in high demand

If you’re looking for a solid investment with stable and predictable cashflows, you could do worse than explore listed infrastructure assets.  This conclusion was hammered home to me yet again by the news that Spark New Zealand (SPK:ASX) is selling 70 per cent of its passive tower infrastructure company for a pretty tidy sum. The deal follows other recent asset sales, and shows the continued appetite by investors for these assets.

The Montgomery Fund has been a long-term investor in SPK, New Zealand’s largest telecom company. We like it because it’s a well-run, stable dividend payer. It is a relatively slow growth business as the legacy fixed-line calling business is in decline and hence masking the growth in the mobile communication and IT divisions that are showing well above GDP underlying growth rates.

With the recent low interest rate environment and a lot of capital seeking steady long-term return, there has been a significant increase in interest from telecom operators to monetise some of the long-term assets that they have built up over the years that are somewhat peripheral to the core operations of a telecom operators. To be specific, we are talking about the “passive” parts of the mobile towers which can be described as the physical parts i.e. the tower itself, the power supply and the buildings that networking equipment is hosted in. This infrastructure is supporting the “active” parts of the of the network which consists of the antennas, the connection to the backhaul fibre network and other “smarts” that make the network function.

A telecom operator’s competitive advantage lies primarily in the active part of their infrastructure and there is a strong argument that there could be benefits to gain if the ownership of the passive parts were separate from the active and in this way infrastructure sharing could take place between different operators to lower overall system costs.

The telcos in Australia and New Zealand have all realised this and Telstra, Optus and TPG all struck deals to divest parts of their infrastructure during the last year.

Spark and Vodafone have both also recently announced that they are going down the same path and on 12 July, Spark announced that they have sold 70 per cent of their passive tower infrastructure company Spark TowerCo to Ontario Teachers’ Pension Plan which is one of the largest infrastructure investors in the world.

I thought it would be interesting to have a closer look at the deal and see if there is anything we can learn and apply to other investment situations.

First the facts:

  • They are selling 70 per cent of Spark TowerCo which will result in a cash inflow of approximately $900 million.
  • The 100 per cent valuation is stated to be $1.175 billion which implies that they will receive some additional cash from the entity in connection with the transaction as 70 per cent of $1.175 billion is $822 million.
  • Spark TowerCo is expected to produce $34.8 million in EBITDA in FY23 so this equates to an EV/EBITDA multiple of 33.8x.

My take on the transaction is:

  • It was surprising that it came out now, as recent press articles have been mentioning August as last bid date submissions. I suspect that Spark received one outstanding bid in the preliminary bidding round and entered accelerated negotiations with Ontario Teachers to try to get ahead of Vodafone’s process as Ontario was likely bidding in that process as well.
  • The multiple of 33.8x EBITDA is a bit higher than the market thought they would achieve given that Telstra has around 28x EBITDA for their towers almost a year ago in a lower interest rate environment. This shows that infrastructure investors are not deterred by the rising interest rates and still have a big appetite for deals.
  • The $34.8 million in annual EBITDA is lower than I and the market thought it would be but we should keep in mind that in a sale-and-leaseback scenario, it is easy to engineer the outcome you want by increasing the ongoing rent you agree to pay for the equipment that you are selling.
  • The projected EBITDA of $34.8 million is about 3 per cent of Spark’s current EBITDA and the Spark TowerCo implied EV of $1.175 billion is around 11 per cent of Spark’s current EV highlighting the big multiple difference that Ontario is prepared to put on the infrastructure part of Spark compared to what public investors are prepared to pay for Spark NZ as a whole.
  • The $900 million in cash released is about 10 per cent of Spark NZ’s current market capitalisation. They will communicate what they will do with this cash at the full year results in August, but there is definitely potential that we will see a decent portion of it returned to shareholders so potentially 5-6 per cent additional capital return on top of the current approximate 5 per cent dividend yield.

The share market seems to agree with me that this is a positive outcome for Spark as the share price has outperformed by around 2.5 per cent since the announcement.

My main conclusion from this and other recent deals is that given the fall in market capitalisation in many companies and infrastructure investors’ continued appetite to acquire assets with long-term stable and predictable cashflows, it is worth having a look at your portfolio (or potential new investment opportunities) in this lens.

Questions you should ask are:

  • Does this company own assets that are essential to the services they offer but that there is little competitive advantage in retaining ownership to? Telecom towers are one example and certain transportation assets like ships or trucks or airplanes can be others.
  • If so, are these assets easily separated from the core business?
  • Can the company offer a purchaser long-term stable and predictable cash flow from ongoing lease payments?
  • Can a purchaser utilise the assets better than the seller by for example increasing the capacity utilisation or introducing new users to the assets?
  • Is the company trading at multiples that would make the remaining parts of the company look significantly cheaper if someone were to purchase part of the company’s assets for a high multiple?

If you can answer yes to these questions, it is definitely worth doing more work on such a company as there are a lot of infrastructure investors with a lot of purchasing capacity out there still looking to take advantage of opportunities presented by falling share prices.

The Montgomery Funds owns shares in Spark New Zealand. This article was prepared 15 July 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Spark New Zealand you should seek financial advice.


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