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Summary

Two top 10 global telcos are currently selling large portions of their networks. Telefonica hopes to raise €5–6bn by selling a range of “noncore” assets, while Verizon is rumored to be auctioning off at least some of its massive data center portfolio. These two follow many similar deals in which telcos have spun off tower, data center, and/or fiber assets, typically with lease-back or similar provisions. Such deal-making has fostered a new breed of network specialists: carrier-neutral providers (CNPs), whose annual revenues are over $30bn and growing >10% per year.

Fewer telcos seem wedded to idea of network ownership

Communications service provider (CSP) revenues have flattened in recent years, and CSP strategies are evolving in the face of competitive threats, new technologies, and changing user behavior. One important shift: telcos are showing less need to own the networks used by their services. While (voluntary) spin-offs of last-mile assets are rare, most breeds of CSP seem happy to sell mobile towers, data centers, and even metro/core fiber…

if the price is right. Financial considerations are usually key drivers in this shift. Some deals are driven by tax savings, as when Windstream spun out its network unit in 2014 (now publicly traded as a real estate & investment trust, Communications Sales & Leasing). More are simply driven by telcos’ interest in raising some cash, matched by the desire of carrier-neutral providers to attain scale and their (growing) ability to fund the deals needed to do so. American Tower’s $5bn purchase of cell towers from Verizon last year is a notable example. Following dozens of these sorts of deals in the past decade, the independent tower sector has grown rapidly and is especially strong in India, Brazil, and Africa. Regulators have also sometimes provided a push towards a more carrier-neutral model, as with China’s new tower JV and more sweeping changes in Australia (NBN/structural separation) and New Zealand (Chorus/Telecom demerger).

Spin-offs move from towers to data centers

Telcos have been divesting towers for many years; the trend is not new, just the scale. However, rising demand for data center assets is a more recent phenomenon, driven by rapid growth of the cloud services market. The importance of “cloud” in most telco strategies might make ownership of data centers appear to be essential to telcos. Such acquisitions as Verizon-Terremark, Shaw-ViaWest, NTT Communications–e-shelter, and even Zayo-Allstream would seem to support this point. Yet this argument is far from settled, with Telefonica now pitching a sale of its towers and data centers and Verizon selling data center assets.

One or both of these deals could be largely about consolidation. Verizon, for instance, has a diverse mix of data centers, some from acquisitions (MCI, Terremark). Some facilities are relatively new, efficient, and/or strategically positioned (e.g. NAP of the Americas), while many others are old and small-scale – not surprising for a telco of its size. Verizon may be trying to consolidate this mess through a limited spin-off, sell off all the assets and establish lease-back and other contractual arrangements with new owners, or accomplish something else entirely. A buyer is still needed on the other side, so there remains uncertainty.

Regardless of the outcome for Telefonica and Verizon, one thing is clear: many telcos do not see legal ownership of facilities as essential to profitably running a network. That’s probably a sign of the cloud’s growing maturity.

Appendix

Further reading

Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)

Network & Tower Sharing Analyzer: 3Q15, TE0006-001144 (November 2015)

Global Data Center Analyzer: 3Q15, TE0017-000055 (September 2015)

Case Study: “Telesites” – America Movil’s Tower Company Spin-Off, TE0001-000968 (June 2015)

“Windstream’s creative REIT financial move will make waves among telecoms service providers,” TE0005-000642 (August 2014)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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