Podcast transcript: Why an asset-right strategy is a telco’s path to value

Announcer

Welcome to the EY Tech Connect Podcast, where we have candid conversation about the most pressing priorities facing tech, media and entertainment, and telecommunication companies, and provide strategic insights on the key issues that matter to them. As industry ecosystems evolve in new directions, we use these discussions to reflect on how companies can not only take advantage of new opportunities, but also tackle emerging challenges.

Adrian Baschnonga

Welcome to the EY Tech Connect Podcast. Let’s introduce you to our experts for today’s conversation. My name is Adrian Baschnonga and I’m Lead Analyst for Telecommunications at EY, and I’m delighted to be joined by Isabel De Dios Gonzalez, a partner for TMT transactions and corporate finance, and Michael Misrahi, partner at EY-Parthenon. So today we’re going to be talking about asset-right strategies for telcos and how they can maximize the value of their assets and the key considerations they should bear in mind as they review their levels of infrastructure ownership. Perhaps it’s worth starting by exploring why asset-right is so important for telcos. What’s the rationale behind it, and why do telcos need to take action now? So, Isabel, maybe over to you for that one.

Isabel de Dios González

Yes, thank you, Adrian. As we all know, telcos are facing significant challenges these days, increased level of competition, significant price pressure, which is not going to be easy going forward. And, at the same time, they need to continue investing. They clearly need to take action. What we are seeing across the industry is that some of the assets they have are really valuable for infrastructure bonds, for private equities, for hyperscalers. So why not rethink your portfolio strategy by which you can monetize certain assets and create value for your shareholders?

Because the pressure is going forward and they need to take action as soon as possible.

Baschnonga                       

Very interesting. And, Mike, maybe you’ve got some thoughts on that as well?

Michael Misrahi            

Yes, when telcos are discussing the assets to be asset-right, I think first and foremost, they’re not only thinking about fiber or copper wire line in the ground, but also the different layers of wire line, what we would call the superhighway of broadband or transit that covers long distance. And then the access roads of broadband and, of course, the electronics on the wire line to compute data centers holding the direct data itself, cell towers, spectrum and wireless telecom services that would also be associated with this, including subsidy cables as well. There’s a whole bunch of elements that go with the network. And when we’re monetizing the assets and thinking about asset-right, we’re talking about strategies that are broad and encompass quite a bit in the telco network. This is a highly strategic and highly customizable exercise. So as far as telcos needing to take action now, the rationale for asset-right, you have different motivations and bespoke strategies. Initial opportunity is really to get them in place and capture value at the beginning of the asset cycle. Over time, the share that you get from having that asset and moving that forward becomes less proportionate and their fair share is achieved. To add to Isabel’s points, one of the major reasons operators began considering going asset-right, and it could be at any part of the network, is you could be repositioning your assets — so for instance, a sales leaseback — and see low risk there. You could just need more capital to capture opportunities from new assets attached to the network, which are very important to position yourself in the immediate term. And all of this is kind of a balance between the risk, between operators’ operations and the capital that’s needed to reinvest and realize value from the future potential of the network. A lot of this is lifecycle competition, other topics that are super important to the evolving nature of the network, things like edge compute or returning value back to investors. Number of motivations are important here.

Baschnonga                       

Well, that’s very interesting to hear, Mike, and from you too, Isabel, just the sheer range of forces in play, if you like, external factors, the competition or these new emerging technologies and clearly a little decision-making on the part of telcos as a result. Now, clearly a lot of telcos are in a range of assets across fixed and mobile infrastructure, but also more broadly across the ICT ecosystem. So, which domains are the key ones that are in play as telcos move forward with these asset-right strategies? Mike, maybe over to you for that.

Misrahi

Across the domains of fixed and mobile telecom infrastructure we’ve discussed — so fiber and copper, towers and spectrum, data centers, subsidy cables, ICT — telecom operators are considering all parts of the network “in play.” So while there are some themes geographically, there are also market-by-market archetype considerations. I’ll give you some examples. In Europe, for instance, the maturity of the market in the wireless space is encouraging more and more towers, to be consolidated by towercos. There’s also evolved use around brand sharing and small cell. We talk about the US, fairly mature market in wireless and increasingly mature market in specific areas of wire line, so transit networks are, kind of, the new thing to be carved out. If you look at Mexico, though, you know, you have towers and backbone that are both being carved out from the operators. So, what is in play and what is not in play, definitely varies. One of the things that’s really consistent is that access networks, whether it’s wire line or wireless, tend to not be as in play when you’re going asset-right. And that’s because whether it’s the radio antennae equipment or if it’s the last mile of fiber and/or copper coax, the customer relationship and experience at that point within the network is super important to control. We could talk about market by market, based on the maturity and the competitive nature and the multiples might be able to achieve from asset-right. But one thing you won’t see is operators that are really focused on carving out or sales leasebacks in, kind of, the access network. But, you know, that’s just my perspective.

González  

No, I absolutely agree, Mike. And to that point, I think we’ve seen a similar trend in Europe. In fact, most of the transactions we’ve seen are around passive infrastructure. So we’ve seen all the large telcos and, you name it, Vodafone, Orange, Telefónica, Deutsche Telekom selling their towers. And they have adopted different transaction structures. Some have gone for an IPO, some others have sold a minority stake, some others have even divested 100% of their tower portfolio. Different types of transactions, but it tends to be around what we call “passive” assets. So they keep the control of the end of the active part and they tend to divest and to transact around what they consider less core for the day to day, which brings them significant valuations as well. It’s a combination of perceiving assets potentially as less strategic and also monetizing those assets with a very, very high valuation and creating value for the shareholders at the end of the day.

Misrahi

I’ll cite just one exception, in some countries, we are starting to see this breakdown of infraco, servco, opco under the same umbrella. And part of that is achieving value on specific returns of each of those businesses. So in your core network or transit network where you have low-double-digit/high-single-digit returns vs. access where you might have higher, kind of, mid-teen returns, capital raise can be very different if you have separate entities. So, I would say there are some nuances there, but effectively, I agree with Isabel here, it’s a lot of passive infrastructure and everything except for maybe that last mile that’s really being considered across the globe.

Baschnonga

Yes, really interesting to hear the diversity of the assets that are in play, and admittedly some nuances there, a greater focus on passive infrastructure and clearly the opportunity varying by geography. And as telcos try to delineate effectively between what is core to them, but also non-core, and then execute the right kind of deal, what should be top of mind for them?

González

I think the critical part here is really taking a holistic view around the entire portfolio on really understanding what are the different linkages and interdependencies with the different asset classes. So, it’s not as easy as saying, “I’m going to divest my passive infrastructure, I’m going to consider selling a minority stake here or there.” Really, you need to take a holistic view and try to understand what’s the impact of a specific transaction on your remaining portfolio. You might be an integrated incumbent player, what are you going to do with your mobile business? If you divest your passive infrastructure, is it better to divest it, is it better to partner with a hyperscaler? Can you divest your data centers, will that affect your five-year strategy? It’s not just considering one isolated asset class and making a decision on what to do with that asset class; it’s looking at your entire portfolio, taking a holistic view and making sure that any action you take in one part of your value chain will have an impact on another part of your value chain. It goes beyond just executing a specific deal. I think that telcos need to be really mindful of the interdependencies between the different types of asset classes, because we’ve seen real convergence.

Baschnonga

What about you, Mike?  Any thoughts to build on that?

Misrahi

I would completely agree with Isabel and having a view of all the assets holistically. By nature this is a network, so everything depends on one another. And you can break those asset pieces apart, but really they’re looking across that continuum and that value chain. In our work with operators specifically on this topic, and especially operators that are multinational where the market dynamics are very different, there are a few factors that we really focus on. Asset by asset, we look at the maturity. So in some markets, for instance, we’ll look at tower situation — maybe the same exact operator in their portfolio, but in some areas, the towers are still generating value, meaning disproportionate fair share, and so they shouldn’t be carved out. At the same time, the country right next door, that tower market may be fairly mature and there’s overbuild of towers everywhere and so, it may be time to be the first mover to carve out your tower. So, the maturity of the market and then of course, the competitive intensity. Then I would also say, the uniqueness of the assets. So, in some mature markets, you may just not have the ability to have a data center or a hyperscaled presence for cloud. I’ll give you an example of the Caribbean where you have trouble with power and connectivity off islands. It may just make sense for the operator to hold on to the data center and provide those cloud services for different businesses. And, then the other thing we’re looking at across the globe is the ability of a neutral party, meaning someone that you’re going to be working with and not competing with, to pay for the assets, to operate the assets to your SLAs and basically prevent any disruption to the business. So, again, it’s market by market, almost bespoke strategies — very important just to look market by market. The last thing I would say is there are specific markets that are opening up. If we talk about for instance, New York City subways or subways in any major metropolitan area, where they’re bypassing even owning the assets. In New York City, for instance, there is Transit Wireless, who runs the subway system and the wireless. They bring everything back to a carrier hotel and four different carriers are connecting into the subway stations. None of the carriers own assets in there. It is a neutral party. So there are some instances where there’s new businesses being delivered and services that are being delivered. And so, you have like a different asset-right thinking right up front, so you’re not capturing a lifecycle.

Baschnonga

Well that’s really interesting, thank you both. Really picking up the sense that need this holistic view and that there are interdependencies, if you like, between your different assets, but also there are some big questions around market maturity, uniqueness of the asset and timing of the transaction, if you like. If we think about going asset-right as a phased journey and one that evolves over a period of years, what do telcos need to consider so that their current strategies are a fit for the future starting with you, Mike, on that one.

Misrahi

Sure thing. I think asset-right is a journey or, or maybe, and it’s more of a game. You constantly want to capture positions where your assets allow you to extract value at the start of the lifecycle. So when you exit, if it makes sense, you want to be capturing capital and reinvesting or distributing back to investors. And so that whole lifecycle is really important, and it never stops. The challenge that isn’t often cited, is investing in the asset at the right time, and more important, exiting at the right time. So for example, you don’t want to be the second wireless operator to sell towers, because then a towerco or neutral party already has a baseline of towers in the market. So in some instances, the timing becomes really important when you exit the assets based on the competition. It’s sort of a game that you’re playing within this journey, and it’s never ending. The interconnected nature of networks and digital infrastructure, we’re talking IT, trucks, employees, network stock, everything’s entangled, so untangling these is also a massive consideration when going asset-right and understanding this complexity. Owning the infrastructure, serving the customers and operating the assets, it’s something we really have to manage very tightly.

González

No, absolutely. And I think to me, one critical aspect is the telcos need to continue revisiting their strategy, this is, as Mike was saying, an evolving process, so they need to continue, question themselves whether they’re getting it right and things may change over time. We are in a fast-changing industry; we’re seeing different forces converging together, and telcos need to make sure that they rethink their needs and their strategy day after day. So it’s not, I execute this bill, I forget about it, I got my strategy right. It’s about rethinking their strategy every day and being flexible around it as well.

Baschnonga

That’s really interesting to hear. Thank you, Isabel, and thank you, Mike, for your thoughts. I mean clearly, this notion of complexity is coming to the fore here and the importance of timing and revisiting. So, I think we’ve covered a lot of ground today in terms of talking through asset-right and what it means for operators. What do you see as the key actions they need to consider in order to achieve the best outcomes? Maybe some parting thoughts from you both and maybe, Isabel, I’ll start with you.

González

Unfortunately, telcos have no time to lose on this. They need to get it right. It’s crucial for them and for their shareholders. They really need to evaluate their entire portfolio, take a holistic view, but also make sure that they are flexible in any strategy that they decide to undertake, because I believe the benefits are clear. They will have revenue opportunities, their strategy will be innovation, they will reduce complexity, they will generate cost and improve margins, but this needs to be done on a continuous basis with a flexible and holistic approach.

Misrahi

Yes, I completely agree with Isabel on this. And I think asset-right is entirely appropriate for operators, but also for investors to understand. For operators, it’s like a Ferrari. It can be really high performance, but it needs to be a more high-touch and educated process as you’re building out the strategy, and it’s one that’s continuous. Those that master this are going to be in a fantastic position within the markets. And for investors who also understand it, they also will be well-positioned in the market.

(Music)

Baschnonga

That’s great. Thank you, Mike, and thank you, Isabel, for sharing your perspectives today. And thank you for joining us today on EY’s Tech Connect Podcast.

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