Liberty Global defends Virgin Media O2 sale of tower stake

U.K.-based operator Virgin Media O2 (VM O2) this week confirmed plans to sell a minority stake in its mobile tower joint venture, Cornerstone Telecommunications Infrastructure, to infrastructure fund GLIL Infrastructure.

The move, which had been expected, will see the operator offload 16.67% of its 50% stake for about £360 million ($437 million) payable in cash, which it said represents a multiple of 18.7x on Cornerstone’s adjusted EBITDAaL for the year that ended in March 2023. VM O2 stressed that it will retain co-control of Cornerstone, together with Vodafone-controlled Vantage Towers, which holds the other 50% stake.

Although VM O2 is selling only a third of its stake, the deal is notable since Cornerstone is the U.K.’s largest mobile towers business and is used by both VM O2 and Vodafone UK as anchor tenants. It manages an estate of around 20,000 sites spread across both urban and rural locations. In addition, VM O2 joins a growing cohort of mobile operators that are selling tower assets to raise much-needed cash.

Complex deal

As expected, the towerco deal was subject to a number of questions during Liberty Global’s third-quarter 2023 (Q3 2023) earnings call on Wednesday. The group, which owns VM O2 jointly with Telefónica in Spain, was forced to defend the pricing of the Cornerstone transaction, and explain why it did not sell off a bigger stake in the tower company when it had the chance. 

Mike Fries, CEO of Liberty Global, rebutted suggestions that the multiple of 18.7x was low for a mobile tower deal, noting that multiples “have come down a bit.”

“We thought that that particular price made sense in the context of what we were offering in the other elements of the deal, which are quite complex … in tower sales. So that made sense [both to Liberty Global and Telefónica] … and we pursued it,” he said. 

Fries also hinted that while only a small stake is being sold for now, it “might lead to more things,” although he did not provide further details. 

Andrea Salvato, chief development officer for Liberty Global, noted that all the various alternatives for Cornerstone had been explored. “As with all these tower transactions, there are complicated sets of variables. It’s a trade-off of retaining strategic and operational co-control at a time when we’re investing heavily in the network, versus realizing some proceeds today.”

“Did we sell it cheaply?” he asked. “If you look at where the European towercos are trading, they’re trading at 17/18 times. And obviously, when you sell a tower company, there are many different ways that you can put value into the towerco, or you can keep value in the MNO. So it’s extremely difficult to compare results across individual transactions.”

Mobile growth

In terms of VM O2’s performance in Q3 2023, Fries noted that postpaid mobile returned to growth with 50,000 net adds after two quarters of losses, fueled by sales of Volt fixed and mobile bundles as well as the strategy of continuing to use both the Virgin Media and O2 brands.

Mobile revenue increased 0.6% to £1.5 billion, as VM O2 said growth in service revenues supported by price rises was partially offset by a 4.9% reduction in handset revenues. The operator’s 5G network now covers 3,200 towns and cities, and is said to be on track to deliver 5G services to 50% of the U.K. population in 2023. In September, VM O2 announced its plan to switch off 3G services in 2025.

The operator’s total revenue adjusted for construction activities this year by Nexfibre — a fibre joint venture created by InfraVia and Liberty Global/Telefónica — grew 7.1% to £2.77 billion. 

In a research note, James Ratzer from New Street Research noted that revenue guidance for VM O2 has been changed from “growth” to “stable,” although he said the “over-riding driver for this is a slowdown in low-margin handset sales, which has little impact on underlying profitability. This is being driven by consumer spending optimization with customers deciding to extend the lifecycle of their phones to react to cost-of-living pressures.”

Ratzer added that a stand-out figure for the quarter was the broadband net adds of 41,000. “Not only is this a very strong rebound since Q2 following the churn impact of a ‘price increase quarter,’ but it is also the highest quarter of net adds in almost two years,” he remarked.