Euro tower companies: right call

The deals practically make themselves. European telecom companies need capital for network investment. As bond yields fall in Europe, meanwhile, investors' need for alternative sources of income grows acute. So the former should sell their infrastructure, and lease it back. Done and done.

This has long been a popular idea in the US. Companies such as American Tower and Crown Castle - both tax-advantaged real estate investment trusts - own towers and rent space on them for antennas. Given long-term contracts with carriers, the scarcity of towers, and low maintenance capital needs, they can carry lots of debt. Both companies have net debt exceeding their earnings before interest, tax, depreciation and amortisation by five times. As Reits, they must return most of their profits to investors. Investors are happy with the structure: they both trade at price to earnings ratios above 40, leaving their dividend yields well below 2 per cent.

Tower business exists in Europe, too. In February, Italy's EI Towers bid for rival Milan-listed Rai Way, owned by the Italian broadcaster Rai. The latter insisted on maintaining majority control of its towers. Last week, EI appeared to consent to buying a minority stake. Both companies trade at lower valuations than their US equivalents - partly because they lack the tax advantages of Reits and due to their much smaller size. Their price to earnings multiples are in the 30s.

There could soon be more traded Europeans in the industry. Abertis, the Spanish infrastructure company, plans to spin off a majority stake in its own telecom asset business as Spanish-listed Cellnex Telecom. Assuming valuation multiples similar to EI or Rai Way, it could be worth €3-4bn.

The fact that the Europeans need not pay out the bulk of earnings may be an advantage - providing more flexibility to invest when opportunities appear, and making them less sensitive to swings in interest rates. That discount to US peers looks attractive.

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