Digital asset owner-operators have been undergoing a significant structural change driven by the growing demand for data, the acceleration of digital trends (such as cloud, 5G, big data and AI) and the intensification of competition (including NBN for Australia). As a result, most operators in the ANZ market have been re-evaluating their asset ownership strategies for ways to reconfigure assets and restructure their businesses to create shareholder value. This trend continues to present ripe opportunities for private equity and core plus funds to capitalise on the evolving landscape.

Telecoms Infrastructure Landscape by asset class

Asset owners have been assessing the value of separating non-core assets such as infrastructure (e.g. cell towers, fibre networks, subsea cables and data centres) and services (managed services, IT services, software/SaaS and industry solutions). In most cases where they have pursued this strategy, asset owners have unlocked value for themselves through greater transparency, cost savings and reduced capital expenditure, and gained greater focus on key metrics such as return on invested capital (ROIC) and profitability from their core competencies. They have also enabled the resulting stand-alone businesses to address wider market opportunities and benefit from focused investment in growth.

Value for this trend occurs on both sides — both for the telcos and for the sponsors.

Benefits for operators

  1. Capital infusion — influx of funds can be used for: 
    • Network expansion and modernisation
    • Investment in new technologies like 5G and IoT
    • Debt reduction and potential shareholder returns
  2. Operational focus — management can concentrate on: 
    • Core service offerings
    • Customer experience enhancement
    • Digital transformation initiatives and product innovation
  3. Financial transparency — potential benefit to valuation can be attained from: 
    • Unlocking hidden value in undervalued assets
    • Greater clarity on levers to drive profitability and ROIC
    • Opportunity to reinvest proceeds in higher-growth areas of the business
  4. Risk mitigation — restructuring assets can help operators: 
    • Reduce exposure to capital-intensive assets
    • Share risks associated with technological changes
    • Better manage regulatory challenges and opportunities in specific asset classes

Benefits for investors

  1. Stable cash flows — investing funds gain access to: 
    • Long-term contracts with predictable revenue streams
    • Asset platforms with scale and high barriers to entry
  2. Value creation opportunities — investors can leverage their expertise to: 
    • Optimise operations and reduce costs
    • Invest to implement strategic growth initiatives
    • Consolidate fragmented markets and portfolios through further bolt-on acquisitions

The different asset ownership business models have a range of EV/EBITDA multiples, reflecting the diverse nature of assets and business opportunities. For traditional integrated operators, EBITDA multiples typically range from 5-10x, depending on factors such as market position, growth prospects and operational efficiency. However, infrastructure assets such as towers and data centres command much higher multiples (15-25x or even higher) due to their long-term stable cash flows and growth potential.

Trading EV/EBITDA Multiples by asset type

Recent deal outcomes (e.g. Airtrunk) underscore the premium investors are willing to pay for high-quality digital infrastructure assets, particularly those positioned to benefit from the rapid growth in cloud computing, data consumption and AI. 

While there is significant opportunity, investors must navigate several challenges when investing in digital assets: 

  • Regulatory environment — the telecommunications industry and digital infrastructure are typically regulated, and investors must be prepared to operate within this complex landscape 
  • Technology risks — rapid technological advancements in technology require ongoing investment to stay ahead of the curve and make informed bets on where to direct limited capital 
  • Stranded costs — when a carve-out is involved, carefully evaluate risks that can arise from long-term leases, depreciation on capital investments, vendor contracts that cannot be easily adjusted or terminated, and stranded overhead costs related to IT systems and shared service functions
  • Market volatility — the market for digital infrastructure and services can be subject to rapid changes in customer behaviour (i.e. consumer, enterprise and wholesale), technology adoption and competitive dynamics 
  • Integration challenges — when acquiring multiple assets, there can be a myriad of difficulties integrating portfolios or separating them from the parent company’s operations
  • Talent retention — ensuring retention of key talent and expertise during an ownership transition can be crucial for de-risking and maintaining the value of acquired assets
  • Cybersecurity risks — be prepared to invest in robust cybersecurity measures to protect assets and comply with evolving regulations

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