Towering debts at Helios and Vodafone

Telecoms infrastructure provider Helios Towers (HTWS) revealed that it managed to narrow its pre-tax loss to $20.9m (£15m) in 2020, compared to a loss of $74.8m the year prior. That's progress of sorts, but profitability sometimes has to take a back seat when the focus is on developing assets. 

Management is targeting rapid growth across the African continent, even though the break-even point remains elusive. Its most recent €160m (£140m) acquisition of Free Senegal, the second largest mobile operator in the country, added 1,200 towers to its portfolio, as well as 400 build-to-suit (‘BTS’) sites over the next five years. The deal, which is expected to close by the end of June, moves the company closer to its target of 12,000 sites by 2025. 

Outside of the deal in Senegal, Helios bagged an additional 1,065 tenancies this year for its own towers, pushing up its tenancy ratio (the average number of customers using each tower) to 2.13, an increase of 0.04 from the year prior.  

This aggressive expansion strategy does not come cheap: over the course of 2020 alone, the company raised more than $1.2bn in debt. And alongside its results, Helios announced a $250m convertible bond offering, with an expected coupon of 2.5 - 3.25 per cent - suitably generous under the circumstances. 

At the end of last year, the group’s net leverage multiple (net debt divided by last quarter annualised adjusted Ebitda) still sat at 2.9, well below its target range of 3.5 - 4.5. But that should start to move towards the 3.5 mark as the Free Senegal deal closes, according to senior management. Chief operating officer Tom Greenwood added that the debt would back the group with sufficient horsepower to pursue further expansion via M&A, as it aims to grow its presence in at least three more markets. 

For investors, it is possible to take on a fast-growing telecom company that is not juggling so much debt. Take Spirent Communications (SPT), which reported its 2020 results on the same day as Helios. The group is a telecoms testing kit provider rather than a network operator - and as such, enjoys no external debt, if you exclude lease liabilities, despite a similar M&A focussed growth strategy. It most recently acquired WiFi testing service octoScope for $55m, and has recently posted a 7 per cent increase in its pre-tax profits to $95.8m for 2020. 

But investors should also be mindful that it is not irregular for tower companies like Helios to carry sizeable debt burdens - there are a lot of sunk costs to take on board. Look no further than UK telco giant Vodafone (VOD), which had a €44bn debt pile at last count in November - up from €27bn in 2019 - after it coughed up €18.4bn for Liberty Global’s assets in Germany, the Czech Republic, Hungary and Romania. 

No doubt shareholders rejoiced this week on the news that the telco hopes to raise up to €2.8bn (£2.4bn) from its European mast business. Vantage Towers, which has more than 68,000 towers, is on track to list this month on the exchange in Frankfurt, at a target price between €22.50 and €29 per share. With around €2.1bn worth of debt, early reports suggest that it could have an enterprise value of almost €17bn. 

Monetising the value of some of its sprawling tower network should help Vodafone remain within its target net debt to adjusted cash profits multiple of between 2.5 and 3 times. Some optimistic shareholders may be hoping for a special dividend - although we think it is more likely that the Vantage Towers IPO will give another helpful boost to Vodafone’s share price, if it remains a majority owner. 

At Helios, we think that the debt issue - though material to the investment case - should not cause undue anxiety among investors, as it is channelling capital into further expansion and consolidation in the markets that it already operates in. Management has hinted at the possibility of introducing a dividend in the medium term, as its free cash flow gradually improves. Good operational momentum is encouraging, but with a careful eye on the group’s leverage position, we move to hold.