The quest by Anglian Water Group (AWG) to return cash to shareholders has placed Cellstructures well on the road to market leadership.
Penta Capital has so far invested in businesses as diverse as La Tasca restaurants, truck trailer rental and corporate records software management. Now the firm has made its first major acquisition with investee company Cellstructures the GBP20 million entry into telecoms infrastructure with the buyout of Ambury Investments, Anglia Water’s wireless cell site rental vehicle. But Steven Scott, a founding director of the firm and the man who led the investment, argues that each of the firm’s investments shares a common thread: “Our expertise is in marketing operations and database management. We’d looked at a number of deals within mobile infrastructure without having done one. But Ambury is really a service business and we can add value with service and marketing type skills and let others take care of the telecoms expertise.”
These others’ include Brendan Clouston, who founded Cellstructures in 1999 after moving to the UK from the US, where he ran TCI, the telecoms company which was sold to AT&T in 2000. Penta’s involvement with Clouston dates from February 2001, when it provided an initial GBP7 million investment to become a partner in Cellstructures after an approach from boutique advisory and fund raising firm Campbell Lutyens.
Penta became involved in Cellstructures because it liked what Scott calls annuity-type’ revenue streams. Ever since 1984, when the mobile market started in the UK, landowners have charged telecoms operators rents to erect masts on their property. Typically, a farmer will earn GBP3,000 per annum from each mast, rising to GBP5,000 according to the attractiveness of the location. Similar revenue streams are also available to landlords of office space. Clouston identified an opportunity to group together operators and charge multiple rents, which are then split with landowners. Scott argues that the result is win-win for Cellstructures, operators and landowners. “For the landlord it maximises the amount of money he is getting off the same site.
Mobile operators benefit because they can outsource the development of their networks without sinking money into dumb metal, while planners like it because masts are concentrated on fewer sites, which reduces any adverse environmental impact. Because Cellstructures builds the masts themselves and because operators are currently on a capex squeeze operators save cash and pay rent instead.” As operators roll out GPRS and G3 technology, demand for masts and towers will increase.
Until the acquisition of Ambury, Cellstructures had grown organically or by joint venture. In January this year it signed a two year joint marketing agreements with London Electricity and National Farmers Union (NFU). The alliance with London Electricity the largest contract ever awarded in the UK for building masts on a site-sharing basis gave Cellstructures access to 18,000 sites on a rental-sharing basis while the agreement with the NFU enables farmers to generate revenue from multiple operators sharing existing sites and from developing new sites on their land. Scott believes such an opportunity will be welcome to the industry: “The NFU came to us to look at ways of improving cash-flows for farmers in the wake of foot and mouth. According to the terms of the NFU agreement, they have set up a call centre on behalf of their members to give them advice. The NFU doesn’t make any money, it’s a service to their members.”
The prospect of growing the company by acquisition was not at the forefront of Cellstructures’ mind, because there were few willing sellers. UK utilities because of their property portfolios have been able to create non-regulated revenue through renting the space on their buildings to mobile operators and Anglian was a forerunner, having adopted the practice in the mid-1980s. Scott comments: “Water towers are perfect because they are brownfield sites but they are quite high up so a water tower on the edge of a town has got a great reach into the town.”
All participants have been under constant regulatory pressure to reduce prices, a pressure that has increased with the pending introduction of AMP4, legislation aimed at levelling the playing field for retail customers. Ambury was ripe for the picking because Anglia was pondering the future of the 500-strong masts business as part of its overall strategic review, which was run by Close Brothers corporate finance. Close’s IT and telecoms team came to AWG’s attention through its role in the sale of Aerial Group, a Phoenix Equity Partners and Bridgepoint Capital-backed masts business, to SpectraSite-Transco, in 2000. Simon Willis, the director who led the bank’s team on the deal, comments: “From a Close Brothers perspective, it is a key part of our strategy to build relationships with larger corporates through middle market deals of this nature, which leverage our sectoral expertise, so we are delighted to have helped AWG structure such a successful transaction, particularly in today’s difficult environment for telecoms deals.”
One of the first things the merchant bank did was to commission Quotient, a telecoms consultancy based in Cambridge, to compile a report which would explain to potential suitors the potential growth of the sites portfolio against the backdrop of the build-out of 3G networks.
The hybrid nature of the business – it is part-property, part-telecoms and part-outsourcing – led Close to identify four types of buyers. These were incumbent competitors such as NTL, Crown Castle and Lattice, private equity buyers with buy-and-build aspirations, property companies seeking to expand their portfolios, and support services companies which regarded it as a business services company. Willis adds: “Each of these categories of buyers came through strongly in the auction, with the exception of the support services companies who I think have yet to fully understand the potential to use mast ownership as the foot in the door to provide outsourced network services to the telcos.”
The first round of bidding drew around eight offers. Penta was among them following a phone call from Bank of Scotland’s telecom team, with whom it has a close relationship through Bank of Scotland’s investment in the Penta fund. Penta rapidly established itself as a frontrunner because of its knowledge of Ambury, coupled with the fact that a number of significant trade buyers were absent from the table. Both Crown & Castle and NTL remain heavily constrained, while other US buyers Spectre Site and Pinnacle had retrenched in the light of September 11 and the tech recession. Previously, the UK had been an attractive market for US mast outsourcing firms of this nature because the North American market is consolidated, with telco operators having already sold their mast businesses to third parties. Scott acknowledges this was vital: “This is not a business we could have bought six to nine months ago because it would have cost a fortune and we would have been up against some billion dollar US companies.”
Lattice maintained its interest in the business until January. The company has had towers for several years to enable its engineers to communicate and five years ago began renting out space to mobile operators.
Cellstructures gained exclusivity in February. From that moment, it completed the deal in six weeks. The deal was funded with GBP14.5 million from Bank of Scotland, GBP2 million equity from Penta, and a further GBP2 million from Clouston. In return, Clouston has a majority stake in Ambury, and Penta a substantial minority. The purchase means Cellstructures now owns the rights to the rental income from 500 sites. It also has the right to put up towers on any of their existing 7,000 sites, as well as any new ones. For this reason, Penta was keen to maintain good relationships with Anglia: “Because we are using Anglia Waters assets to get the revenues, we wanted to give them a bit of an earn-out so they help develop more sites.” Also, Cellstructures has a service agreement with Anglia Water Services, which will provide support and maintenance to the sites themselves. In essence, Cellstructures’ management will concentrate on marketing to the operators. Scott says: “It’s partly a real estate play, partly a service play and there’s a bit of telecoms involved as well. Cellstructures knows where the gaps in operators’ networks are and works with the radio planners within them.”
Cellstructures will continue to grow the portfolio and will increase site sharing, through outsourcing site roll-outs by operators, taking ownership of the mast itself and assisting operators in managing their networks efficiently. The geographic area covered by the network covers around ten per cent of the UK population and, together with the LE Group alliance, brings a strong South East focus to Cellstructures’ portfolio and operations.
Thus Scott believes Cellstructures will add to its acquisitions now that it has established a precedent with Ambury. And utilities, he believes, are the best source of deal flow. “We are able to work alongside the utility, without them setting up significant internal overhead and establishing their own relationships with telcos, to develop telecom revenue on their regulated assets. While they are all either already exploiting or thinking of exploiting their sites, they may not have the expertise or desire to do it themselves. We think we have established a model with the Ambury deal.”