Cellnex new buyback announced: Our take
As expected, Cellnex has announced an acceleration in its shareholder remuneration to 2025 from the earlier target of 2026, but the size of the expected return of €800m is higher than expected.
In this note we review our take and future implications for Cellnex and also touch on recent press stories that they could be looking to sell the Swiss asset.
Summary
We hosted a call with Marco Patuano last year (replay available HERE) in which he was clear that the company was exploring routes to accelerate remuneration and that his favoured approach was the buyback.
However, offsetting this, a key “red line” for Cellnex has been to ensure that it maintains its investment grade and it was in discussions with the rating agencies to see what financial flexibility it had to accelerate payments, as it has since progressed with both the Austria and Ireland sale since the upgrade to Investment Grade.
Clearly these discussions have gone well as the company has announced an €800m share buyback in 2025. This would be dependent on the Ireland sale completing (expected in Q1 2025) and the buyback would aim to complete no later than December 2025. This represents a 4% buyback return for 2025.
In parallel, Cellnex intend to extend their existing equity swap contract from the current €150m to up to €550m. The initial swap was designed to give the company direct exposure to its own share price, although the extension is now intended as a hedge against the coming buyback program. The increase of the equity swap is not conditional on the Ireland transaction closing.
The €800m share buyback is incremental to the dividend commitment announced at the CMD last year (5 March 2024), when the company committed to a minimum €500m dividend payment from 2026 onwards. At the time, the company described having a further ‘>€7bn’ of excess cash available for shareholder returns or industrial opportunities until 2030 – this €800m buyback is seemingly the first part of that to be allocated.
Impact to Cellnex leverage
This 2025 buyback would broadly offset the deleveraging from the Ireland transaction , for which the company will receive €971m – albeit net proceeds might be slightly affected by the outcome of the Phase II remedies, which might involve some modest disposals.
The combination of the Ireland sale and the buyback would therefore leave 2025 leverage ~7.5x (on an after-lease basis).
Impact of buyback on leverage
We had previously been led to believe that leverage below 7x was a critical feature for the ratings agencies to maintain investment grade rating.
However, even though the buyback will mean net debt/ EBITDAaL will remain over 7x, we have to say this is one of the aspects of the Cellnex story we are far less concerned about given the long duration and diversification of its contracts. Although the path to deleveraging is reasonably slow for Cellnex, the visibility on a base level of future earnings is also high and this should provide support for the balance sheet.
Therefore, based on today’s announcement, it would seem as if the credit rating agencies are starting to swing to this view as well and are indicating that 7.5x on an after-lease basis might still be appropriate to maintain an investment grade rating.
Impact to our Cellnex valuation
We would expect the shares to react positively to this, even though there was already some expectation this was coming, in part because this is a buyback and also because the magnitude of the cash return is likely to be larger than people had expected. In our call with Marco Patuano last year, he had suggested that even accelerating the cash return by €500m “might be a squeeze”.
Given our fair value for Cellnex is €31/ share (with WACC of 5.8% and 1.5% g) which is just modestly above today’s trading price, we do not see the buyback as being as accretive to our fair value as other market participants might say, and therefore this buyback is unlikely to change our view of fair value.
And not to be a killjoy, but if this even leads to a near-term ramp in the share price and Cellnex ends up buying back stock above €31/ share, this might even be modestly dilutive to our view of fair value.
Overall though buying back stock here is c.3% accretive to RLFCF/ share, based on Cellnex’s current bond yield of c.3.5%.
Approx. 3% accretion to RLFCF/ share from the buyback
Swiss sale coming next?
Given this announcement today, we also should comment on the recent press stories that Cellnex is also considering selling Switzerland (72% owned by Cellnex, 28% with Swiss Life), with a valuation mentioned of €1.8-2.2bn, which we assume is for 100% of the EV and would be similar to our EV for 100% of €2.5bn at a multiple of 20x EBITDAaL.
On one hand, a sale like this is likely to signal the ability to return further cash to shareholders which when combined with today’s buyback announcement is likely to be a near-term fillip for the share price.
But on the other hand, we are left scratching our head about the signal this sends about Cellnex’s desire to own tower assets, and where its medium-term strategic direction is heading. Most recently, Cellnex has sold its Austrian business. It is in the process of finalising its Irish sale. It supposedly tried to sell its Polish asset but stepped back from that process over complications with active RAN sharing, and there have more stories that it could consider selling its French fibre and data centre venture.
If a strategic buyer is willing to pay a material premium for the assets, then this could be in the best interest of shareholders today, but at the same time, it is also putting a cap on the longer-term value creation for the company and potentially signals that the company is less positive on the longer-term multiple that tower assets should trade at, especially as the most recent disposal in Austria was done at c.19x.
We would await to see how this process develops, but as we show below, with Cellnex today trading at 17x EBITDAaL (a multiple last seen in 2018), any sale process is likely to be accretive to the trading multiple, albeit it shrinks the size of the company over the medium-term.
Cellnex trading multiple back to 2018 levels
