OTPP to Acquire Spark New Zealand's Mobile Tower Business

Florence Chong of IPE Real Assets reports Ontario Teachers to buy Spark New Zealand’s mobile tower business:

Ontario Teachers’ Pension Plan Board (Ontario Teachers’) is acquiring a 70% interest in Spark New Zealand’s mobile towers business for NZ$900m (€548.5m).

Under the terms of the transaction, which values Spark’s TowerCo business at NZ$1.2bn, Spark New Zealand has entered into a 15-year agreement with TowerCo (plus rights of renewal) to secure access to existing and new towers, with an expansion programme over the next 10 years.

“We are pleased to have formed this strategic partnership with Ontario Teachers’ – a high-calibre investor with a long-term partnering focus and significant experience managing a portfolio of infrastructure investments globally, including within Australia and New Zealand,” Spark CEO Jolie Hodson said.

Spark’s TowerCo business is a leading New Zealand towers business with approximately 1,263 sites.

Hodson said: “As part of the deal, we have committed a substantial build programme to TowerCo, with 670 sites to be built over the next decade.

Hodson said Spark retained a 30% stake in TowerCo, ensuring it stayed as a key strategic partner as the business grows.

Bruce Crane, senior managing director and head of Asia Pacific infrastructure and natural resources at Ontario Teachers’ said the Spark Towers investment built the plan’s long track record of investing in superior businesses in New Zealand and would draw on its deep experience investing in digital infrastructure businesses globally.

Spark New Zealand chair, Justine Smyth said the transaction will deliver proceeds of NZ$900m, “enabling direct shareholder returns and investment in future growth opportunities that will accelerate Spark’s transition from traditional telecommunications to higher growth digital services”.

OTPP put out a press release on this agreement to acquire Spark New Zealand's mobile tower business:

Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”) announced today that it will acquire a 70% interest in Spark New Zealand’s mobile towers business for NZ$900 million. Spark’s TowerCo business (“TowerCo”) is a leading New Zealand towers business with 1,263 sites.

Under the terms of the acquisition, Spark New Zealand has entered into a 15-year agreement with TowerCo (plus rights of renewal) to secure access to existing and new towers, with a build commitment of 670 sites over the next 10 years.

Bruce Crane, Senior Managing Director and Head of Asia Pacific Infrastructure & Natural Resources at Ontario Teachers’ said: “The acquisition of a 70% stake in TowerCo is an ideal fit for our growing global portfolio of high-quality infrastructure assets. This investment builds on our long track record of investing in superior businesses in New Zealand and will draw on our deep experience investing in digital infrastructure businesses globally. We look forward to working with the Spark New Zealand team to build and grow a leading business that will enable New Zealanders’ continued access to critical telecommunications services to meet their growing mobile demand needs over the long-term.”

Spark New Zealand CEO Jolie Hodson said: “We are pleased to have formed this strategic partnership with Ontario Teachers’ – a high-calibre investor with a long-term partnering focus and significant experience managing a portfolio of infrastructure investments globally, including within Australia and New Zealand.”

Ontario Teachers’ is a significant investor in New Zealand, including its recent private equity investments in Abano Healthcare Group and Asia Pacific Healthcare Group, as well as a large portfolio of timberland assets.

The transaction is subject to regulatory review and is expected to close in late 2022.

About Ontario Teachers’

Ontario Teachers' Pension Plan Board (Ontario Teachers') is a global investor with net assets of C$241.6 billion as at December 31, 2021. We invest in more than 50 countries in everything from equities to real estate to infrastructure and venture growth, to deliver retirement income for 333,000 current and retired teachers in Ontario.

With offices in Hong Kong, London, San Francisco, Singapore and Toronto, our more than 350 investment professionals bring deep expertise in industries ranging from agriculture to artificial intelligence. We are a fully funded defined benefit pension plan and have earned an annual total-fund net return of 9.7% since the plan’s founding in 1990. At Ontario Teachers’, we don’t just invest to make a return, we invest to shape a better future for the teachers we serve, the businesses we back, and the world we live in. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Spark New Zealand also put out a press release on this agreement:

Spark New Zealand today announced the Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”) will acquire a 70% interest in its TowerCo business.

Spark’s TowerCo business (“TowerCo”) is a leading New Zealand towers business with approximately 1,263 sites. The transaction values the business at $1.175 billion, representing a FY23 pro-forma EBITDA multiple of 33.8x [1].  

Spark expects net cash proceeds [2] of $900 million at completion, which is subject to Overseas Investment Office approval, and is anticipated to occur in the first half of FY23.

Under the terms of the deal, Spark has entered into a 15-year agreement with TowerCo (plus rights of renewal) to secure access to existing and new towers, with a build commitment of 670 sites over the next 10 years.

Spark New Zealand Chair, Justine Smyth said: “The establishment of TowerCo will accelerate Spark’s strategic objective of delivering a smart, automated network, while maximising value for shareholders. The transaction will deliver proceeds of $900 million, enabling direct shareholder returns and investment in future growth opportunities that will accelerate Spark’s transition from traditional telecommunications to higher growth digital services.

“Spark intends to release an updated capital management policy at its full year results on August 24. When assessing the most appropriate use of proceeds Spark will consider three key pillars – maximizing returns to shareholders, investment in future growth, and maintaining financial flexibility through an appropriate investment grade debt rating. The capital management policy will provide clarity on the proportion of proceeds allocated to each of these areas and the most effective means of returning proceeds to shareholders.”

Spark CEO Jolie Hodson said the Company saw a high level of market interest in its passive mobile assets: “We are pleased to have formed this strategic partnership with Ontario Teachers’ – a high-calibre investor with a long-term partnering focus and significant experience managing a portfolio of infrastructure investments globally, including within Australia and New Zealand.

“Our intention in establishing TowerCo is twofold – it allows us to deliver better outcomes and service experience for our customers and Aotearoa through faster, more efficient deployment of digital infrastructure, and it better realises the value of our passive mobile assets, maximising value for shareholders and enabling us to invest in future growth opportunities.  

“A standalone TowerCo business with sole responsibility for passive mobile infrastructure will have a single-minded focus, delivering efficiency, service innovation, and improved speed to market. This is going to be particularly important when you consider the 5G build programs of tomorrow will be very different to the 4G ones of the past, requiring many more, smaller sites, closer to the customer, and greater overall densification.”

Bruce Crane, Senior Managing Director and Head of Asia Pacific Infrastructure & Natural Resources at Ontario Teachers’ said: “The acquisition of a 70% stake in TowerCo is an ideal fit for our growing global portfolio of high-quality infrastructure assets. This investment builds on our long track record of investing in superior businesses in New Zealand and will draw on our deep experience investing in digital infrastructure businesses globally. We look forward to working with the Spark New Zealand team to build and grow a leading business that will enable New Zealanders’ continued access to critical telecommunications services to meet their growing mobile demand needs over the long-term.”

Spark will continue to determine how its mobile network is developed, including where and when capacity investments occur, with TowerCo then designing and deploying these build programmes.

Jolie continued: “As part of the deal, we have committed a substantial build programme to TowerCo, with 670 sites to be built over the next decade. This is a significant investment in the digital infrastructure that will underpin the growth of our digital economy and enable businesses in Aotearoa to innovate and grow.

“Spark is the anchor tenant and retains a 30% stake in TowerCo, ensuring we are a key strategic partner as the business grows. We will also continue to own all the ‘smarts’ of our network – such as radio equipment and spectrum – which is what drives our competitive advantage and differentiation in the market.”

[1] Assumes FY23 EBITDA of NZ$34.8 million as at 30 June 2023. 

[2] After transaction costs

This is a significant deal for Ontario Teachers' Pension Plan, adding a leading New Zealand tower business to its global portfolio of infrastructure assets.

The two press releases above show how this is a win for all parties involved and that Spark will continue to own a sizable minority stake (30%) in TowerCo, ensuring it remains a key strategic partner as the business grows.

A little more background so you can fully appreciate this deal.

Back in February, when Spark announced it delivered strong first half performance, it also announced plans to establish Spark TowerCo:

During FY21 Spark conducted a review of its infrastructure portfolio, to focus effort and investment on its strategically important assets. Since that time Spark has announced an accelerated 5G rollout, delivering 90% population coverage by the end of 2023, a material upgrade of its Mayoral Drive Exchange to support multi-access edge compute capability, and a significant increase in capacity at its Takanini Datacentre – with up to 8MW now contracted and construction of a new data hall underway.

Today Spark announced plans to establish Spark TowerCo as a subsidiary company, to improve the performance, utilisation, and capital efficiency of its passive mobile assets – spanning ~1,500 mobile sites.

Hodson continued: “We can see globally that shared ownership models are an effective way of improving returns from infrastructure assets that are not critical to competitive advantage. In mobile, our active assets are what drives our competitiveness – including our core network and radio equipment. These assets leverage our spectrum holdings, provide differentiated customer experiences, and support our wireless aspirations.

“Our passive mobile assets, on the other hand, are the physical towers that support this active equipment. By separating these assets into a subsidiary model, we can improve utilisation through coverage expansion, future service innovation, and increased tenancy, while delivering efficiencies in build, maintenance, technology, and lease costs as we expand mobile coverage across Aotearoa.”

Spark intends to commence a process in the second half of FY22 to explore the introduction of third-party capital into Spark TowerCo, however there is no certainty that a transaction will proceed.

“Should we choose to introduce third-party capital we will retain a shareholding and remain a key anchor tenant, with appropriate agreements in place on arms-length terms for operations and services. There will be no change for our customers, and we will continue to invest in modernising our mobile network and improving coverage for Aotearoa.” 

In April, Spark commenced a process to explore introduction of third-party capital into Spark TowerCo:

As foreshadowed at its half year results, Spark New Zealand has today commenced a process to explore the introduction of third-party capital into its subsidiary, Spark TowerCo.

Spark TowerCo will be a leading New Zealand towers business with approximately 1,263 sites [1]. Spark intends to maintain a shareholding in Spark TowerCo and will be a key, long-term, anchor tenant and strategic partner. Forsyth Barr and Jarden have been appointed to undertake the market engagement process, however there is no certainty that a transaction will proceed.

Stefan Knight, Spark Finance Director says, “The infrastructure build programmes needed to support New Zealand’s increasing data needs and new technologies like 5G, and potentially 6G in the future, will be very different from the build programmes of today – requiring many more, smaller sites, closer to the end customer, and greater overall densification.  

“Spark TowerCo will have a sole focus on passive mobile assets so will be able to achieve greater focus, service innovation, and efficiency, reducing costs and increasing speed to market for these build programmes.” 

Spark TowerCo is projected to have EBITDA in FY23 of ~NZ$35m with a strong growth profile over the next 10 years.

“Spark has the largest mobile and wireless broadband customer base in New Zealand which means we have a significant build program to execute in the future,” explains Knight. “With that in mind, Spark TowerCo will have a commitment from Spark to a comprehensive new site build programme over a 10-year period.”

The establishment of Spark TowerCo will not create any change for Spark’s customers, who will continue to benefit from Spark’s investment in enhancing its network experience and improving coverage for Aotearoa.

Notes:

Spark TowerCo will incorporate Spark’s passive mobile assets. The definition of active vs passive mobile assets is as follows:

• Spark’s ‘active’ mobile assets include the core of the mobile network, the radio
  equipment that creates the mobile network, including the antennas, and the connection of these antenna back to the core network.
• Spark’s ‘passive’ mobile assets are the physical towers that support the active
  equipment, including standalone macro towers, rooftops, and lamppost towers.

[1] In Spark’s 1H22 results, we disclosed that Spark owns ~1,500 mobile sites. The transaction excludes ~250 sites related to outbound co location on third party owned infrastructure that have been considered out of scope, so approximately 1,263 sites will transfer to Spark TowerCo.

For those of you who don't know, Aotearoa is the current Māori-language name for New Zealand, and there is deep meaning for referring to it that way. 

I am providing you with this background to really appreciate the genesis of this deal and what led up to Ontario Teachers' being chosen as the third-party capital of choice to help Spark achieve greater focus, service innovation, and efficiency, reducing costs and increasing speed to market for these build program.

Massive infrastructure deals like this take time, they require relationships and there's no doubt that Spark chose the right partner and did its due diligence on OTPP before signing this agreement to sell 70% of TowerCo to it.

OTPP's Infrastructure and Natural Resources group led by Dale Burgess manages $36 billion in  infrastructure ($26 billion) and natural resources ($10 billion) to provide steady inflation-linked cash flows over the long term.

Last year it announced plans to double its infrastructure investments within the next five years, mostly in core infrastructure (airports, toll roads, regulatory utilities and renewable power), and the Asia Pacific region was identified as an underrepresented portion of its overall infrastructure portfolio:

"We have the desire to grow in that part of the world, we want to make sure that it's done in the right pace," Mr. Burgess said.

So, it is hardly surprising to see this agreement take place as Dale Burgess and his team are executing on their strategy, gaining more exposure to the Asia-Pacific region.

Also worth noting what Bruce Crane, Senior Managing Director and Head of Asia Pacific Infrastructure & Natural Resources at Ontario Teachers’ said concerning this deal: 

 “The acquisition of a 70% stake in TowerCo is an ideal fit for our growing global portfolio of high-quality infrastructure assets. This investment builds on our long track record of investing in superior businesses in New Zealand and will draw on our deep experience investing in digital infrastructure businesses globally. We look forward to working with the Spark New Zealand team to build and grow a leading business that will enable New Zealanders’ continued access to critical telecommunications services to meet their growing mobile demand needs over the long-term.”

OTPP has been investing in Australia and New Zealand for a very long time (like the UK, both countries have strong rule of law and are open to foreign investors). 

Late last year, I covered how OTPP, PSP Investments and KKR took control of Australia's Spark Infrastructure in a $5.2 billion takeover deal of the power grid operator.

The bulk of OTPP's infrastructure assets are in transportation and logistics (46%), Energy infrastructure (41%) and water and waste water treatment (11%), and the rest in other (2%):

 

This deal on Spark TowerCo is for tower assets, a growing area of interest among Canada's large pensions.

OMERS Infrastructure which recently announced it is planning to double its massive infrastructure portfolio, also announced a second agreement of 2022 to acquire Stilmark, an independent Australian developer, owner and operator of mobile tower assets. 

The transaction will be OMERS second tower investment in Australia this year, following the announcement on 9 May that it signed an agreement to acquire 100% of TPG Telecom Limited’s mobile tower and rooftop portfolio.

What is attracting OMERS and OTPP Infrastructure to tower assets is secular trends in e-commerce and the digitization of everything, including healthcare, work and other areas.

In fact, back in May, OTPP released a report on how digitization, decarbonization and disparity are shaping the future of investing, showing how global internet usage has more than doubled in a decade:

Remote work. Telemedicine. Online shopping. A more digital way of life was already underway when the pandemic supercharged it. It is now clear that we are in the midst of a seismic transformation that will test people, businesses and governments—and open up opportunities to do things better. For investors, the challenge will be supporting businesses as they adapt to a more digital world. And identifying disruptive companies that are using digital technology to create new products and new business categories.

These are the long-term trends that matter to pensions and there are many ways of playing this trend from acquiring logistics properties, to data centers to acquiring tower assets. 

It is also a more defensive play because unlike transportation assets, these assets aren't as cyclical and provide more steady income streams during all market cycles (less risky, less return but more reliable income streams during tough times).

The key on all these deals is to have the right strategic partner and Spark New Zealand is definitely the right partner.

I invite my readers to read more about this company here to really appreciate its operations and its commitment to diversity and inclusion as well as its commitment to sustainability and digital equity.

In short, this is an amazing company which is growing very nicely, and it shares the same values as Ontario Teachers', something Jo Taylor, its CEO, talks about often when he makes public comments.

Lastly, in other related news, OTPP recently announced it has completed the acquisition of HomeEquity Bank from Birch Hill. You can read that press release here and my previous comment on this deal here. 

Below, Rachael Jones, business reporter at Kalkin TV in Australia, reports on this deal (fast forward to minute 1:30). This is a great long-term deal for all parties and definitely a great addition to OTPP's infrastructure portfolio.