Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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This week in StubWorld ...
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Cashed-up <a href="https://www.smartkarma.com/entities/ck-hutchison-holdings-ltd" target="_blank" data-smartkarma-citation="entities:132:1" rel="noopener">CK Hutchison Holdings (1 HK)</a> is in the market every day as its shares trade around all-time lows on an implied stub and simple ratio basis.
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Preceding my comments on CKH are the weekly setup/unwind tables for Asia-Pacific Holdcos.
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These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.
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This week in StubWorld ...




Cashed-up CK Hutchison Holdings (1 HK) is in the market every day as its shares trade around all-time lows on an implied stub and simple ratio basis.




Preceding my comments on CKH are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


European Event-Driven Analyst

Jesus Rodriguez Aguilar

<a href="https://www.smartkarma.com/entities/cellnex-telecom-sau" target="_blank" data-smartkarma-citation="entities:21258:1" rel="noopener">Cellnex Telecom Sau (CLNX SM)</a> has announced a €7 bn capital increase, with preferential subscription rights, in the proportion of 19 new shares for 48 existing shares.
<ul>
<li>
This is the 4th capital increase in two years. Cellnex raised €7.7 bn in the previous ones.
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<li>
Cellnex will issue 192.7 mn new shares at a subscription price of €36.33 per share.
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The subscription period will begin on 31 March and will last for the next 15 calendar days.
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All shareholders who have acquired shares up to 31 March and whose transactions have been registered in Iberclear up to 6 April 2021 (both inclusive) shall be granted preferential subscription rights.
</li>
</ul>
Cellnex should have the support of the market. This rights issue is not due to solvency problems. The company is buying assets at c. 11x EV/EBITDA and its shares trading at 17.2x EV/21e EBITDA. Share price weakness over the last months could be explained by the market discounting this huge rights issue.
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Cellnex had already announced its intention to increase capital by €7 bn in February, in order to finance new acquisitions. The issue price of the new shares is in line with market expectations, hence the low impact on the share price on 30 March.
Cellnex presents solid fundamentals, an upside potential of over 27%, good long-term growth prospects (see Capital IQ consensus above, turning EPS positive in 2022 and maybe even in 2021) and CF profitability of more than 7.7% as of 2022 (Capital IQ consensus).
In addition, the capital increase will allow the company to continue buying assets worth another €11 bn in the next 18 months and generating economies of scale. Although, it should have a practically zero impact on valuation.
Regarding rights trading, it may happen as in previous large rights issues:
<ul style="list-style-type: circle;">
<li>On the first hour of the first day of rights trading (i.e. 1 April), existing shorts (on the shares) have to deliver the rights to the borrowers, for that doing they either will have to buy the rights (presumably not many available for sale) or buy back shares at the request of corporate brokers. A pop in the shares and the rights may be expected. Some smart funds (passive funds for instance) may sell their rights at that point and buy shares in the market to avoid dilution.</li>
<li>It often happens when there is a large delivery of rights, the market is not completely ready: folks have to cover their shorts faster than existing sellers of rights could sell, and the only way to hedge market movement is by buying shares.</li>
</ul>
(See further in the Insight for terms).
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Cellnex Telecom Sau (CLNX SM) has announced a €7 bn capital increase, with preferential subscription rights, in the proportion of 19 new shares for 48 existing shares.


This is the 4th capital increase in two years. Cellnex raised €7.7 bn in the previous ones.


Cellnex will issue 192.7 mn new shares at a subscription price of €36.33 per share.


The subscription period will begin on 31 March and will last for the next 15 calendar days.


All shareholders who have acquired shares up to 31 March and whose transactions have been registered in Iberclear up to 6 April 2021 (both inclusive) shall be granted preferential subscription rights.


Cellnex should have the support of the market. This rights issue is not due to solvency problems. The company is buying assets at c. 11x EV/EBITDA and its shares trading at 17.2x EV/21e EBITDA. Share price weakness over the last months could be explained by the market discounting this huge rights issue.

Cellnex had already announced its intention to increase capital by €7 bn in February, in order to finance new acquisitions. The issue price of the new shares is in line with market expectations, hence the low impact on the share price on 30 March.
Cellnex presents solid fundamentals, an upside potential of over 27%, good long-term growth prospects (see Capital IQ consensus above, turning EPS positive in 2022 and maybe even in 2021) and CF profitability of more than 7.7% as of 2022 (Capital IQ consensus).
In addition, the capital increase will allow the company to continue buying assets worth another €11 bn in the next 18 months and generating economies of scale. Although, it should have a practically zero impact on valuation.
Regarding rights trading, it may happen as in previous large rights issues:

On the first hour of the first day of rights trading (i.e. 1 April), existing shorts (on the shares) have to deliver the rights to the borrowers, for that doing they either will have to buy the rights (presumably not many available for sale) or buy back shares at the request of corporate brokers. A pop in the shares and the rights may be expected. Some smart funds (passive funds for instance) may sell their rights at that point and buy shares in the market to avoid dilution.
It often happens when there is a large delivery of rights, the market is not completely ready: folks have to cover their shorts faster than existing sellers of rights could sell, and the only way to hedge market movement is by buying shares.

(See further in the Insight for terms).


Telxius, a subsidiary of <a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> (50% Telefonica, 40% KKR, 10% Pontegadea) reached an agreement with Boston-based <a href="https://www.smartkarma.com/entities/american-tower-corp" target="_blank" data-smartkarma-citation="entities:6365:1" rel="noopener">American Tower (AMT US)</a> to sell its entire tower unit (30,722 sites across Argentina, Brazil, Chile, Germany, Peru and Spain).
<ul>
<li>The EV is €7.7 bn including the remaining payments to be done by Telxius to <a href="https://www.smartkarma.com/entities/telefonica-deutschland-holding" target="_blank" data-smartkarma-citation="entities:21687:1" rel="noopener">Telefonica Deutschland Holding (O2D GR)</a> to complete the German transaction.</li>
<li>The price is 30.x EBITDA, above the usual 23x.</li>
<li>Telefónica will reduce its debt by €4.6 bn, 12.5% of the total.</li>
<li>Debt reduction and pending corporate operations provide the group with sufficient liquidity to maintain its commitment to shareholders for the time being.</li>
</ul>
In the current context, Telefonica focuses on the management of FCF to preserve the payment of the dividend, by reducing investments. The dividend remains at €0.4 per share and debt, one of the group's main drawbacks, fell c.15% LTM. In the long term, the potential for structural growth is low, competition high, and room to maneuver limited. The current environment makes it difficult to sell non-strategic assets at adequate prices and questions the sustainability of the dividend.
<h3>Recommendation</h3>
Telefonica: DCF valuation is €4.2 (Capital IQ consensus, WACC 6.4%, g 0.3%).
<ul>
<li>The sale of Telxius may support market expectations for a potential acceleration in the execution of the strategic reshuffle announced by management, thus leading to a re-rating of the company.</li>
<li>But there are risks: slower deleverage, lower economic growth in Spain (24% of EBITDA), macro deterioration and currency depreciations in Central and South America (c. 15% of EBITDA). Positive surprises may come from further disposals at high multiples thus leading to faster deleverage, better than expected economic growth in Central and South America and a reduction of the (so far unsustainable) dividend.</li>
</ul>
Cellnex, reiterate TP of €64.36. Cellnex could become the object of a take-over.

Telxius, a subsidiary of Telefonica SA (TEF SM) (50% Telefonica, 40% KKR, 10% Pontegadea) reached an agreement with Boston-based American Tower (AMT US) to sell its entire tower unit (30,722 sites across Argentina, Brazil, Chile, Germany, Peru and Spain).

The EV is €7.7 bn including the remaining payments to be done by Telxius to Telefonica Deutschland Holding (O2D GR) to complete the German transaction.
The price is 30.x EBITDA, above the usual 23x.
Telefónica will reduce its debt by €4.6 bn, 12.5% of the total.
Debt reduction and pending corporate operations provide the group with sufficient liquidity to maintain its commitment to shareholders for the time being.

In the current context, Telefonica focuses on the management of FCF to preserve the payment of the dividend, by reducing investments. The dividend remains at €0.4 per share and debt, one of the group's main drawbacks, fell c.15% LTM. In the long term, the potential for structural growth is low, competition high, and room to maneuver limited. The current environment makes it difficult to sell non-strategic assets at adequate prices and questions the sustainability of the dividend.
Recommendation
Telefonica: DCF valuation is €4.2 (Capital IQ consensus, WACC 6.4%, g 0.3%).

The sale of Telxius may support market expectations for a potential acceleration in the execution of the strategic reshuffle announced by management, thus leading to a re-rating of the company.
But there are risks: slower deleverage, lower economic growth in Spain (24% of EBITDA), macro deterioration and currency depreciations in Central and South America (c. 15% of EBITDA). Positive surprises may come from further disposals at high multiples thus leading to faster deleverage, better than expected economic growth in Central and South America and a reduction of the (so far unsustainable) dividend.

Cellnex, reiterate TP of €64.36. Cellnex could become the object of a take-over.

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:
<ul>
<li>Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.
</li>
<li>In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.</li>
<li>This protects the Ibex 35 companies from takeover raids by European rivals.</li>
</ul>
This rule could make it possible to avoid hypothetical bids of <a href="https://www.smartkarma.com/entities/total-sa" target="_blank" data-smartkarma-citation="entities:812:1" rel="noopener">Total Sa (FP FP)</a> or <a href="https://www.smartkarma.com/entities/eni-spa" target="_blank" data-smartkarma-citation="entities:21185:1" rel="noopener">Eni SpA (ENI IM)</a> for <a href="https://www.smartkarma.com/entities/repsol-sa" target="_blank" data-smartkarma-citation="entities:21292:1" rel="noopener">Repsol SA (REP SM)</a> or <a href="https://www.smartkarma.com/entities/deutsche-telekom-ag" target="_blank" data-smartkarma-citation="entities:21611:1" rel="noopener">Deutsche Telekom Ag (DTE GR)</a> for <a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> , which have been the subject of rumours in the market.
<ul>
<li>Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.</li>
</ul>
Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: <a href="https://www.smartkarma.com/insights/acs-unlocking-value-via-disposals" target="_blank" data-smartkarma-citation="insights:44311" rel="noopener">ACS: Unlocking Value Via Disposals</a>).

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:

Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.

In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.
This protects the Ibex 35 companies from takeover raids by European rivals.

This rule could make it possible to avoid hypothetical bids of Total Sa (FP FP) or Eni SpA (ENI IM) for Repsol SA (REP SM) or Deutsche Telekom Ag (DTE GR) for Telefonica SA (TEF SM) , which have been the subject of rumours in the market.

Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.

Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: ACS: Unlocking Value Via Disposals).

Enhanced Limits to Investments in Spanish Companies

<a href="https://www.smartkarma.com/entities/cellnex-telecom-sau" target="_blank" data-smartkarma-citation="entities:21258:1" rel="noopener">Cellnex Telecom Sau (CLNX SM)</a> has closed a transformational operation, valued at around €10 bn, which has allowed it to reach over 103,000 telecommunications towers (vs. the prior 73,000) and strengthen its leadership position in Europe. The company has met its expansion objectives, even earlier than planned (December 2021). A capital increase has not been necessary, although it has run out of ammunition for future acquisitions.
It is difficult to overstate the importance of the purchase. It represents an earthquake in the European market for telecommunications towers, which now has a colossus, far away from any other potential European player.
<ul class="">
<li>Since its IPO in 2015, Cellnex has invested c. €26 bn in acquisitions.</li>
<li>After the pact, Cellnex's footprint extends to twelve countries. Spain (where Cellnex is based), with its 11,000 towers, is now only the fifth market in number of towers (and represents only 10% of the total footprint) behind Italy (24,500) , United Kingdom (14,700), France (13,700) and Poland (11,900).</li>
<li>This operation is unique due to its size and transformative nature: it involves raising the number of towers by 41%, revenue by 46% and backlog by up to 63%, long-term insured revenue.</li>
</ul>
A capital increase was not strictly necessary to purchase the Hutchison Towers. The company had cash available of more than €8 bn. However, the net debt/EBITDA approaches 6x and therefore Cellnex runs out of ammunition for future acquisitions. I do not rule out that Cellnex pays future purchases with its own shares.
Taking an average of DCF valuation and multiples, my TP is €64.36 per share, which implies an upside of 20% to the last closing price. Therefore my recommendation is LONG Cellnex.
<ul>
<li>The dividend yield is low because Cellnex is in an accelerated expansionary phase. However, the generation of recurring cash implies a profitability of more than 5% as of 2022e.</li>
</ul>

Cellnex Telecom Sau (CLNX SM) has closed a transformational operation, valued at around €10 bn, which has allowed it to reach over 103,000 telecommunications towers (vs. the prior 73,000) and strengthen its leadership position in Europe. The company has met its expansion objectives, even earlier than planned (December 2021). A capital increase has not been necessary, although it has run out of ammunition for future acquisitions.
It is difficult to overstate the importance of the purchase. It represents an earthquake in the European market for telecommunications towers, which now has a colossus, far away from any other potential European player.

Since its IPO in 2015, Cellnex has invested c. €26 bn in acquisitions.
After the pact, Cellnex's footprint extends to twelve countries. Spain (where Cellnex is based), with its 11,000 towers, is now only the fifth market in number of towers (and represents only 10% of the total footprint) behind Italy (24,500) , United Kingdom (14,700), France (13,700) and Poland (11,900).
This operation is unique due to its size and transformative nature: it involves raising the number of towers by 41%, revenue by 46% and backlog by up to 63%, long-term insured revenue.

A capital increase was not strictly necessary to purchase the Hutchison Towers. The company had cash available of more than €8 bn. However, the net debt/EBITDA approaches 6x and therefore Cellnex runs out of ammunition for future acquisitions. I do not rule out that Cellnex pays future purchases with its own shares.
Taking an average of DCF valuation and multiples, my TP is €64.36 per share, which implies an upside of 20% to the last closing price. Therefore my recommendation is LONG Cellnex.

The dividend yield is low because Cellnex is in an accelerated expansionary phase. However, the generation of recurring cash implies a profitability of more than 5% as of 2022e.


Spain

Cellnex Telecom S.A.U. is an independent operator of wireless telecommunications infrastructure and broadcast infrastructure. The Company's sites are located in Spain and Italy.

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Cellnex Telecom Sau (CLNX SM)

StubWorld: CK Hutch's Ongoing Buybacks

CKH looks cheap here priced at 6.8x/0.4x forward PE/PBR, together with a 50% discount to NAV. Expect buybacks to continue. Recommend an outright...

David Blennerhassett

Cellnex: Serial Rights Issuer

With solid fundamentals, Cellnex should have market support. A pop in the shares and the rights is to be expected at the very beginning of rights...

Jesus Rodriguez Aguilar

Telefonica's Disposal of Telxius

Telefonica manages FCF to preserve the divi, by reducing investments. Debt fell c.15% LTM. Structural growth potential is low, competition high,...

Jesus Rodriguez Aguilar

Enhanced Limits to Investments in Spanish Companies

Any attempt to acquire over 10% of a Spanish listed company by any foreign investor must be approved by the Cabinet. This could prevent bids of...

Jesus Rodriguez Aguilar

Cellnex's Transformational Acquisition

The purchase represents an earthquake in European telco towers. An average of DCF and multiples gives a TP of €64.36 per share, which implies an...

Jesus Rodriguez Aguilar

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