If you’re looking for a solid investment with stable and predictable cashflows, you could do worse than explore listed infrastructure assets. This conclusion was hammered home to me yet again by the news that Spark New Zealand (SPK:ASX) is selling 70 per cent of its passive tower infrastructure company for a pretty tidy sum. The deal follows other recent asset sales, and shows the continued appetite by investors for these assets.
The Montgomery Fund has been a long-term investor in SPK, New Zealand’s largest telecom company. We like it because it’s a well-run, stable dividend payer. It is a relatively slow growth business as the legacy fixed-line calling business is in decline and hence masking the growth in the mobile communication and IT divisions that are showing well above GDP underlying growth rates.
With the recent low interest rate environment and a lot of capital seeking steady long-term return, there has been a significant increase in interest from telecom operators to monetise some of the long-term assets that they have built up over the years that are somewhat peripheral to the core operations of a telecom operators. To be specific, we are talking about the “passive” parts of the mobile towers which can be described as the physical parts i.e. the tower itself, the power supply and the buildings that networking equipment is hosted in. This infrastructure is supporting the “active” parts of the of the network which consists of the antennas, the connection to the backhaul fibre network and other “smarts” that make the network function.
A telecom operator’s competitive advantage lies primarily in the active part of their infrastructure and there is a strong argument that there could be benefits to gain if the ownership of the passive parts were separate from the active and in this way infrastructure sharing could take place between different operators to lower overall system costs.
The telcos in Australia and New Zealand have all realised this and Telstra, Optus and TPG all struck deals to divest parts of their infrastructure during the last year.
Spark and Vodafone have both also recently announced that they are going down the same path and on 12 July, Spark announced that they have sold 70 per cent of their passive tower infrastructure company Spark TowerCo to Ontario Teachers’ Pension Plan which is one of the largest infrastructure investors in the world.
I thought it would be interesting to have a closer look at the deal and see if there is anything we can learn and apply to other investment situations.
First the facts:
My take on the transaction is:
The share market seems to agree with me that this is a positive outcome for Spark as the share price has outperformed by around 2.5 per cent since the announcement.
My main conclusion from this and other recent deals is that given the fall in market capitalisation in many companies and infrastructure investors’ continued appetite to acquire assets with long-term stable and predictable cashflows, it is worth having a look at your portfolio (or potential new investment opportunities) in this lens.
Questions you should ask are:
If you can answer yes to these questions, it is definitely worth doing more work on such a company as there are a lot of infrastructure investors with a lot of purchasing capacity out there still looking to take advantage of opportunities presented by falling share prices.
The Montgomery Funds owns shares in Spark New Zealand. This article was prepared 15 July 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Spark New Zealand you should seek financial advice.