- Spark TowerCo will assume financial responsibility for future 10-year infrastructure construction program
- Spark New Zealand will focus on network and spectrum services and other active operating assets that drive market competitiveness
- The separation of Spark TowerCo optimizes Spark’s capital structure and supports long-term shareholder value growth.
Spark New Zealand Limited (“Spark” or the “Group”), formerly Telecom New Zealand, is the country’s largest telecommunications and digital services provider, providing mobile and broadband services throughout New Zealand. Spark employs 5,000 people, serving consumers, businesses and government through 24 regional business hubs and 67 retail stores. Spark’s comprehensive suite of services spans mobile, broadband, cloud and digital services as well as entertainment. The company’s infrastructure supports 2.4 million mobile connections and reaches 98% of New Zealanders through 1,500 mobile sites and 18 data centers.
Spark New Zealand has appointed Forsyth Barr and Jarden to undertake an engagement process to assess the appetite of institutional investors to subscribe to the capital of its infrastructure subsidiary, Spark TowerCo.
This follows a detailed review of Spark’s future capital-intensive infrastructure needs. The review also focused on the Group’s existing infrastructure portfolio, comprising 1,500 passive mobile tower assets. Spark has an ambitious infrastructure building program ahead to meet New Zealand’s growing data needs and new technologies like 5G, and eventually 6G. This future construction program will require many smaller sites, closer to the end customer, and greater overall densification. Spark concluded that infrastructure assets such as cell towers do not provide a competitive advantage in the telecommunications sector. However, specialized infrastructure focused on passive cell tower assets supports continued service innovation and efficiency, reducing costs and accelerating time to market for these infrastructure building programs.
The problem for Spark is how to fund this infrastructure building program in the most capital efficient way.
Spark considers that the optimal capital solution is to entrust 1,263 of its 1,500 mobile phone towers to subsidiary Spark TowerCo. This infrastructure-owning subsidiary is understandably attractive to risk-averse investors, with a focus on critical infrastructure assets that generate reliable, recurring, long-term cash flow. Mobile phone towers are ideal for investors seeking stable capital returns from preferred assets under long-term contracts with low credit risk counterparties such as Spark.
A key outcome for Spark shareholders is that the substantial investment needed to modernize its mobile network and improve mobile coverage will be picked up by income-conscious investors who have an appetite for these passive infrastructure assets. This allows Spark shareholders to optimize their return on capital by focusing on active assets that drive competitiveness and deliver higher margins. These assets are the core network and radio equipment that sits on top of the cell towers and provides different levels of service than those provided by Spark’s competitors, such as Vodaphone.
Spark TowerCo’s proposal is similar to the Telstra InfraCo Towers proposal announced several weeks ago. InfraCo Towers will own and operate Telstra’s mobile phone tower assets. Investor demand and resulting market valuations for these Telstra assets should be a useful guide for potential Spark TowerCo investors.
Like Telstra, Spark understands the fundamental investment principle that a business does not need to own an asset to operate it. Separating low-risk, capital-intensive assets into a separately owned vehicle, with exclusive “right-of-use” provisions, enhances existing returns for Spark shareholders by optimizing the use of equity.
Spark New Zealand has given Spark TowerCo a 10-year commitment to a comprehensive program to build new tower sites. This is an equally positive outcome for Spark New Zealand shareholders, as it relieves Spark shareholders of equity dilution by not having to contribute substantial new capital to passive assets that cannot deliver the superior returns on equity derived from operating assets.
Spark understands that the future is digital as it is experiencing strong demand from New Zealand businesses and consumers looking to digitize and transform their telecommunications needs. This trend is driving demand for Spark’s infrastructure assets.
Spark’s ability to use and operate these infrastructure assets without incurring a substantial capital expenditure burden is positive for Spark’s increased shareholder value over the long term.
This Post Market Wrap is presented by Kodari Securities, authored by Michael Kodari, CEO of KOSEC.