This Post Market Wrap is presented by KOSEC – Kodari Securities

• Spark TowerCo to assume financial responsibility for 10-year future infrastructure build programme  
• Spark New Zealand to focus on network and spectrum services and other active operating assets that drive market competitiveness 
• Spark TowerCo separation optimises Spark capital structure and supports long term shareholder value accretion.

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 across New Zealand. Spark employs 5000 people, servicing consumers, business and government, through 24 regional business hubs and 67 retail stores. Spark’s comprehensive service range covers mobile, broadband, cloud and digital services as well as entertainment. The Company’s infrastructure supports 2.4 million mobile connections and reaches 98 percent of New Zealanders through 1500 mobile sites and 18 data centres. 

Spark TowerCo  

Spark New Zealand has appointed Forsyth Barr and Jarden to undertake an engagement process to assess the appetite for institutional investors to subscribe capital to its infrastructure subsidiary, Spark TowerCo.    

This follows a detailed review of Spark’s capital-intensive future infrastructure needs. The review also focused on the Group’s existing infrastructure portfolio, comprising 1500 passive mobile tower assets. Spark has an ambitious infrastructure build programme ahead to support New Zealand’s increasing data needs and new technologies like 5G, and ultimately 6G. This future build programme will require many smaller sites, closer to the end customer, and greater overall densification. Spark have concluded that infrastructure assets like mobile phone towers do not provide a competitive advantage in the telecommunications business. However, a specialist infrastructure focus on passive mobile phone tower assets does support ongoing service innovation, and efficiency, by reducing costs and increasing speed to market for these infrastructure build programmes.  

The issue for Spark is how to finance this infrastructure build programme in the most capital-efficient way.

Spark consider the optimal capital solution is to hive off 1263 of its 1500 mobile phone towers into the subsidiary, Spark TowerCo. This infrastructure owner subsidiary has natural appeal to risk-averse investors with a focus on critical infrastructure assets that generate dependable, recurrent, long term cash flows. Mobile phone towers are ideally suited to investors seeking capital stable returns from privileged assets under long dated contracts with low credit risk counterparties such as Spark. 

A key outcome for Spark shareholders is that the substantial investment necessary to modernise its mobile network and improve mobile coverage will be taken up by income-conscious investors who have an appetite for these passive, infrastructure assets. This enables Spark shareholders to optimise their capital returns by focusing on active assets that drive competitiveness and deliver higher margins. These assets are the core network and radio equipment assets that sit on the phone towers and offer differential service levels to that provided by Spark’s competitors, such as Vodaphone.   

The Spark TowerCo 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. The investor demand and resultant market valuations for these Telstra assets should be a useful guide for prospective Spark TowerCo investors.

Looking Ahead 

Like Telstra, Spark understand the fundamental investment principle that a business doesn’t need to own an asset, in order to exploit it. Separating capital intensive, low risk assets into a separately owned vehicle, with exclusive ‘right of use’ provisions, enhances existing Spark shareholder returns by optimising the use of equity capital. 

Spark New Zealand has given Spark TowerCo a 10-year commitment to a comprehensive new tower site build out programme. This is an equally positive outcome for Spark New Zealand shareholders, because it relieves Spark shareholders of equity dilution by not having to contribute substantial fresh 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 experiences strong demand from NZ businesses and consumers seeking to digitise and transform their telecommunication needs. This trend is driving demand for Spark’s infrastructure assets. 

The ability for Spark to use and operate these infrastructure assets without incurring a substantial capital expenditure burden is positive for Spark shareholder value accretion over the long term.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.