Spark to offload 70% of TowerCo business for NZ$900m

Spark (ASX: SPK) should trade higher at the open after Telstra’s (ASX: TLS) Kiwi counterpart revealed plans to return proceeds of a 70% sale of its TowerCo business to the Ontario Teachers’ Pension Plan Board (OTPPB) for NZ$900m ($816.4m) to shareholders.

OTPPB is understood to be one of several parties vying to acquire Spark’s NZ$1bn ($910m) portfolio of assets following the recent wave of telco tower sales locally.

Given the downward pressure on earnings, institutional investors are attracted to the quality of earnings these types of assets can deliver.

Deal to be completed in 1H FY23

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.

Expected to occur in the first half of FY23, the proposed deal will see the Canadian pension fund buy 1,263 sites, and at a portfolio value of NZ$1.18bn, which equates to 33.8 times earnings (EBITDA) forecast for FY23.

By comparison, AustralianSuper recently purchased Australian tower owner Axicom at 27 times earnings (EBITDA), after buying a stake in towers owned by Optus for 28 times earnings (EBITDA).

Capital management

While the company will release further details along with its full year results 24 August, Spark chairman Justine Smyth has already hinted at the capital management policy the company has in mind.

As well as enabling direct shareholder returns, Smyth also expects the transaction to fund investment in future growth opportunities, while maintaining financial flexibility through an appropriate investment grade debt rating.

One of the company’s primary goals, noted Smyth is to accelerate Spark’s transition from traditional telecommunications to higher growth digital services.

Recent results

Spark’s share price is down -2.84% over one year and has held up well during the broader market selloff earlier this year.

While Spark trades 1x EV/EBITDA multiple point higher than Telstra, Morgan Stanley notes the company offers a secure dividend and higher yield than its Aussie counterpart.

First-half results showed a “stronger than expected” 5% mobile average return per unit (ARPU) growth and positive earnings growth.

The broker believes Spark’s more secure earnings outlook than Telstra makes for a lower risk profile during an economic slowdown.

“In addition, there could potentially be dividend upside if the company is able to sell a portion of the mobile towers for an attractive price.”

Spark NZ share price over 12 months.