DMT owns and operates nearly 1,500 broadcasting and telecom towers in Italy (77% / 23%). The Company was carved out of Mediaset in January 2000 through effectively an MBO by CEO and founder, Alessandro Falciai, who owns 36% of the shares. This is very similar to well-known domestic tower businesses such as American Tower, SBA Communications and Crown Castle. DMT also has a non-core equipment technology business that will benefit from the government mandated shift from analog to digital television. This historically troubled business will be profitable in 2H 2009 and likely sold in mid 2010. We ignore Systems in our analysis, but mention it qualitatively in 'Long Merits' and 'Long Risks.'

• Valuation: DMT will earn its market cap back in cash over the next 5 years. On management's base case, the shares trade at just 4.4x and 4.8x 2014 levered and unlevered free cash flow. Peers trade at twice the 2010 EBITDA multiple and nearly 4x the sales multiple (7x 2010 vs. peers at 14x and 2.4x vs. peers at >9.0x). Peers also posses more leverage with ~1.5x turns more of debt (4.3x vs. 6x). Peers include American Tower, Crown Castle and SBA Communications.

 

• Business Quality: The average contract length outstanding is currently 12 years for the Tower business providing extreme sales visibility. Incremental pre-tax ROIC is 100% (capex of E3-4mm vs. incremental EBITDA of E3-4mm and growing by ~10% per year). Towers will be around as long as wireless (WIMAX, mobile phones, digital television, etc.). Additionally, there is ample room for DMT to exploit tower capacity more efficiently. Rental space is underutilized, helped by continuing reduction in size of the equipment installed, leads to increasing existing tower capacity. Permits to build new towers are nearly impossible to obtain, so barriers to entry are quite high.

 

 

• Management Quality: CEO Alessandro Falciai is an aggressive entrepreneur who rose quickly through the ranks at Mediaset and then through an MBO, purchased the assets of DMT. Falciai has built solid relationships with local authorities as well as the PM of Italy. He owns 36% of the Company, and is thus completely aligned with shareholders.

 

 

• Long inflation: >75% of sales have automatic inflation escalators while just 17% of costs are potentially exposed to inflation.

 

 

• DMT potentially qualifies for REIT status, which would add 30% to fair value.

 

 

• Clear Market Dislocation: The shares are just 12% of their highs set in mid 2007 (>E76) and are just 37% of their 52 wk highs (Sept 2008). There does not appear to be any permanent value impairment (no share dilution). As the Systems division begins to generate profits, analyst estimates and the share price should improve dramatically as this non-core business is currently perceived as having significant negative equity value.

   

  • Systems has clouded the profitability of the Group (-20mm of EBIT and 24mm of debt at YE 2008). Due to cash burn, investors feared a major rights issuance, which given liquidity - probably would have been impossible. Sellside analysts estimated E30mm to shut down the division (management says E9mm). Despite losses in 1H 2009, this business will be profitable in 2H. Management has repeatedly stated that there will be no need for an equity issuance. Given the CEO's ownership, it is clear that he is incentivized to avoid a dilutive offering. We can have confidence that this business will only IMPROVE sentiment and fundamentals as the Prime Minister of Italy is completely aligned and incentivized to drive the transition from analog to digital. Mediaset, owned 38% by Prime Minister Silvio Berlusconi, will benefit heavily from the move from analog to digital as they are the incumbent cable provider trying to compete with satellite players like Sky. DMT is a child of Mediaset, sold/spun to the current CEO and Mediaset alumnus in 2000, and the Systems business is driven almost entirely by the shift to digital in broadcast television. Similar to the US, Berlusconi has overseen legislation mandating the switchover to digital transmission. The program is setup by region with the entire country going digital by the end of 2012. This supplies the Systems business with more than three years of visibility, which should be enough to achieve profitability and then sell the business. Previous losses were driven by former PM Romano Prodi's decision to suspend the government mandated move to digital. Berlusconi's was elected in 2008, and theoretically has a 5 year mandate.

   

   

  • Estimates are too low: Analysts underestimate the growth of Tower Biz and the resulting margins. For example, one analyst with a 'Hold' has 2% growth in 2010, 1.9% in 2011 and 1.5% in 2012. In reality, DMT will grow 4-6% from content and contract renewals + inflation. Estimates are nominal, so we possess a significant margin of safety given revenue visibility with any modicum of inflation leading to outperformance. Tower revenues grew organically by 4% in 1H 2009. From speaking with our Telecom management contacts as well as a senior manager at a comparable business in France, we are highly confident in management's 4-6% revenue growth targets before inflation escalators. Secondly, analysts estimate sub-50% margins for the Tower business despite management's assertion that the business should earn 50%+ EBITDA margins in 2010 and up to 55% in 3-5 years. This can be achieved quite easily given operating leverage (almost entire cost structure is fixed). Tower will likely do close to 50% EBITDA margins this year (did 55% in Q3 of 2008).

   

   

  • Morgan Stanley and UBS dropped coverage in November 2008 and March 2009 respectively, which led to lower liquidity and investor interest amidst a collapsing equity market.

   

   

  • Dissolution or delay of several expected catalysts:

     

    • Transformational deal did not happen: DMT looked to acquire Wind-3 Italy tower network (named Eiffel, which was a E1.5bn-E2bn deal despite DMT's equity value of just E260mm at the time...stock was mid 20s). The deal fell apart in early fall of last year along with the credit markets. Many global hedge funds and European institutional funds liquidated their positions very rapidly when it became clear that the acquisition would not go through. By itself, DMT was likely too for the respective mandates and capital bases of these funds.

     

     

    • Investors thought the Systems business would be sold in early 2008, and certainly would not complete erase the profitability of the Tower business.

     

     

    • Talks of a deal with Atlantia, the Italian motorway company failed in late 2008.

     

 Long Risks

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