Mott MacDonald’s technology and communication business has extensive experience of providing due diligence and consulting services on infrastructure sharing strategies – just one part of a comprehensive range of advisory services. The consultancy has worked with some of the leading players in the African tower sharing market such as Eaton Towers and American Tower, either working directly for or appointed by their investors on particular transactions.
We spoke to Andrew Doyle, Managing Director of Mott MacDonald’s technology and communications practice and two of his principal consultants, Simon Clayton-Mitchell and Dave Tanner, to learn more about the art of evaluating tower portfolios…
TowerXchange: Thank you for your time gentlemen. Please could you tell us about the different models required to undertake the due diligence for infrastructure sharing projects.
Mott MacDonald:
We have a set of models, benchmarks and forecasts which we use to predict lease up rates, revenues and costs. These will typically feed directly into a financial due diligence process. The data is combined into an analysis presented to secure finance for tower transactions.
Let’s start with our typical demand-side models, which look at the current market structure. We consider what assets the operators have, where their towers are located, the amount of tower sharing that has taken place to date, and the drivers for growth. Often we’re able to talk to the operators about their feel for where the network is going. We evaluate current and future subscriber numbers, traffic growth, new technologies, coverage extensions, capacity, infill in towns, and based on these we forecast the required network architecture investment over the next ten to fifteen years.
We find that our forecasts vary significantly from country to country. We could be talking about driving 2G to 95% coverage in one country while introducing 4G in another.
Once we’ve predicted capacity demand in a country, we translate that into forecasts for the number of sites and points of service needed. Ultimately that enables us to assess the addressable market, and the towerco’s prospective market share if they acquire that portfolio. From this we are able to forecast the potential lease up rate. And with a forecast of both the number of potential new towers and points of service that might be needed, we can predict the capital expenditure and operating expenditure needed to maximise the shareability of the network.
Alongside that, we benchmark to determine whether the proposed lease pricing is sensible, often seeking to at least match, and preferably improve upon, the revenues generated at existing sites.
Finally, we also evaluate risk from an operational perspective. Are the buyers of the towers building a towerco in the way they need to? Have they got right skills, processes and procedures in place?
Depending on who we’re appointed by, we present these findings to the towerco to inform their business plans and negotiations, or to investors so they can then make a decision on the financing of the deal.
We’re able to assess the towerco’s addressable demand based on the overlap between available capacity at the locations they’re acquiring, and where there’s demand for new sites
TowerXchange: How do you evaluate the shareability of the physical assets at a site, from the towers themselves to backhaul and power capacity?
Mott MacDonald:
We evaluate “site attractiveness” in our due diligence process – matching operators’ current and future demand for sites, or indeed tenancies, to determine how that aligns with the locations and quality of towers in the portfolio for sale.
We conduct physical site audits to evaluate the quality of the site. Is it a big, well-constructed lattice with space for additional kit, or is it a rusty old site that needs upgrading? Is there enough shelter and lease space for new cabinets and cabins? Is there room on the towers for additional antennas? We look at transmission: the connections, reliability – is there enough bandwidth available? Is there fibre? Is there enough power? Is it on grid? What’s the grid connection like – is there enough capacity? Potential transmission and power problems tend to be quite obvious, for example if 85% of sites are using significant diesel generator run time, with the associated truck rolls and diesel costs, you know a lot of investment might be required in the network.
We also try to take a geographic information system view of the world – where the towers are located compared to locations of other operators. We usually have the site location data on the portfolio being acquired, but it can be a challenge to get location information from other operators, although sometimes it can be derived from site maps or other available data.
If we have this data, we’re able to conduct an analysis of how far apart the towers are, the overlap in networks, and this informs the modelling side of the due diligence. This enables us to get a sense of whether the opportunity is an urban fill-in play or more focused on rural network extension, for example. We’re able to assess the towerco’s addressable demand based on the overlap between available capacity at the locations they’re acquiring, and where there’s demand for new sites.
TowerXchange: How do new technologies, whether 3G or in future 4G, factor into your forecasts and models?
Mott MacDonald:
Capacity for future 3G and 4G equipment of course creates additional demand. We have some interesting models to map potential demand at each point of service by technology, whether it’s 2G, current or future 3G or 4G. We are able to predict the capacity the operators are going to need for each, and get a sense of the balance between macro cells, microcells, small cells, in-building solutions and offload to Wi-Fi, giving us a picture of how demand for traffic will be met.
TowerXchange: What can you tell us about the increasing demand for points of service across Africa?
Mott MacDonald:
Every market we’ve looked at has significant demand for additional towers and points of service in general, driven by coverage extension and 3G. We would anticipate a further substantial increase in demand for points of service with 4G, albeit that is quite a bit further down the line.
In three out of four different country models we last produced, there was a doubling of the tower requirement in the next 10-15 years, and in the fourth market the growth was just less than double. So you see why Africa is an attractive market for towercos and investors.
TowerXchange: Given the increasing volume of tower sharing deals in Africa, should operators invest in building more shareable towers to boost valuation in a future sale?
Mott MacDonald:
We think operators would find it difficult to make a case to invest that capital expenditure now, but they’ll look at it on a case by case basis. Building a shareable site doesn’t have to cost that much more, but of course it depends how much space you share. In markets where little sharing is taking place currently, an operator could build shareable structures in unique locations, but there’s no guarantee you would get tenants.
Operators tend to look only as far as whether to build a tower at a given site or not, they don’t tend to see tower sharing as a potential revenue stream, which is of course why towercos’ focus on co-locations adds so much value.
We feel that the first or second towercos will find a market, if they strike relatively quickly
TowerXchange: Based on the models and forecasts Mott MacDonald have built over the different infrastructure sharing transactions you’re advised on, does infrastructure sharing look like a no-brainer in Africa? Have they looked like good investments?
Mott MacDonald:
The maturity of the market in terms of mobile and, in particular, mobile broadband adoption is critical, and in the seven or eight markets we’ve looked at, I would say the infrastructure sharing model stands up well.
We feel that the first or second towercos will find a market, if they strike relatively quickly. Markets will continue to mature and delays may mean that the greater opportunities are missed.
With increasing data demands, network growth and falling ARPUs, margins are pressurised. So we feel that increased infrastructure sharing, whether through outsourcing or sale and leaseback to a towerco, or through joint ventures, is where many African markets are heading. But operators and towercos alike should not delay!
