It’s not just the initial deal structure that defines the success of tower sharing transactions. Income from co-locations is the critical measure of success for towercos, and for their investors and partners.
Tenancy ratios, also known as lease up rates, remain the critical measure for success. But beware of the different means of presenting tenancy ratios – is an equipment upgrade from an anchor tenant counted as an additional tenant? Sometimes bartering may also be counted in tenancy ratios. Ultimately the best measure of success remains improvements to EBITDA margin.
Target tenancy ratios vary according to a variety of factors including the capacity of the market, volume of sharing before acquisition, rental rate and terms of the initial sale of the towers. Experienced practitioners tend to agree that a tenancy ratio above 1.5 is usually the first target in most markets. If tenancy ratios exceed 2, it usually indicates a highly successful tower venture.
The competitive sensitivity of tenancy ratios means we cannot publicly state how the different infrastructure sharing deals are progressing, but we do know that towercos in some of Africa’s most mature markets are on target to achieve tenancy ratios well above 1.5 by the end of 2012.
Towercos can only do so much to attract new tenants. Ultimately the RF characteristics of the tower are what they are. Towercos may not be able to influence roll out plans, but they can identify holes in coverage, and of course they all maintain relationships with RF Network Planners.
Therefore, tower companies must analyse data supplied by the seller, using their own models to bid for portfolios based on an accurate forecast of potential tenancy ratios. TowerXchange have revealed some of the evaluation metrics used in our interview with Mott MacDonald here.
Another important measure of operational efficiency is site-level profitability, as highlighted by AT Kearney’s excellent recent report “The Rise of the Tower Business.”
Securing buy-in from key stakeholders in the operator
Another critical consideration is the need to secure permission of all shareholders. As we know, substantial stakes in many African operators are retained by local market shareholders. Natasha Good, Partner at Freshfields Bruckhaus Deringer explains: “every subsidiary of a global operator is effectively a new OpCo in it’s own right when it comes to structuring infrastructure sharing transactions – each local OpCo board needs to be familiar with tower sharing. Previously network operators had been able to make changes with every moving part – employees, contractors, networks – so tower sharing requires the loss of control of what feels like a very core asset.”
Operator CFOs can use tower transactions to achieve a variety of objectives. EBITDA might actually go down if you’re selling and leasing back towers at a premium rate in order to maximise cash released – the increased lease costs simply being the cost of that capital. But it might be necessary to free up cash flow, which might be used to provide dividends, or to fund network rollout or extensions that accelerate time to market.
It’s a common misconception that CFOs are universally in favour of infrastructure sharing, whilst CTOs remain protective of their network assets. As one senior executive at a tower company stated, “one of the principal challenges is convincing local CTOs and COOs that it’s a good idea – although it’s becoming easier as more and more CTOs have experience dealing with towercos.”
The conclusion of TowerXchange’s ‘introduction to infrastructure sharing in Africa’ is a simple one: there are an infinite variety of tower deal structures, defined by sliding scales of capital released, rental rates and stabilised opex and equity stakes, not to mention the term of the deal. All these variables mean infrastructure sharing can be tailored to meet different objectives in different market contexts.
