The devil is in the detail – the detail of painstakingly constructed and hard negotiated Sale and Purchase Agreements (SPAs) and Master Lease Agreements (MLAs) that define the main terms in any tower transaction. Jeff Eldredge and Rob Dixon, Partners at Vinson & Elkins, have advised on over ten sale and leaseback transactions in the last couple of years in countries such as the DRC, Ghana, Nigeria, South Africa and Tanzania. Rob and Jeff kindly agreed to meet with TowerXchange and to provide us with an overview of tower sharing SPAs and MLAs.
TowerXchange: What are the key components of a Sale and Purchase Agreement (SPA) in a tower transaction?
Rob Dixon:
There are of course many components common to all SPAs, but let’s concentrate on those components which are unique to towers deals. A key example is the structure and content of the conditions to closing. First, we’ll typically have a set of transaction conditions precedents that need to be fulfilled before the deal can happen at all. These would include any over-arching regulatory requirements (for example an operating licence or a competition approval).
Secondly, we’ll typically have a set of conditions precedent that need to be fulfilled (or waived) before a specific tower can be transferred. These would normally include good title, satisfactory ground lease arrangements (for example, the right to sub-lease the tower to third party co-locators and to assign leasing arrangements in security) and compliance with regulatory requirements (for example, building permits and environmental consents)…it’s potentially a long list!
The buyer will require a certain number of towers before the deal is economically viable. Typically, therefore, the deal will be structured so that closing does not happen unless and until a certain number of towers are ready to be transferred (i.e. the tower-specific conditions precedent are satisfied or waived).
Jeff Eldredge:
One key point in the process is the extension of ground lease terms. Towers deals can involve thousands of different parcels of land. Different ground leases will expire at different times, giving uncertainty on future costs. The buyer will therefore seek to have the ground leases extended for a reasonable period.
Rob Dixon:
As a result of that and certain other conditions taking time to satisfy, there are typically a number of closings as the tower-specific conditions are gradually satisfied. In the interim, the buyer might take over the operation of the non-transferred towers on a managed services basis. Different deals are of course structured differently – some deals go further to synthesise the buyer’s ownership of non-transferring towers from first closing.
TowerXchange: What happens to any towers for which the CPs cannot be satisfied?
Rob Dixon:
The treatment of ‘stub sites’ depends on the deal. The operator is unlikely to have the ongoing capability (or desire) to maintain and operate the sites so the towerco may agree to manage the sites (with the operator retaining ownership). The buyer is likely to conduct legal diligence on a sample of sites before signing the SPA so it will have a reasonable idea of the position before signing the deal. The SPA is, of course, only one part of a sale and leaseback deal. It’s relatively short-lived compared with the MLA which will often govern the parties’ relationship for many years.
The MLA is where the real value is for the tower company and where most of the real complexity lies in a deal
TowerXchange: So tell us about the critical consideration when drafting Master Lease Agreements.
Jeff Eldredge:
The MLA is where the real value is for the tower company and where most of the real complexity lies in a deal. It’s a long term contract (perhaps 10-20 years) and a large value contract. The operator needs sufficient flexibility to manage its needs to deploy and maintain equipment, while the towerco needs sufficient control to maximise the co-location opportunities – that’s how they build value. Thus, there’s a natural tension that needs to be resolved to everyone’s satisfaction.
The MLA is an umbrella agreement which defines the operator’s rights as anchor tenant in terms of leasing space and capacity (windload) on the transferring towers and the towerco’s obligations to the anchor tenant in terms of such space and capacity (including the service levels which apply). Different rights and obligations typically apply to different towers. For example, network planners can get very nervous about sharing particularly critical towers with other operators and therefore a small number of the towers might be identified as exclusive to the anchor tenant. The service levels for different classes of towers is also likely to vary and be closely negotiated. These will typically be set out in a service level agreement, which may form part of the MLA.
Rob Dixon:
There are of course other agreements which are important in most towers deals – for example the Build to Suit Agreement – but perhaps that’s for another time!
Phased close
It’s common practice to have at least two phases of closing a sale and leaseback transaction, giving extra time to finalise documentation for troublesome towers. As Alan Harper, CEO of Eaton Towers explained “With Warid, 90% of the towers were included in the first close, but we take over 100% of the towers whilst the last complicated paperwork is finalized.”
Capacity crunch
Operators err on the side of caution when it comes to reserving capacity on towers for future upgrades. But every square meter the operator reserves is a square meter less for the towerco to sell, and that goes directly to the value of the tower. When it comes to the Master Lease Agreement, “it’s important to help operators avoid reserving more capacity than they really need for upgrades”, to use the words of one senior towerco executive.
