How to structure an active infrastructure sharing joint venture

Herbert Smith Freehills have credentials in Africa having advised Cell C on some of the active equipment aspects of their sale of towers to American Tower. However, TowerXchange wanted to talk about active infrastructure sharing when we visited TMT partners Nick Elverston and Amanda Hale. Nick and Amanda recently advised Telef?nica and Vodafone on their active infrastructure sharing joint venture Cornerstone, involving 24,000 towers in the UK. Will active infrastructure sharing spread to Africa?

TowerXchange: How do operators’ attitudes to infrastructure sharing in Europe compare to those in Africa?

It’s tough to persuade incumbent Mobile Network Operators to share networks wherever you are in the world, but in emerging markets we often find mobile operators are not quite as wedded to their networks.

Sometimes operators sign a terms sheet that says they’ll get large scale infrastructure sharing done in a month. Then inevitably the project expands, parties realise they can’t realistically conduct due diligence on every tower, and eventually we reach an inflection point after which the legwork really starts. Most infrastructure sharing deals take around six months.

Infrastructure sharing is a journey. It starts with every mobile operator owning their own network. Then it progresses via various steps which might include national roaming or bi-lateral tower swaps, which might expand to a sale and leaseback of passive infrastructure to an independent tower company. We think there are massive potential savings in transmission backhaul sharing. We also think the future will see fibre rings being jointly rolled out by operators. And then we get to active infrastructure sharing and spectrum sharing.

Spectrum sharing is complex but it makes financial sense as spectrum is such an expensive, scarce asset. No operator uses all of its spectrum all of the time.  It’s allowed in the UK although we’ve yet to see it done in practice - it’s just a matter of time though. We expect other jurisdictions will follow in allowing operators to buy, sell and pool spectrum.

TowerXchange: How have regulators’ views of infrastructure sharing evolved?

It’s been an interesting regulatory progression from a starting point where most markets had one national fixed line entity owning one network, to the liberalisation of markets to open up monopolies, and back again now to the possibility of a single shared network infrastructure. For example, we’re aware of one emerging market territory thinking about mandating single networks, starting from rural areas.

Regulators view had once been that competing network infrastructures were key to competition, but it’s taken a global economic downturn, and a growing feeling that mobile broadband is needed to bridge the digital divide, for governments and regulators to reconsider whether we really need these competing infrastructures.

Regulators are starting to realise that infrastructure sharing shouldn’t just be allowed but should be encouraged. They’re realising that they can make rural connectivity more achievable by sharing the burden.

In the UK Ofcom has favoured infrastructure sharing for quite a while now, both passive and active, and the next stage is spectrum sharing. In Europe many national regulators that had historically not been keen on network sharing are now in favour of sharing. The next stage is the regulators are actively trying to promote it. In Africa, regulators may want to have a number of licensed mobile operators, but that doesn’t mean they can’t have one network infrastructure.

The Kenyan government is forming a public private partnership to roll out a single LTE network with a consortium of mobile operators, equipment vendors and institutional investors. It’s going to be challenging to work out the model as it’s tough to make all stakeholders feel they are getting an equitable share. Is free spectrum from government a sufficient incentive for stakeholders to knuckle down and agree on single network strategies? Time will tell.

TowerXchange: What is slowing progress along the journey to active infrastructure sharing?

One issue we found with active infrastructure sharing is governments’ concern to protect local jobs. Consolidation can mean less jobs, which can give rise to anti-outsourcing policies. Competition law concerns are also important. At the level of passive infrastructure sharing, the competition concern is limited compared to sharing active infrastructure sharing, which tends to require tighter controls on the exchange of information between competitors. This can be resolved by nominating a “clean team” which can receive information relating to their competitive partner’s business and which can adopt information exchange guidelines.

Then there may be issues around foreign investment control - some territories have concerns about towercos having foreign control, and may have requirements to use local suppliers. Those concerns tend to increase when you move to active sharing.

The requirement to retain local shareholders can represent another obstacle to overcome when trying to find a partner to share with.

In the UK, Vodafone and Telef?nica’s RAN sharing strategy worked because the partners had almost equal strength in the market. They structured the deal to partition the country with Telef?nica (O2) contributing and building towers in the Eastern half of the country, with Vodafone contributing the Western half (they share London). One set of active equipment at each site delivers two separate radio access networks; the same equipment operates at two different frequency bands, one for each operator. Both parties are reliant on each other.

In African markets with incumbent market leaders possessing a significant market share advantage over their rivals, the dynamics of any infrastructure sharing deal will be affected.

The challenge is about assigning value to shared assets. Do you want to spend two and a half years in due diligence (as happened in a previous infrastructure sharing deal in the UK), or are you prepared to commit to each other, make it work and realise the benefits sooner?

TowerXchange: Tell us a bit about the deal underpinning the Telef?nica / Vodafone active infrastructure sharing joint venture. We know it involves 18,400 sites and aims to achieve 98% indoor coverage across 2G, 3G and 4G by 2015, but what is the Cornerstone entity, what are they actually responsible for?

Cornerstone is a joint venture newco that runs the passive estate for both Vodafone and Telef?nica under a long term service contract. The shareholder agreement governs the ownership and operation of Cornerstone. Active assets remain the responsibilities of each mobile operator, but only in their half of the country. So Cornerstone is not a NetCo, it’s a towerco plus a RAN sharing arrangement.

Each entity is doing something very different within the deal. Cornerstone, the towerco, can be used as a vehicle to attract third party investment or debt financing, and has two long term, exclusive arrangements. Meanwhile, each operator becomes a managed network service provider to the other, governed by service level obligations, relief mechanisms, termination rights and liability provisions.

Active infrastructure sharing helps mobile operators evolve from an engineering company into a service company. It helps that Telef?nica and Vodafone UK are broadly equivalent players in a stable, mature environment. Telef?nica and Vodafone had started with Cornerstone 1, passive infrastructure sharing, but they recognised an opportunity to accelerate cost savings by sharing active infrastructure just as they were they were looking to invest in 4G.

It would be a much more complicated proposition in Africa, where you might need a third party to make it work, whether that be a towerco or outsourcing to an equipment manufacturer.

Outside of Africa, we’ve seen at least one instance of a vendor trying to work out if they can be the NetCo - building a single network for the country and getting operators to deal solely with them. Of course the regulator would want to have a tight hold on the network provider, but what if there were just one 4G network, with each operator getting managed network services from the vendor but maintaining ownership over and using their own spectrum?

TowerXchange: Is the network becoming a commodity?

The network is no longer a major source of competitive differentiation. Branding has a big effect on customers, especially in Africa. A highly respected brand is often associated with higher quality or greater coverage. There are examples of customer surveys showing that customers have given a branded MVNO a better score on network quality than to the network operator providing the MVNO with the underlying network. As long as the network is built, who owns it is irrelevant, and operators are increasingly realising that they fight on brand, not on network coverage.

TowerXchange: Changing topics, can we get into the nitty gritty of landlord and tenant law applicable to the tower industry...

We’re talking about transferring a lot of sites, and exposing the transaction to all sorts of potential local and national taxes.

On top of that we’ve got to deal with private landlords and government land owners from whom you need planning permission. It can be a long process between agreeing and closing a tower transaction, during which time you’re vulnerable. For example, if a majority of towers are sourced from a single supplier, they have a lot of bargaining power.

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