Marco Cordoni is a Partner with Analysys Mason and the Head of the London office. Marco has been advising on strategic, operational and corporate finance matters within TMT for more than 16 years. Since joining Analysys Mason in 2006, Marco has supported numerous M&A and debt financing transactions on behalf of TMT players, investment banks and private equity groups in Europe, Africa, Middle East and the Asia-Pacific region. He has directed more than 60 of Analysys Mason’s due diligence and valuation assignments for such transactions. He has also undertaken various strategy and business planning assignments on behalf of major international telecoms operators, infrastructure players and media groups.
TowerXchange: Please introduce Analysys Mason, explaining the role you typically play in advising on tower transactions, and your experiences of working with the emerging market tower industry.
Marco Cordoni, Senior Partner, Analysys Mason:
Established 30 years ago, Analysys Mason is a strategic consultancy and research firm dedicated to the TMT sector.
Over the last 10-15 years, we have worked on TMT assignments in all but four African countries, advising on operators’ strategy, regulation, spectrum, mobile and fixed licence support, privatisations, financing, and M&A transactions.
We have extensive experience of advising on and conducting commercial and technical due diligence on tower transactions in Europe, Africa, the Middle East and Asia, and we’re seeing more and more tower deals in South America.
Tower sales and leaseback transactions are a relatively recent development in Africa, and Analysys Mason has been involved in a large proportion of the African tower deals to date. In Africa, we have covered 15 different countries specifically for tower due diligence or market sizing exercises, and we’ve conducted due diligence reviews on 25-30 tower transactions worldwide.
While we have offered strategic support to a number of operators considering tower spin-offs, a significant proportion of our work to date has been on the buy-side. We’ve worked for most of the major African tower companies and/or for their shareholders and lenders - advising on M&A and debt and equity raising.
We’ve also supported operators in developing their business cases for, and implementations of, network sharing.
TowerXchange: What does the due diligence on a tower transaction consist of?
Marco Cordoni, Senior Partner, Analysys Mason:
It requires similar processes and documentation as for any other M&A due diligence assignment. The main components are typically financial, tax, legal, technical and commercial due diligence reports.
The financial due diligence team - usually a Big Four accountancy firm - will audit accounts to understand historical financial performance or to build a pro-forma P&L statement for the towerco. There may also be a tax due diligence, to determine the most tax efficient structure of a new towerco. Again, this is typically undertaken by the same, or sometimes a different, Big Four accountancy.
A law firm with experience of tower transactions will typically conduct the legal due diligence aspect, which can be very complex for towers in emerging markets, since property rights might not be well established and documented. The law firm will need to look at ownership titles and legal documentation on a tower-by-tower basis. It may also establish the ownership structure of the towerco and draft the share purchasing agreement. It will also draft several other commercial documents, such as the master lease agreement and service level agreements.
Analysys Mason’s usual role in tower deals is to undertake the commercial and technical due diligence.
On the technical side, we typically review:
The structure of towers to determine how sound they are and whether any remedial capex is required
The availability of space for additional tenants and any augmentation capex required
Ongoing structural maintenance requirements and associated costs
Other opex with a particular focus on energy costs (considering both diesel and electricity costs)
Capex, such as the upgrade or replacement cycles for generator sets, batteries, solar panels, and any other hybrid energy equipment
The status of monitoring systems and access control systems
Uptime
TowerXchange: What’s the typical sample size, and how long does it take to conduct the technical due diligence on an emerging market tower transaction?
Marco Cordoni, Senior Partner, Analysys Mason:
Depending on the investor, the sample size for a technical due diligence can be anything from a few dozen sites, up to perhaps 10% of the portfolio. There have been examples of a full technical due diligence on all sites, but that’s more often done on the sell-side. Frequently, to expedite closing, technical due diligence is conducted on a sample of towers and continues after an initial close with a conditional offer. This includes legal mechanisms to recover some value, if the towers’ condition deviates significantly from the asset register.
Frequently, to expedite closing, technical due diligence is conducted on a sample of towers and continues after an initial close with a conditional offer. This includes legal mechanisms to recover some value, if the towers’ condition deviates significantly from the asset register
The time required for due diligence depends on how many people you put on the ground, the size of the country, and ease of access and the number of towers. For example, it can take six months or more to visit every tower in a big portfolio, while a few hundred site visits take much less time.
There are also situations where investors don’t need a technical review and only require commercial due diligence.
TowerXchange: What are the key measures of value in the tower industry - what is Analysys Mason evaluating in commercial due diligence?
Marco Cordoni, Senior Partner, Analysys Mason:
On the revenue side, we evaluate three key metrics: the potential tenancy ratio on the existing portfolio; build-to-suit (BTS) opportunities; and the potential lease price.
The most important metric is the potential tenancy ratio on the existing portfolio to be acquired. We evaluate the co-location revenue that can be achieved from the portfolio as it stands - which depends on structural factors revealed in the technical due diligence - as well as the attractiveness and uniqueness of locations, and the size of the network compared to the tower market in the country. It’s also important to consider operators’ roll-out plans for coverage extension and densification for capacity requirements, and what other independent towers are available for lease. Major mobile telecoms trends are also important, such as the prospects for increased mobile penetration and the progress of 3G and 4G roll-outs.
On the revenue side, we evaluate three key metrics: the potential tenancy ratio on the existing portfolio; build-to-suit (BTS) opportunities; and the potential lease price
Most tower transactions also include a BTS agreement, defining pricing for the towerco to build new towers for the anchor tenant on the back of the towerco owning the portfolio, or for another mobile player. BTS opportunities are typically more capital-intensive, with lower return on investment than buying and co-locating towers, but they still contribute positively to the valuation.
Lease rate pricing is less risky to forecast than BTS and tenancy ratios, as contracts are much more transparent and stringent. Nonetheless, lease rates have come down in Africa - in Nigeria, for example, the initial tower lease rates were as high as US$8000 per month, but are now closer to US$3000-4000.
The commercial due diligence will also establish the current opex and potential future opex savings, as energy opex is particularly important in Africa. We also assess the capex for any BTS programme. If a technical due diligence has been performed, this part of the commercial due diligence will be informed by the output of the technical review. Alternatively, the analysis of opex and capex is typically at a higher level.
TowerXchange: How important is it that a culture of tower sharing exists and there is an established ‘market rate’ for lease pricing?
Marco Cordoni, Senior Partner, Analysys Mason:
Whether operators were used to sharing towers was a key driver of tenancy ratios a few years ago, when there were few towercos outside of the US and India. But now, most operators are used to the cashflow benefits of selling tower assets and the role that independent towers play in network planning.
There are still a few operators who don’t seem to see tower sharing as a viable model, but they are becoming the exception rather than the rule.
TowerXchange: Do you encounter a significant deviation between tower databases and what is actually on the site? And does this data accuracy represent the most significant challenge to closing an emerging market tower transaction?
Marco Cordoni, Senior Partner, Analysys Mason:
Tower databases are often inaccurate in any country, not just in emerging markets. Operators hire advisers like us to collect documentation internally. It just takes a bit of time to perfect the database. If time is of the essence, a typical workaround is for towercos to make a conditional offer, subject to a survey of each tower to check they are in the advertised condition. So it’s only a question of time, not really a challenge to closing deals.
The single most important item is a site database with accurate co-ordinates of all sites to be sold. For most transactions, we can obtain the locations of all the other operators’ and towercos’ sites, which helps assess the attractiveness of the tower locations and enables us to construct a detailed model of the potential upside in terms of co-locations.
