edotco 360: How to deliver telecoms infrastructure at the ‘right cost’

CFO Thivanka Rangala’s job is to oversee standardisation and efficiency programs, adding value to inherited assets with a potential future IPO in mind. Of course edotco’s first responsibility is to create value for its customers, while creating a business case where it makes more sense for operators to lease than build towers, and persuading operators to avoid the risk of ‘last mover disadvantage’ by transferring their assets to a towerco.

TowerXchange: Please could you introduce yourself to TowerXchange’s readers – what is your background, what is your role, and what attracted you to join the edotco team?

Prior to my current role, I was the VP Regional Development and Investor Relations of Axiata Group, looking after the Regional Development of the holding company subsidiaries which  includes performance monitoring and analysis, KPI setting and management, strategy and investors relations.

In January 2014 when Axiata first set up edotco, I was assigned as the CFO of edotco Group, with a mandate to run standardisation and efficiency programs to ensure edotco is operating at the ‘right cost’.

In comparison to MNOs, infrastructure companies can be straight forward and trickier to manage. Controlling infrastructure means controlling somebody’s life blood for five, ten or fifteen years down the line.

The advantage with edotco is that we are the carved out assets from Axiata and that gives us a solid footprint from day one.

TowerXchange: How does the opportunity compare in markets where you have to build compared with markets where assets can be carved out from an existing Axiata Group opco?

The country where edotco’s business consists of completely new build is Pakistan, a market which is as complicated as it can be. In Pakistan we have the opportunity to start afresh, with no anchor tenant.

Operations, sales and marketing are done at ground level by our country operational teams. The rest of the business is fairly standardised, in turn allows us to manage centrally and create economies of scale.

TowerXchange: How is edotco financed? Is there the possibility of a future IPO?

edotco is fully equity based today - 100% owned by Axiata Group. It’s not efficient to be 100% equity funded – we’d look to leverage at some point or other.

You have to show you made it better after you inherited it - consolidating and growing the footprint, otherwise it’s tough to realise the valuation you’re looking for.

TowerXchange: Thivanka, you might recall speaking for me when I used to run the Mobile Money Group and associated events. Is there an opportunity to synchronise towers with mobile money branch network extensions?

With respect to the potential synergies between mobile money branch extensions and network extensions, I think any sort of speculative build can be dangerous, but if there’s a roadmap for an operator to extend into a new geographical area where the potential ARPU made the business case marginal, mobile money might make a couple of percentage points of difference. However, the first mover in such remote locations might have two to three year’s head start before the market can sustain a second operator and co-location becomes an option.

TowerXchange: Focusing on your old home of Sri Lanka, are edotco operating in a well served market where decommissioning of parallel infrastructure may be necessary, or are more sites needed to densify cell sites and extend coverage?

Sri Lanka is a relatively mature tower market with close to 100% coverage. edotco is marketing 2,150 of Sri Lanka’s ~7,000 towers.

There were a lot of tower swap deals before we inherited towers in Sri Lanka – the tenancy ratio was already 1.8 – a typical sign of a mature market. Co-locations are just ticking over 2.0 now so sharing is close to the maximum.

Sri Lankan operators have already rolled out LTE, but there’s more build work to be done particularly smaller sites to supplement capacity. There is greater potential if there’s an upturn Sri Lankan in the economy; with the addition of new buildings, IBS and aesthetic towers, structures that blend in with environment, are likely to be in demand.

Towercos don’t have much incentive to decommission towers, which is seldom necessary as parallel capacity is often found in high yield locations where one tower may be at capacity, so someone else will want capacity on the other tower – there’s often potential to monetise the lower part of the tower to non-telco tenants.

TowerXchange: Do you agree with the threat of “last mover disadvantage” applying to operators who bring their towers to market late, whose towers become stranded assets on the balance sheet?

As operator you have legacy thinking that coverage is king, but in every market it’s only a matter of time before parity is achieved and the competition catches up. If you are a market leader, you have an opportunity to be a first mover in infrastructure sharing and co-location. If you are a new market entrant with financial resource and  planning to deploy, you can get to market quicker with co-location.

From towerco’s perspective, we can’t push out the tower network speculatively; it doesn’t make sense to buy idle towers. But if we get into a market early we can do amazingly well in terms of co-locations and tenancy ratios, even in markets with two or three towers in a GPS location, as long as there’s more than one tenancy the business model works.

For operators who sell late in game, it’s a bit of a trick. Operators who are a last to sell may not attract any interest from towercos, and if they do they are likely to only attract a valuation which is a product of the replacement value of those towers are minus the potential co-locations they have missed. Similarly there is no logic for operators thinking about retaining their most strategic and valuable sites until later, if they bring less attractive towers to market first, they’re a headache and won’t attract the same interest.

TowerXchange: How do the economics of building versus leasing towers compare?

The reality today is that operators can’t build or operate towers at the cost of towercos are offering. We benefit from sharing costs two or three ways. In general capex recovery is ten years – that’s in line with tenor that you sign up for.

The economics are slightly different in remote areas where we might have to charge a slightly higher lease rate to recover capex.

The replacement cost of a tower in Southern and Southeast Asia can vary from US$30-200k depending on the size of the structure. Camouflage adds a lot of, and often doesn’t co-locate very well, but is a necessary option in some locations and regulatory environments.

These costs will go down with the use of new designs, structures and materials.

Thivanka will be among the roundtable leaders at the TowerXchange Meetup Asia. Join him and many other senior executives from the regional tower industry in Singapore, 9-10 December 2014.