At EY, we continue to be at the forefront of transactions in the African tower market, successfully completing nine deals on the continent to date and advising on a host of others. We provide our clients the full range of advisory services to ensure a successful transaction from lead M&A advice to commercial, financial and tax due diligence and tax structuring. Our core telecom infrastructure team is based in the UK, drawing on an extensive and specialised network of offices in 33 African countries with 5,500 professionals to ensure that we provide our clients with the best advice possible.
In our last article we discussed the different towerco models which are communally operated, particularly in Africa. In this second article we will share some insights into preparing data for, and the approach to financial diligence, both of which are a fundamental part of any tower transaction. The themes are principally around ’Own and Operating’ transactions, where a towerco is acquiring a portfolio of towers from an MNO however, it is applicable to Managed Services or Management and Marketing agreements.
Robust financial information is paramount to the success of a deal, ensuring maximum value for the seller by giving the buyer confidence and comfort over the costs and revenues of the towers being sold.
In our experience, we often find sellers are not adequately prepared for a transaction with financial information being unavailable, incomplete, inaccurate, or unable to be supported by the underlying financial records or contractual information. When this is the case it adds a significant amount of time and expense to a transaction process. A buyer will try to establish appropriate operating costs and revenue per tower through the use of their internal teams and third party diligence providers, which will be fundamental to its offer price. This takes time, delaying the transaction and can place significant information demands on the seller, as well as eroding confidence over the performance of the portfolio for sale.
Such issues may lead to a loss in potential value for the seller as a buyer will look to use its own more prudent assumptions in its valuation model, rather than the assumptions put forward by a seller (and which cannot be supported). Certainty is reduced over synergies and cost savings they can deliver to the portfolio post transaction, making it a more risky investment and more difficult to raise finance. Ultimately at an extreme such issues can lead to a transaction falling over.
Why does a lack of robust financial information occur?
The cost base and revenues generated from a tower network are not generally a material part of a MNO’s operations, and as such are not normally separately accounted for or monitored in sufficient detail for an MNO to quickly extract the historical costs and revenues information that a buyer is looking for. The operations of the passive tower portfolio are also rarely standalone necessitating both a degree of carve out analysis as well as “estimation” to derive a set of standalone financial results. Typical carve out issues include maintenance contracts which typically cover work on both passive and active assets, or when rental costs include ground rent paid for the towers being sold and co-location rent paid to third party tower owners. The buyers ability to understand the historical costs of the passive network being sold are fundamental to its assessment of value.
MNOs do not spend sufficient time in advance of the transaction working through all the different considerations in preparing robust historical financial information to potential buyers. Often the approach is just for sellers to provide what is available rather than asking themselves what would a buyer need in this circumstance and how can I provide it to them
Experience shows us, particularly in Africa, that historical financial information is often impacted by timing issues around the receipt of cost invoices and payments from customers. For example, electricity invoices are received irregularly often resulting in a high degree of estimation and significant month on month volatility when estimates are trued up to reflect the actual invoiced amounts. When such timing issues occur significant analysis is required to understand the actual cash costs, and this analysis should be done by the seller.
In our experience, MNOs do not spend sufficient time in advance of the transaction working through all the different considerations in preparing robust historical financial information to potential buyers. Often the approach is just for sellers to provide what is available rather than asking themselves what would a buyer need in this circumstance and how can I provide it to them.
What does a buyer want to see?
Most buyers want to see supportable historical monthly opex, revenues (cash received and barter arrangements) and capex for the passive assets being sold for at least two years and the most recent trading period to date. This level of information will provide them not only with sufficient data for the basis of their business plans, but if prepared properly will provide a buyer with the confidence it needs. For this confidence to arise the monthly financial information needs to be supported by the underlying financial records, that reconcile to management and audited accounts or other supporting documentation such as third party contracts, evidence of cash receipts / payments and third party invoices received.
A buyer will also need to be made aware of any proposed changes post transactions for example:
When will tenants who currently have a barter arrangement with the MNO move to cash paying and at what rate?
Will agreements with tenants change from a partial sharing arrangement, where the tenant provides their own power, to a full sharing where the tower owner provides the power and bills a higher rental fee?
Where MNO owns land that towers are located on, will this land be included as part of the transaction or will the MNO become a land lord to the buyer with an additional ground rent to be paid?
How does financial due diligence help?
To date EY has worked with a number of towercos, to assist them in establishing what the historical costs and revenues of portfolios are and to fill in the gaps often left by what the MNOs provides. Our experience is that MNOs rarely go through a robust process of extracting, preparing and challenging financial information which is to be prioritised as a consequence buyers see significant value in engaging a financial diligence provider to provide the support they need, as well as to give a second opinion on the assumptions to include in their valuation. Often, the initial costs and revenues presented by MNOs are inaccurate and incomplete, a fact which is quickly uncovered as a buyer movers through its due diligence process with MNOs then running the danger of being “on the back foot” during subsequent discussions on portfolio performance and value.
Financial due diligence does not however have to be restricted to the buyer. A seller should consider engaging a diligence provider so that:
The seller will have a clear view on actual costs and revenues of the portfolio, supported by an independent third party. This will put the seller in a more informed and supported position for negotiating transaction price of the sale and any ongoing MSA with the buyer.
Historical financial information will be identified earlier in the process and the seller will be aware of upsides that may have previously been missed (and which would not necessarily be flagged if the buyer was performing the diligence work). This reduces the likelihood of a reduction in offer price as the deal progresses and helps ensure maximum value is achieved.
A seller due diligence report (i.e. a vendor due diligence report) can be provided to multiple potential buyers keeping their transaction costs down and potentially more parties interested in the portfolio, thus increasing the opportunity for a more competitive sales process and a better sales price.
The ultimate buyer gets reliance on the financial due diligence work performed, which can be used to support the raising of finance.
Presently, the use of vendor due diligence reports is not common in the sector and especially in Africa. Whether or not an MNO commissions such a report, our view is that there is still a significant amount of pre-deal worth that an MNO can do around financial information to be presented to buyers which will not only help to increase confidence and comfort, but will also make for a smoother disposal process.
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