What are the prospects for towers in Thailand?

Guest editorial by Phil Cooper

In recent years we have seen South East Asian tower markets develop at pace. Across the region, we have seen the gestation and growth of independent tower companies. Real national and regional heavyweight towercos have emerged such as Tower Bersama and Protelindo in Indonesia and edotco from Malaysia.

However, Thailand seems to have been overlooked in this shift towards independent tower ownership. The market structure in this major South East Asian mobile market remains unclear to most market observers, and the ongoing political turmoil has meant that tower investors so far have shied away from dipping their toes in the market. One or two have tried and their lack of success seems to confirm the negative market sentiment.

Is now the time to re-assess the Thai tower market?

Given the pace of change over the past 25 years, it would be wrong to blame the telecommunications authorities in Thailand for getting the structure and development of Thai mobile networks so completely wrong.

According to most observers, the development of the tower market in Thailand has been seriously hampered by the decision to go down the network concession route rather than the licensing route adopted by other national regulators.

As a result, in the 1990’s the Thai telecommunications regulator decided to adopt a concession / Build –Transfer – Operate (BTO) regime to drive the development of 2G mobile networks across Thailand.

25-year concessions to build and operate nationwide 900 MHz band and 1,800 MHz band networks were given to three MNOs – True (currently owned by CP Group and China Mobile – Orange was a previous investor), AIS (owned by Temasek and SingTel) and DTAC (later acquired by Telenor – Orange were also looking).

In return for the concessions, the operators paid 20-30% of their top line revenue by way of a fee to the state owned telecommunications enterprise who effectively owned the spectrum – CAT Telecom for the 850 MHz and 1,800 MHz band and TOT for the 900 MHz band.

Given that this was the 1990’s, no one involved in the process foresaw that at the end of the concession term, while the 2G active equipment would have little value, yet the towers would still be of considerable value to the operators.

Given what we now know, its unsurprisingly that as the concession terms drew close to completion, all of the operators made legal attempts to block the transfer of their tower assets to CAT and TOT.

All of the MNOs are reluctant to relinquish ownership of their towers or pay twice for the same assets. Even though the towers are up to 25 years old and only built for single tenancy, they are the root cause of the disputes.

While the initial response of the MNOs was to consult their lawyers, fortunately after much activity saner heads prevailed. All parties now realise that the best way to end the disputes is to find a commercial solution rather than continue the legal manoeuvres.

As a result, all of the operators are in active discussions with one or both of TOT and CAT. Both AIS and True have built large numbers of 3G tower assets outside of the concession regime, so they do have a network to fall back on should the discussions reach an impasse.

DTAC have only 800 tower sites not subject to concession, so they are in a more difficult position if the discussions with CAT stall. Already DTAC have been served an injunction by CAT ordering the removal of equipment from a number of disputed towers.

The proposed commercial solution to the ownership disputes is to form joint ventures between the state owned agencies – CAT and TOT – and the MNOs. This is hoped to result in the emergence of three towercos over the coming months.

While the joint venture towerco solution is sub optimal, all parties get something out of the deal. The MNOs get assurance that their passive networks remain in place and up, providing them with the security of service they demand. In addition, CAT and TOT’s revenues streams remain in place, without which they are financially exposed.

DTAC is concluding an agreement to form a joint venture with CAT for their 11,000 towers under concession. CAT will get a 49% share of the JV and the accompanying dividends.

AIS are likely over the next few months to conclude a similar agreement with TOT covering 12,000 towers under concession.

True are also seeking a solution to their dispute via injecting their disputed towers into their recently launched and listed fund – Digital Telecommunications Infrastructure Fund (DIF, formerly known as TRUEIF). CAT would receive shares in the infrastructure fund in return.

An interesting question is what will the MNOs do with the towers they own outside of the concession regime. Only 2G towers were included in the concession agreements and all of the operators have built 3G towers. Current estimates suggest that True has built over 6,000 3G towers, AIS has built 10,000 and DTAC has built 800. These newer towers may have the structural capacity for multi-tenancy and thus be considerably more valuable should a culture of infrastructure sharing emerge in Thailand.

For a tower investor, there are a number of potential routes to gaining market exposure to the Thai tower market. The first is to acquire a stake in the towercos formed by the proposed dispute resolution solutions.

DTAC’s parent Telenor has partnered with towercos in other nearby markets – most notably Myanmar, so they may be receptive to selling some or all of their stake in their joint venture with CAT.

AIS have no pressing need to monetise their tower assets and their owners (Temasek and SingTel) usually prefer to control their network assets. Therefore the probability of AIS selling out to an independent towerco is low, although a sale and leaseback or managed services deal that would significantly reduce their operating costs might pique their interest.

Investing in the joint venture towercos would provide relatively low risk exposure to the market – each JV will have long term rental agreements with strong credit MNO anchor tenants and while lease fees are not publicly disclosed, one has to assume that the unit economics for each tower would be need to be positive and that lease fees would be significantly higher that the operating and financing costs for each tower – assuming that power (almost all sourced from the electricity grid) is a pass through with minimal cost exposure to the towerco.

While these factors de-risk any investment, the big imponderable is what role the Thai state, through their proxies CAT and TOT, will seek to assume. For these stakeholders, the towers represent annuity revenues; it is not clear whether they have appetite to transform the towercos into growth plays, investing in improvement capex and BTS programmes.

Neither CAT nor TOT are cash rich and both have expensive payrolls and employee benefits to fund. As a result, they will not be able to provide financial support to the joint venture towerco. Any refurbishment capex needed (remember the age of the towers) or strengthening required to host co-location tenants would be for the account of the joint venture partners. This represents a significant risk as its difficult to accurately assess the refurbishment needed for general upkeep and co-location strengthening.

One might also speculate that the newly formed joint venture tower companies may lack management expertise and experience in managing a pure play telecom infrastructure business. While this is also a risk factor, it is also a compelling reason why an experienced towerco from Malaysia, Indonesia or India could add considerable value in terms of process, governance and commercial exploitation.

Finally, the political situation in Thailand is unstable and it is hard to predict how the state might behave once each towerco is up and running, especially when they begin generating better returns through efficiency gains and increased co-location lease up rates.

As noted previously, the towerco joint ventures do not include the non-concession 3G towers. It is still unclear what AIS and DTAC will do with these towers. One option could be to inject these assets into their respective JVs, although this would give CAT and TOT a valuation free ride as its unlikely that they would be willing to reduce their 49% shareholding accordingly.

This is less of an issue for DTAC as they only have a small proportion of their towers outside of the concession regime, but for AIS, the impact on the valuation of the JV would be significant. Given their preference for owning their own towers, these assets may remain under their ownership.

The towers built outside the concession regime would appear to be among the most investible in Thailand – their ownership is clearer and more predictable, they are newer and their structural capacity is generally greater.

True, alone among the MNOs, has proactively developed their own towerco solution through the formation of DIF (formerly known as TRUEGIF or TRUEIF).  True has injected over 12,138 of their own towers into the infrastructure fund / towerco that they subsequently listed.

DIF appears to include concession and non-concession towers as well as considerable fibre assets in the fund and as such is a simpler vehicle for investors to evaluate than a newly formed joint venture.  They are gaining traction in their co-location marketing with DTAC signing then expanding a co-location agreement with DIF.

Many of same concerns that investors and towercos face with the joint venture towercos would also apply to DIF, including refurbishment capex requirements, strengthening required for co-location and so on. The calibre of the management team is also an issue as pure play towerco experience is thin on the ground.

By listing the fund, True has effectively signalled that they would consider reducing their ownership in the fund and this represents a second route to exploit the tower opportunity, either as a significant minority shareholder or as a majority shareholder, FDI restrictions notwithstanding.

Due to the requirements of listing the fund, considerable analysis already exists for investors to conduct their due diligence, although political risk remains a harder factor to evaluate.

Currently there are approximately 45,000 towers in Thailand and while the percentage of population coverage is acceptable, only 50% of the country’s landmass is covered. Estimates suggest that another 15-20,000 PoSs are needed nationwide during the next ten years.

While much of this extra capacity will be supplied via co-location, there will be demand for new build to suit towers. The opportunity will therefore exist for a new player to enter the market to satisfy demand and finance new tower builds.

Thailand has a number of experienced tower constructors and access to quality tower materials with which a new market entrant could partner. The grid is of such high quality in Thailand (such a major issue for many other emerging markets towercos) that power provision is not a significant risk factor and a steel and grass business model could be offered to the local MNOs.

While they will face competition from DIF, it’s unclear whether the joint venture towercos would have the interest or capability to compete for new tower build contracts.

From a risk / return basis, a greenfield tower play may be the most attractive and easiest to execute – especially if the towerco in question already has a relationship and credibility with one or more of the MNOs.

Again, the big question is how to navigate the complexities involved in the start up process in a market where regulations exist but are often ignored, and where FDI is often restricted to a minority stake. A regional towerco has tried this approach in the past, but with little success and a rapid exit.

Perhaps their failure has more to do with political as much as commercial issues. Any of the routes described here carry with them significant political risks – the situation in Thailand is unstable at the best of times and especially now.

The question has to be whether recent developments in resolving tower ownership and the launch of DIF represent a real inflexion point or whether we are in the midst of another false dawn and greater political forces at play will limit any real progress.

Having said that, for investors with the risk appetite for the market, it might be worth considering a hybrid approach – a small tower new build contract or the purchase of part or all of a non concession tower portfolio would provide a beachhead into the market from which further expansion could be launched.

In conclusion, there is room for towercos in Thailand but that room needs to be created, both from a legal and regulatory perspective. Restrictions limiting overseas ownership to 49% of any venture should not be seen negatively as co-investment with the appropriate local investors would help towercos navigate through a complex market.

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Following a successful career in investment banking and IT, Phil became involved in the tower industry in 2011 by joining Eaton Towers as Group Commercial Manager. At Eaton, Phil worked on a number of tower transactions in sub Saharan Africa.

In September 2013, Phil left Eaton to join the start up management team of Apollo Towers Myanmar where as Chief Financial Officer through July 2015; he played a key role in establishing Apollo as the leading tower company in Myanmar, successfully rolling out over 1,000 towers with Telenor as anchor tenant.

At Apollo, he was responsible for two landmark financing transactions: securing Myanmar’s first ever ECA backed trade financing and a long term debt financing from the U.S. DFI – The Overseas Private Investment Corporation.

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Everyone we spoke to in conjunction with this article felt that the current regulations concerning network sharing and the licensing of tower companies was limiting the development of mobile services in Thailand. Indeed, according to one stakeholder, infrastructure sharing remains technically prohibited in Thailand, although that prohibition does not appear to be enforeced. In addition, for a country where revenues from tourism are such a major part of GDP, the environmental impact of tower blight should be a concern.

The question needs to be asked: how does the Thai regulator improve the situation?

Firstly they need to look to how their ASEAN peers have structured their regulatory regimes. In countries such as Myanmar and Indonesia, tower sharing is promoted and the emergence of independent tower companies encouraged. The Thai regulator did issue a draft regulation encouraging tower sharing in May 2012, but it appears that the draft has yet to become law.

Some tower sharing is taking place on a limited basis already in anticipation of the new regulation but a three-year hiatus is too long and passing this regulation into law would be a good forward step.

As the current concession agreements time out over the next few years, all operators will need to roll out new 3G and 4G points of service. Without large scale infrastructure sharing and the independent tower company model that exists because of co-location, the operators are going to have to waste valuable capital on network building rather than investing that capital on improving services to customers.

Thailand ought to be an attractive market for towercos. It’s not too late to fix the regulatory framework so that it encourages tower sharing.