Analysys Mason take the MNO perspective on infrastructure sharing

With the pace of tower transaction deal flow continuing to pick up in Asia, it can be challenging to predict where and when the next transactions or portfolio divestments will occur. We recently spoke with Lim Chuan Wei, Partner at Analysys Mason, to get an MNO perspective on infrastructure sharing, and find out what motivates the decision to sell assets, and what stops them from making the leap as well.

TowerXchange: What can you tell us about the development of the tower industry from an MNO perspective?

With margins continuing to decline and competition increasing, MNOs are looking at how they can reduce their capex, and many have begun divesting towers and reallocating resources into active equipment, especially when bidding on spectrum and rolling out 4G services. This has had definite benefits for some of the early adopters of the tower sharing model, but there are some potential pitfalls that make some MNOs think twice about divesting infrastructure.

TowerXchange: What would you say are the biggest obstacles for MNOs considering divesting their infrastructure?

One of the main potential challenges is future-proofing agreements with towercos. In many cases it’s hard to predict how technology will change and what the new demands on the infrastructure will be. As wireless technology continues to evolve, more space is often required on towers for active equipment, and this can have an unforeseen impact on sharing agreements, requiring an increase in cost.  MNOs looking into divesting want to avoid being limited in how much space they have on towers, and being stuck with unforeseen costs.

TowerXchange: What’s your perspective on the MNO approach to tower agreements?

A lot of MNOs make a compromise between getting more up front, and being willing to pay more in perpetuity, but this impacts EBITDA. Putting forward less cash up front makes the EBITDA less effective, and being charged US$1,000 vs. US$500 per month makes a big difference. Paying more up front also leads to lower margins in the future.

This is less of an issue than it used to be, and now many top MNOs are looking into divesting assets to towercos, but there is still resistance. By selling their towers MNOs lose control of who the tenants are, and in some cases their competitors can become tenants. MNOs divesting assets need to make sure that the SLAs are sufficient. Another consideration is whether some key staff responsible for maintaining the towers are included in the deal; this doesn’t always happen but when it does it can be tricky to negotiate. There are many different objectives, alignments and other factors to consider. Valuation is another point; buyers will have a higher valuation because there are more tenants and both the MNO and the buyer share the upside. No matter what, extra tenants will always increase the value of the towers.

TowerXchange: What is the impact of regulation?

Regulatory issues also have to be taken into account; current examples of this can be found in Bangladesh where they are looking at licensing tower companies, and in China all of the towers of the incumbent MNOs are being consolidated into one huge tower company controlled by the government.

The balance of power can vary a great deal, and the influence on regulation of MNOs and towercos is different. It’s more difficult for a government or regulator to tell an MNO that a tower is not built to spec than it is to say it to a towerco responsible for a new rollout. Governments and regulators can’t afford to have legacy towers torn down and risk losing coverage in certain areas, but in some cases towerco towers can be decommissioned.

In general MNOs don’t want to be over-reliant on any one supplier; in China, for example, the consolidation into one huge tower company is likely to lead to the rise of an independent tower company market as mobile companies choose to reduce their dependence on one single towerco. And in Indonesia a lot of MNOs are trying to sell their assets; XL sold their first batch to STP but that probably won’t happen again as they want to reduce their exposure to risk. When an MNO has only one towerco meeting its needs it can cause big problems if there are issues with that company down the road. MNOs can’t afford leave everything 100% in the hands of another company. With a 5-10 year contract there is always the potential that prices will increase and MNOs don’t want to have all their infrastructure in one basket.

Ultimately, MNOs can benefit from towerco expertise in building, contract and leasing management. When an MNO needs new towers quickly towercos can have them up and running in short order. If the contract is carefully planned, the skill of towerco infrastructure management can definitely lower future capex.

TowerXchange: Which markets do you expect to see the next transactions or tower divestments?

At this point there are some very developed tower markets in Asia including India and Indonesia, but there are others that still have some way to go. When the time comes for the lesser-developed markets they will have to consider these points. Making the right choices in the early stages can avoid the higher costs that we see now in markets like the U.S. and Australia.

Thailand and Vietnam are poised on the adoption of the towerco model, but there are still regulatory hurdles, and the local MNOs aren’t completely sold yet. It will also be interesting to watch the Myanmar market as this is one of the last greenfield telecoms deployments and companies like Telenor have extensive experience with towercos and the towerco model. There are likely to be a lot of lessons for other MNOs and towercos in other Asian markets to learn.