The commencement of Vimpelcom’s sale of 10,400 towers in Russia coupled with the public declaration they are looking into the sale of additional assets in the CIS marks the start of a new wave of activity in developing markets in Eastern Europe and Central Asia. Whilst towerco activity and infrastructure sharing in the region are currently very limited (with only a handful of towercos and JV infracos of note outside the Russian market) there remains significant potential for the formation of new commercial entities through the assemblage of local technical expertise, regional and international capital and experienced management teams. In this interview we speak to the IFC’s resident tower expert Eric Crabtree and the bank’s Head of Telecom, Media & Technology for the region, Temel Oktem to discuss the dialogue they are having with MNOs, investors and local stakeholders surrounding the development of an independent towerco market in the region.
TowerXchange: Within the Eastern European and Central Asian markets that the IFC operates what is the status of the independent tower market? Do any countries have independent tower companies and is there any culture of infrastructure sharing?
Eric Crabtree, Chief Investment Officer, IFC:
If you look at the region, Russia is the most advanced with towercos such as Russian Towers and Vertical present and also an active bid process underway with the Vimpelcom divestiture. This is by far the biggest thing happening in the region at the moment and is also the clue to what may happen next. Vimpelcom as an entity is now looking across its networks for divestitures, so any place where they have a presence therefore becomes a potential market where we will next see independent towercos emerging. Vimpelcom will drive the creation of the industry as they move, they are quite serious about the divestiture process and it’s not just going to be Russia, it’s going to be others in the region and so that’s where to place your bets on anything happening.
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
In terms of existing towercos in the region, you only find examples in Russia (as Eric mentioned) and Poland where the company Emitel is present - to my knowledge there are no other materially sized independent towercos. I came across a company, Konsing Group, with 47 towers in Serbia and there may be others like them, but in terms of sizeable independent towercos, you are really limited to Russia and Poland. We also see an appetite amongst local tower builders to move up the value chain (as they have done in Russia) but to date, outside of the Russian market this has not yet resulted in the formation of any new towercos.
In both Turkey and the Ukraine, Turkcell have subsidiaries which manage their towers (Global Tower and UkrTower respectively) but they are wholly owned by Turkcell and as such, cannot be classed as independent towercos.
We also see some infrastructure sharing in the region. In Greece, Victus Networks exists as a network sharing agreement between Wind Hellas and Vodafone; and in Romania there is Ovidiu Telecommunications, a network sharing agreement between Vodafone and Orange. In both scenarios there is both active as well as passive infrastructure sharing, however the joint venture infracos don’t actually own the towers, rather they manage them on behalf of the operators.
TowerXchange: Could we see any of the big international towercos entering the region?
Eric Crabtree, Chief Investment Officer, IFC:
Cellnex are looking very aggressively at the Italian divestiture (Inwit) and when we look at the firms in Western Europe, they look likely to be the earliest major player that could go into some of the markets that the IFC is involved in. When they listed, however, the story given to investors was “Western Europe” and so their latitude initially is going to be limited. As a firm however, they know Vimpelcom well - it is one of their chief clients, and so that may entice them to enter the region at some point.
TowerXchange: Could we see any local tower builders moving up the value chain to become towercos in the region? Are there any strong candidates that stand out?
Eric Crabtree, Chief Investment Officer, IFC:
When you look at developing markets globally, the generic observation is that there are always a number of local tower builders - there are fairly low barriers to entry, the margins aren’t particularly good as a general rule and they frequently get taken advantage of by the tower owners in terms of payment terms, however some of them do graduate. It is a leap, but in Russia we are seeing that a few builders are making the transition into ownership.
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
Those principles apply to the region also. Some builders are bigger than others but it doesn’t change the fact that there are narrow margins and the builders are not strongly capitalised and so on their own they’re not able to acquire the towers and turn into a towerco by themselves. What the tower builders do bring however are many of the critical skills that are needed to play in the tower market, which is why they make a great combination with private equity funds who want to get into the business.
TowerXchange: Could these potential new entrants compete effectively with more established regional players like Russian Towers?
Eric Crabtree, Chief Investment Officer, IFC:
Firms with the right assemblage of talent - the money and the build expertise but also someone in the mix who has managed a portfolio of towers could become genuine challengers. It’s one thing to put the site up, throw down the foundations and get the steel up - it is quite different to make sure the site is up and running and taken care of and that the relationship with the client is managed correctly. The money can’t accomplish that, you need other kinds of talent brought in. If you have all that in the mix it’s not impossible - Russian Towers will face and is facing competition on the bid for Vimpelcom’s towers.
TowerXchange: It is quite fragmented when we’re talking about tower builders who could make the transition into towercos; when it comes to the financing part of the equation, who are the key players here? Are they mainly funds with a regional interest or is it more funds that have an appetite for towers globally?
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
The smaller deals tend to have interest from the regional funds. When we’re talking about larger deals, you will also see interest from the more sizeable regional funds (such as Mid-Europa, Cinven and CVC) but there will also be global players like Providence Equity and KKR who are very active in this sector.
TowerXchange: Has the dialogue between private equity funds and local tower builders surrounding towerco formation started already?
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
I don’t think there are many active discussions at this point. The private equity funds need to smell the deal before they get really active and then they’re able to move very quickly - they need to see the divestitures coming into the market first. I know that some of the funds are talking to advisors to get an idea of what potential asset sales are on the horizon, but they’ll only act once there is a serious process in place.
TowerXchange: What risks are there for investors looking at the region?
Eric Crabtree, Chief Investment Officer, IFC:
Outside of the Eurozone, the obvious concern is going to be currency devaluation and the ability of towercos to negotiate dollarised or euro based lease payments, or at least partial ones, to cover off some of that that risk. That’s a big concern right now - even though eventually of course the Euro and Dollar will weaken against these emerging market currencies, they are not in a strong position today.
A second key indicator to look at is the number of healthy MNOs in any given market - this is usually the driver of a market’s attractiveness and sits quite apart from any macro risk.
In relation to regulatory risk, one thing that I am observing in other markets, which holds up a lot of build out, is the auctioning off of spectrum. Anything that is holding up the data revolution on the regulatory side is another potential risk you must evaluate.
Outside of the Eurozone, the obvious concern is going to be currency devaluation and the ability of towercos to negotiate dollarised or euro based lease payments, or at least partial ones, to cover off some of that that risk
Another concern to note is as to whether the country has (and most haven’t) made any noise about regulating the sector. The problem you find in developing markets globally is that you can often have a very interventionist state, a divestiture doesn’t occur until certain personal interests are met or they get a piece of the tower company and as such the bidders don’t go in. I haven’t got any specific examples of that happening in the CEE but it is definitely something that investors need to be aware of.
Finally, If you’re looking at a country like the Ukraine where you have a conflict that’s obviously going to deter a lot of investors. On the other hand, for the IFC that situation makes it a priority market and one that we would be prepared to invest in with the right partner.
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
What I can also add to the list is the availability of debt financing in some of these markets. Sometimes international lenders familiar with the tower business will not be active in the market and then you will be limited to local banks who have never seen a tower business trying to finance it. This can create problems for a potential investor and towerco.
TowerXchange: We discussed Vimpelcom’s appetite to divest some of their assets as a key factor in stimulating the independent tower market in the region. Who are the other key MNOs in the region and what are their attitudes towards tower divestment?
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
The other MNO with a very similar footprint to Vimpelcom is TeliaSonera - they have operations in Azerbaijan, Georgia, Kazakhstan, Moldova, Tajikistan and some of the neighbouring countries. The one caveat with TeliaSonera however is that they have announced an interest in selling up and exiting those operations and so may cease to be a major player there. Telenor who is an investor in Vimpelcom, is also looking at an exit from the region.
One interesting company to watch is Turkcell who are TeliaSonera’s partner in markets including Moldova, Georgia, Kazakhstan and Azerbaijan (where TeliaSonera is the controlling partner and Turkcell is in the minority). Turkcell also have operations in Turkey and the Ukraine. Turkcell have started to approach bankers regarding a potential sale of their towers and whilst it is most probably a longer shot given the regulatory barriers in Turkey, it is an important indicator of changing sentiment in the region.
When you go to more Southeastern Europe, you start to see operators such as Telekom Austria, Deutsche Telekom, Vodafone and Orange active in multiple markets, as well as Telenor having a presence here.
We have been talking with all the various MNOs for a while, and whilst generally they keep their cards close to their chests, we are starting to see movements. If you take Turkcell as an example,the tower business idea had been floated in Turkey a while back and it was a no go for them at that time. Now they’re approaching banks to give them advice on how to do a transaction which is a radical change. As in other markets, once someone takes that first step, the others will follow. I’m optimistic on the market developing having seen Vimpelcom advancing on their bid process and people like Turkcell publically considering it, it’s a very good sign that things will evolve, firstly in the Vimpelcom markets and then the rest of the region.
TowerXchange: What work is the IFC currently doing in the region to support the market?
Temel Oktem, Head of Telecom, Media & Technology, Europe, Middle East and North Africa, IFC:
We engage with the MNOs, not only in relation to towers but also generally in the region and we talk to potential investors, government bodies and regulators. One role we are trying to play is to increase the awareness of the telecom tower market, highlighting potential issues and trying to make sure that risks are mitigated under the right structure - as the deals come through that will be more of a role we continue to play. As the deals emerge, we will help bring people together, both on the buy and sell-side and also play a key role in supporting the local and regional banks. We will share our experience of financing tower transactions globally and help them get more comfortable in understanding the tower business.
