This April we brought together a group of towerco experts and investors to discuss the topic of "growing and scaling a towerco" - a pertinent topic in all markets. The experience and international mix of participants was remarkable: moderator Peter Egbertsen shared experience as a Director at Protelindo (with a footprint in Indonesia, Myanmar, and the Netherlands), we had contributions from Towershare in Pakistan, Towercom in Ireland, Brittannia / Hibernian Towers / Ulstercom in the UK and Ireland, Eaton Towers in SSA, NOVEC in the Netherlands, Digital Bridge in the Americas and China, and American Tower in 13 countries and counting! These views were supplemented by several debt, private and public equity investors with experience in the asset class. Here’s what we learned…
Discipline: every tower has to make sense
Discipline is critical when scaling a towerco; every investment – every individual tower – has to make sense. With growing competition in this sector, you have to be very wary of making stupid deals. It’s important to remember the cautionary tales; even in the U.S. lots of towercos went bankrupt when the bubble burst in the early noughties; even American Tower and SBA Communications lost huge market cap – you’ve got to manage your leverage so you can survive tough times.
“Don’t grow for the sake of growth. You can retire on the cash flow from five towers, or you can buy towers, but every deal has to make sense,” said one towerco. “For example, we made an €80mn acquisition in a European country, funded half from cashflow, half with bank debt. That deal looks good now, and we’ve recovered the acquisition cost, but if the debt was twice the price the deal would look pretty average. If you don’t have access to low cost capital you have to be even more disciplined. Your deals have got to be futureproofed.”
The temptation for less disciplined inorganic growth is substantial as there aren’t many businesses you can scale as quickly as a towerco. Hypothetically you can achieve scale in a tower company from a standing start with your first deal; given sufficient upfront capital, and assuming you can find an MNO who will trust a prospective partner with little or no operational track record, a towerco can scale quickly and put capital to work under a business model with which investors are increasingly comfortable. But just because you can grow quickly, doesn’t mean to say you should.
One simple piece of guidance: put enough of your own money at stake that you walk away from deals you don’t like. Investors will always be more inclined to back a management team with ‘skin in the game’. “I’ve personally said no on occasions when the board says yes,” said one towerco CEO. “It pays to be ‘boringly rational’ – every deal has to make sense, tower by tower, country by country.”
If that’s a good guiding principle for inorganic growth, there’s a parallel principle for organic growth: don’t issue stupid MLAs!
Towercos have got to get the contractual terms right, and that means they’ve got to get the relationship with the MNO right. It might be tempting to slash lease rates to secure a big BTS contract, but if you need almost two tenants per tower and 5,000 sites to achieve scale, your investors may run out of patience and you may run out of cash before you get to scale – and what’s your exit strategy? No-one’s going to want to buy a portfolio with a deeply discounted lease rate. It’s also not in MNOs’ interests to work with towercos who may be here today, gone tomorrow. Disciplined towercos negotiate and defend a good MLA. In the words of one towerco: “the capital value is in the contract, not in the steel.”
Don’t assume the scale and co-location revenue will come just because your leases are cheaper than the other guys – and don’t cut corners on permits and quality – again, no-one going to want to buy a portfolio in which they need to invest tens of thousands of dollars or euros retreading permitting processes or upgrading structures.
Again the lesson is simple: only do deals where you see the returns. Don’t give away too much value in the pursuit of scale. There is a time to sit back and not do anything. Another business cliché tower entrepreneurs hold dear: “you don’t need to be the biggest, just be the best.”
It pays to be ‘boringly rational’ – every deal has to make sense, tower by tower, country by country
Today’s low interest rates can be an anathema to discipline. If you trim the margin too thin on a tower acquisition or tower build, today’s interest rates can only go up. You need to have a really good M&A team and access to smart capital which makes sense in the future as well as today.
Sources of capital
With Europe a zero interest rate environment, towers are increasingly interesting as an investment opportunity in long term contracts with proven cash flow streams. Putting money in towers makes more sense than putting money in the bank. Whether it’s pension funds gravitating toward infrastructure investments, or strategic investors such as American Tower with access to low cost capital from their own cash flow, there is no shortage of prospective sources of funding for European towers, although still not the same depth of investor pool as in the U.S. when it comes to institutional capital, private equity growth funds, and pension funds with account mandates.
“There’s a natural tendency to look at the towercos listed in the U.S., plus the likes of Cellnex as examples of what liquidity looks like in this asset class,” said one investor, “but don’t lose sight of the cost of capital to scale a business. Towercos need discipline in terms of their cost of capital. For firms like us with a remit to invest across multiple sectors it’s about comparative valuations. I’m nervous that everyone is so excited about the tower business. Even high teens valuations in the U.S. still seem high to me, so we’re looking for low double digit multiples, and seeking an exit through sale to a strategic or aggregator. Given the vintage of 4G in Europe, and the development of a market in which a significant proportion of MNOs retain towers, clearly some stakeholders think there’s more value to be found in the future than now.”
As ever, different breeds of capital have different appetites. Many private equity investors don’t see the same magnitude of growth opportunity in Europe to deliver their targeted 20%+ annualised returns, and thus have a preference for emerging market towers where the ongoing 3G and subsequent 4G rollout and the associated growth in data demand mean tower networks are still being extended as well as densified, thus organic growth can be more substantial. The relatively high operational, country and currency risk associated with emerging market towers has meant the pension funds have been less keen on such opportunities to date.
Is there a minimum tower count to realise economies of scale?
In a mature tower market like Indonesia, where the majority of acquirable operator towers have been sold, the principle remaining path to scale is through organic growth and lease up – a towerco might need at least 2,000 Indonesian towers to achieve scale. Europe is a different story; one towerco cited an example where they have just 260 towers under management, which they run with just two fulltime employees, plus backup from their corporate HQ. Another towerco in the same European country has 20 staff managing 800 towers. A third towerco has 30 staff managing 2,000, whereas a fourth towerco reported a significantly higher headcount managing 2,000 towers, but in a context where the company was deploying more aggressively.
“We used to think we needed 1,000-2,000 towers per country to have scale,” said the CEO of an African towerco. “But then we built a portfolio of 300 towers in South Africa and it’s been very profitable, so our minimum scale for entry into a market has dropped. It’s all about how you structure it and manage the business. We can be profitable more quickly when focusing on organic growth. But African towerco operations aren’t as lean as European towercos; we need more people for logistics – half our time and money spent on power.”
“We buy few portfolios with less than 1,000 sites unless we already have a footprint in the country,” said a representative of a large, listed towerco. “What adds value for us is any steps the seller has taken which compresses the time it takes to integrate a new portfolio. A seller will attract a premium valuation if they have all their documentation in order.”
Value drivers
Value drivers vary across different tower markets. For example, while consolidation and decommissioning of towers is a big issue in Europe, most delegates at the U.S.-centric tower summit at the CTIA were unfamiliar with the concept of decommissioning. However, the U.S. market is host to a thriving ecosystem of independent tower developers building and selling towers half a dozen or a dozen at a time – that’s not a phenomenon we see in Europe yet.
Rollup
“Build to flip” tower entrepreneurs also feed another tier of the towerco ecosystem; rollup plays. The most renowned of these was Global Tower Partners (GTP), backed by Blackstone and built by Marc Ganzi and his team, largely on the back of over 300 small acquisitions, most with independent developers and ‘Mom and Pop’ operations. GTP scaled to over 15,000 towers, and was sold to American Tower for US$4.8bn. That roadmap is being played out again by Ganzi and former Blackstone Partner Ben Jenkins in their latest venture, Digital Bridge, albeit this time with a more global and diverse footprint, extending beyond macro towers into data centres and small cells – Digital Bridge’s biggest acquisition to date being the acquisition of ExteNet Systems from SBA Communications for US$1.4bn.
Expansion across borders
Opinion differed as to the opportunity for multi-country tower plays in Europe. One investor made the comparison that it was easier to cross jurisdictions in the U.S. tower market where one remained under common rule of law with leasing frameworks and tax structures largely institutionalised, whereas in Europe has disparate tax regimes, disparate landlord freehold/leasehold relationships, and differing MNO requirements. The investor concerned felt European towercos needed to walk before they run to scale across multiple countries.
In contrast, a towerco contended that scaling any business was about hiring and backing the right management team, and towercos are no different. If you have people that can execute a towerco business plan in one market, you can you spread that overhead across adjacent countries. Another towerco concurred: while each country needed local management, there are many functions a towerco can centralise rather than replicate in every country.
How to persuade operators to sell their towers
“It’s a push and pull process, said one towerco. “We have to educate MNOs but there needs to be a need.”
One investor recalled the then CEO of American Tower Steve Dodge touring European MNOs in the late nineties, advocating the monetisation of towers or the creation of joint ventures. As we know, few European towers changed hands outside of Crown Castle’s foray into the United Kingdom, but with subscriber and revenue growth plateauing, debt rising and pressure to maintain dividends to prop up stock, European MNOs have greater incentive to monetise towers than ever, particularly given the relative valuation benchmarks established by Cellnex and INWIT’s IPOs.
The independent towerco business model is increasingly proven outside the U.S.; there are towercos building trust by creating efficiencies on every continent now, and those towercos are increasingly prepared to offer more flexibility on deal structures.
How can we accelerate Europe’s transition from a market where 87% of towers remain operator-captive, or on the balance sheet of operator-led towercos and JVs? “Towercos need to start giving the MNOs more of what they want,” proposed one towerco CEO. “More pertinently, what aren’t we giving them?” Suggestions ranged from improving cycle times for co-location to easing tower transactions: “the transition of a portfolio from MNO to towerco is always a painful process.”
“Towercos can’t survive if we give MNOs everything they want,” contended another towerco. “Valuations are high, opex is high in the markets we’re targeting. It’s a challenge to convince MNOs in the Middle East that they need to leave something on the table – if MNOs retain too much of the value, the towerco may not have the opportunity to create sufficient value to raise capital.”
“We were recently negotiating with an MNO who also have their own towerco,” said another towerco. “We found ourselves negotiating about pockets of value we sometimes hadn’t realised existed yet! But MNOs who have run their own towerco appreciate that independent towercos work the assets harder than MNOs. We’ve worked with some demanding customers and sellers over the last ten years, but we’ve found that there is enough value from co-location growth to make it worthwhile for all parties.”
The operational challenges of building and scaling a towerco
The operational challenges for towercos are amplified when the business model calls for provision of power as a service, as opposed to markets like the US and Indonesia where power is a pass through.
“There’s no one thing the supply side that makes a transformational difference to opex and thus the bottom line performance of a full service towerco – it’s a hundred little things, which therefore requires huge attention to detail,” said the CEO of an African towerco whose lease prices are inclusive of power. “The structure of your outsourcing partnerships becomes critical, as does the management of people and the power supply chain. I don’t want to be in the power generation industry but at the moment there’s no one stop shop solution – each vendor provides incremental benefits, but I don’t see a clear structure for provision of power as a service across all emerging markets, and it’s still not clear which model will prevail.”
“The operational challenges of power management are magnified in Myanmar, where there was no endemic no tower industry, and no distributed power generation industry either. We didn’t encounter any partner we could trust to take whole power problem away,” said another towerco representative. “We’d be interested to buy power as a service, or buy power by the kWh, but we remain unconvinced that the ESCOs have access to the necessary capital, nor have the proven execution capability from delivery to installation and running the sites.”
“MNOs are inclined to wash their hands of their principle operational challenges and risks,” said another towerco. “Towercos must stay disciplined and focus on the core model.”
Another towerco agreed: “in one country the MNO was trying to make us take responsibility for power provision but still tell us what DG to put on a site. They can’t have it both ways, but unfortunately this creates just another opportunity for cowboy towercos to sign bad deals to the detriment of all concerned.”
Top ten tips for scaling a towerco
1. Have the discipline to walk away from deals that don’t make sense
2. Manage your leverage so you can survive tough times – interest rates can only go up!
3. Be prepared to take the time to rollup smaller tower portfolios
4. “The capital value is in the contract not in the steel”
5. Don’t discount leases excessively – no-one will want to buy your portfolio!
6. Don’t cut corners on permitting and structures – you’ll harm valuation
7. You may not need 1,000+ towers to achieve scale – build smart, build organically
8. Investors are more interested in the people they invest in than the assets – the credibility of your management team is critical
9. If MNOs try to retain too much value, they risk making their towerco partners uninvestible
10. Be wary that a towerco providing power as a service is a fundamentally different animal to a pureplay ‘steel and grass’ towerco – pick a business model and stick to it
