Greek tower market opens up

Greece’s telecoms market has been subject to some very tough economic conditions in recent years, leading to lower sector revenue and investment. Operators across the board have seen gross profits tumble year after year, and the continuing economic turmoil will make market conditions particularly tough during the next few years. At the Greece roundtable at the TowerXchange Meetup Europe 2016, the parlous state of the Greek economy was extensively discussed. The general consensus amongst the participants was that the telecoms market had reached a tipping point, making the entry of an independent tower company a distinct possibility.

Greece has a well developed mobile market with SIM penetration of 163% (Source: GSMA Intelligence, Q4 2015). The biggest player in the market is Hellenic Telecommunications Organization S.A., the former state monopoly, which is now majority owned by Deutsche Telekom. Since September 2015, the company has been trading under the Cosmote brand name. The other two major operators are Vodafone Greece and WIND Hellas, which trades both under the name WIND and Q Telecom (following a 2006 acquisition of the number four operator) plus MVNO Cyta, launched in 2014. Any further M&A in the mobile market has been postponed due to current economic uncertainties.

The Greek economy is still reeling from a financial crisis and massive austerity measures required by three international bailouts since 2010. It has the highest unemployment rate in the European Union, and its economy is 25% smaller than it was in 2009 (Source: The Huffington Post). These economic factors, together with increased regulation and intense price competition, have had a corrosive effect on operators’ margins. Between 2008 and 2015 the revenue of the top three MNOs in Greece declined by 53%.

Driven partly by cost considerations, Vodafone Greece and WIND Hellas formed a 50/50 joint venture (JV) company called Victus Networks to share 2G and 3G mobile access network infrastructure in March 2014. The company’s main objective is to manage the Radio Access and Transmission Networks (RAN) of its parent companies and, in parallel, implement a partial active radio network sharing (MORAN) for 2G and 3G technologies in rural and selected urban areas of Greece.

Whilst infrastructure sharing is significant between Vodafone Greece and WIND Hellas, incumbent Cosmote has less of an appetite to share their towers.

There are around 12,000 towers and rooftop structures now in Greece, representing around 1,500 SIMs per tower, indicative of a relatively mature network. At present, no telecom tower companies have a foothold in the country – the MNOs own all of the assets.

Broadcast infraco Digea has 156 sites and also leases capacity from the MNOs in the market, as well as ~80 sites owned by States TV and Radio provider ERT. Digea is owned by seven different private broadcasters, each possessing a temporary nationwide broadcast license. One of these seven private broadcasters is already defunct, most the others are deeply in the red. Greece’s new government wants to restructure broadcast licensing, auctioning off four permanent nationwide licenses. This could create an incentive for the current seven stakeholders to monetise and exit Digea.

At present, only 30% of the MNOs towers are located in urban areas, where licensing, landlords and official bureaucracy is are hampering further densification.

Vodafone Greece and WIND Hellas currently own 7,000 tower and rooftop sites between them. Prior to the establishment of the JV, several hundred sites had been set up for co-location; these sites are now being utilised for network sharing. The tenancy ratio on Victus Networks’ towers and rooftops is 1.5 but is expected to go up as the MNOs increase their network sharing. A decommissioning programme is under way which is expected to result in the Victus Networks tower count falling to 6,000 and the tenancy ratio increase in tandem.

Victus Networks report that around 200 sites (primarily in mountainous regions) in their portfolio are off-grid, with the majority running 24/7 on hybrid, energy efficient DGs.

Market leaders Cosmote, 100% owned by OTE which in turn is 40% owned by Deutsche Telekom, whose passive infrastructure assets were inherited from a former fixed services incumbent monopoly, were historically was not amenable to co-location by other MNOs or broadcasters. As a result Cosmote may consider spinning off their towers into a fully owned subsidiary, partly to reduce the risk of being classified a dominant player by the regulator. While Cosmote have little incentive to monetise towers with net debts of just €859.8mn compared to revenues of around €4bn per annum (74% from Greece), a carve-out towerco in Greece could be part of a larger group-level strategy implemented by Deutsche Telekom.

The two Victus Networks partners have differing levels of motivation to monetise towers. Vodafone Greece has zero debt and a strict capital intensity KPI which means there is no incentive to release cash from a tower sale, whereas Wind Hellas are significantly more cash hungry.

In common with many other cell site portfolios in Europe, the cell site portfolios most likely to come to market in Greece consist of relatively few greenfield ground based towers; a degree of parallel infrastructure which may need decommissioning (particularly in urban areas); and may require that substantial work be undertaken to prepare the assets for monetisation, including updating maintenance, licensing and permitting.

Vodafone Greece and WIND Hellas joined forces in part to fend off competition from Cosmote, which currently has a market share of 50%. Given its market dominance, Cosmote is well placed to deliver LTE-Advanced services, which were made available in parts of Athens and Thessaloniki in Q3 2015. Cosmote’s 4G population coverage is believed to be around 80% at time of writing.

To prepare for LTE-Advanced, Victus Network will be extending coverage into rural areas and sharing more assets between the operators in major towns and cities.

Considering the current economic conditions in Greece, investment in 4G in the country is overwhelming.

There is a high probability that a tower company will enter the Greek market within the next two or three years. Greek MNOs are under pressure to invest in the revenue generating side of their businesses and let someone else take care of the infrastructure. In the case of Victus Networks, it is public knowledge that one of the MNOs is open to selling some of the JV’s towers to a third party.

There are two obstacles to a tower company entering the market. The biggest obstacle revolves around VAT. VAT is at 23% in Greece and must be paid to the state prior to any purchase. When Victus Networks was formed, the MNOs asked to be exempt from the tax but their request was refused by the government. As a result, Vodafone and WIND’s Greek towers still sit on the MNOs’ balance sheets, not on Victus’. Any tower company entering the Greek market would need to have the capital available to pay the tax prior to actually acquiring the assets. The ability of the DFIs to now invest in Greece for a limited period of time however opens up another line of investment for a prospective towerco in the market.

Secondly, tower sites in Greece need to be licensed and the whole process is very bureaucratic. The active equipment on every single site has to be licensed and permits need to be acquired for forklift trucks and other equipment. MNOs also have to re-apply for licenses every time they add a new frequency to a tower. Any tower company choosing to enter the Greek market will need to have the time and patience to deal with these issues.

The joint venture between Vodafone Greece and WIND Hellas has allowed both companies to pool their production costs and invest more capital into their networks. Cost cutting will continue to be a priority for Greek MNOs as long as consumer spending stays stagnant.

There is the potential for at least one of Greece’s leading operators to divest their tower portfolios, which makes it likely that a tower company will enter Greece in the near future.