News surrounding MNO tower divestitures, carve outs and joint ventures is starting to secure more inches in European telecom press, suggesting that the European tower industry is very much at an inflection point in its growth curve. On the opening morning of the TowerXchange Meetup Europe, four prominent towerco executives were invited to share their perspectives on what the future has in store for the market. Joining the panel was Scott Coates, CEO of Wireless Infrastructure Group and Chair of the newly formed European Wireless Infrastructure Association; Peter Owen Edmunds, Chairman of the Board of Directors at Russian Towers, being closely watched regarding their shortlisting for VimpelCom’s 10,400 towers; Nicolas Ott, Managing Director of Telecoms at broadcast-telecom towerco Arqiva which owns over 10,000 towers and has a growing presence in small cells and DAS; and Frederic Zimer, CEO of FPS Towers who have experienced 40% YoY growth following an ambitious strategy to realise the potential of France’s rooftops.
Motivating factors surrounding the recent spate of European tower activity
TowerXchange’s analysis of the size and growth of the European tower industry was presented at the opening of the TowerXchange Meetup Europe. Of Europe’s 600,000 cell sites (including Russia and the CIS), 36% are in the hands of infrastructure companies, with 13% being owned by independent towercos and by 2020, we forecast these numbers to reach 65% and 48% respectively. Considering the recent surge in activity and tower transaction pipeline projected, the panel were asked for their views on the factors affecting these dynamics.
The success of the towerco business model internationally has paved the way for the European market and the subsequent IPOs of Inwit and Cellnex were then the catalyst in bringing the model to the attention of European MNOs. Such healthy valuations demonstrated to operators that the value of their towers could be crystallised and as such, had the potential to serve as an effective means to reduce pressure on balance sheets as they looked to invest further capital into next generation networks, whilst maintaining dividend payments.
Whist panellists agreed that many of Europe’s operators are not as capital constrained as their international counterparts (many of whom have completed sale and leaseback transactions), they did feel that operators had come to realise the added incentives to monetise their towers. In times of reduced margins, operators are starting to feel that time and money are better spent focussing on quality of service and customer retention plans than on retention and management of their passive infrastructure.
All panellists felt that we were past the point where MNOs see their towers as a source of competitive advantage, similarly past the point where engineers were sceptical that third parties could effectively manage their networks. The decision to divest infrastructure assets ultimately comes down to balance sheet drivers; when is the right time to monetise? Ultimately, the panel felt that all operators will be drawn into considering alternative options for management of their passive infrastructure.
The IPOs of Cellnex and INWIT have also put another force at work in the market. Bringing awareness of the independent tower sector to the public markets has fuelled the appetites of institutional investors who have been struggling to obtain the returns they are looking for in conventional investments. Amidst low interest rates across the continent, the stable, long term yet higher yielding returns offered by tower lease contracts represent an attractive alternative investment. Competition amongst investors for a piece of the asset class continues to prop up valuations and further motivate operators to examine carve outs and IPOs or strategic sales.
Panellists were keen to point out that the attitudes of operators are, however, not homogenous with Peter Owen Edmunds using the different attitudes of Russian operators as an example. Within the Russian market, three distinct business models can be seen: VimpelCom have chosen a sale and leaseback structure, with 10,400 towers on the market and an appetite to follow a similar strategy across their CIS portfolios; MegaFon have favoured the creation and potential strategic sale of their own towerco - First Tower Company, which manages the company’s 14,000 towers; whilst MTS prefer to retain their passive infrastructure, seeing the management of their services end to end as a source of competitive advantage (Editor’s note: MTS has since announced the creation of “MTS Towers” through which they propose to lease up 5,500 towers, around half their portfolio).
As to which business model was the optimum choice for an operator and which model would prevail, the panellists commented that this very much depended on the strategic agenda of each MNO. The different paths answer to different business goals and what’s more, are not mutually exclusive.
Panellists felt that momentum has however started to build in the sector, further fuelled by the activities such entities such as the European Wireless Infrastructure Association and TowerXchange which are helping to focus the spotlight on the industry.
Regulation
At present, the tower industry is largely unregulated yet it sits in a precarious position between the regulation governing active infrastructure and the regulation governing the land on which towers sit. Authorities are often confused about where the boundaries are - what is passive, what is active and what is land. As a relatively new industry, it sits upon the shoulders of towercos to educate and communicate with authorities to clarify such definitions and ensure that the market is able to develop effectively. In the eyes of many operators, over-regulation has hampered the development of the European telecoms industry, and panellists felt it was critical that the tower industry did not go the same way.
The European Wireless Infrastructure Association, as an advocacy group representing the interests of the sector, plays a critical role in this. The telecoms industry as a whole is undergoing a major overhaul and it is important that the tower industry is involved in putting in place the new framework. The association has already established itself as a voice in Brussels, working closely with key commissioners to influence their vision for the European telecoms sector.
All panellists felt that there was no need for regulation of the tower industry, with it being a highly competitive and well functioning sector. It’s ability to improve the quality of telecoms infrastructure whilst bringing new investment to the sector and lowering costs was helping to improve connectivity across the continent. Panellists felt that the tower industry’s value was appreciated by regulators and as such, they did not expect a heavy hand from authorities. By contrast, panellists anticipated that the tower industry and regulators would work hand in hand to modify policies in such a way that it helped alleviate bottlenecks, tackling challenges in key areas such as permitting which have hampered the cost effective rollout of new infrastructure.
Where are the growth opportunities for European tower companies?
Amidst changing market conditions, the latter part of the panel focussed on where each of the towerco panellists saw growth opportunities for their companies.
In Russia, Peter Owen Edmunds saw two key areas for Russian Towers to focus on. The first was the building of new sites in urban environments where much of the focus for operators currently sits. Less keen to deploy sites using rooftops due to fragmented building ownership in Russia, Russian Towers has been working on a strategy using street lighting, and anticipated that this would continue to eclipse work in the rural sector, where the company had originally focussed.
The second area of growth Edmunds mentioned was the layering of additional offerings and services on top of the provision of passive infrastructure. This includes diversification into DAS, fibre to the towers and possibly even small cells, areas in which the company is currently running trials to take more of proactive, service driven approach. Going forward Peter felt that towerco revenues in Russia would be less dependent on tenancy ratios and increasingly driven by delivering extra layers of service to the operators.
Nicolas Ott commented that he saw strong growth for Arqiva. Due to expanded coverage obligations, the UK market requires more sites in rural areas whilst the overlay of additional equipment in urban areas will be critical to meet capacity requirements. Arqiva are already taking a front seat in the deployment of small cells (rolling out networks for two operators), while also playing a role in indoor DAS and Wi-Fi as the challenges of deep indoor coverage increase. In a world where we are short of spectrum, Ott added, operators and infracos will need to deploy a range of solutions to meet connectivity requirements.
FPS Towers CEO, Frederic Zimer commented that the French market was similarly busy with major growth potential for towercos - FPS recently reported 40% YOY increase in revenues. The rooftop market, which is a core focus for FPS, is becoming increasingly important for cell site densification in France; the rollout of FREE mobile is still ongoing, presenting significant opportunities for towercos; and the deployment of RANsharing between SFR and Bouygues and the rollout of the Internet of Things for each of the operators provide extra avenues of business.
Wireless Infrastructure Group’s Scott Coates suggested that in the nine years they have been running WIG, now is definitely the most exciting period. In the UK, they are seeing an expansion in network footprints involving macro sites, which they haven’t seen for a long time, as well as huge opportunities in DAS. When it comes to outdoor small cells, Scott felt that whilst there was an obvious opportunity, the strength of the business model must first be closely evaluated. Further exciting opportunities exist for towercos in geographic expansion. Whilst to date they have tended to confine their activities to their home market, Coates saw this as changing. With new investors in place, WIG themselves are now focussed on M&A with other middle market towercos across the UK and Western Europe, creating opportunities to extend their footprint further.
With all four panellists seeing such strong opportunities for growth the session provided an upbeat start to the inaugural TowerXchange Meetup Europe, providing insights from some of the sectors most exciting towercos.
