A first look at the CIS tower markets, particularly Kazakhstan and the Ukraine

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Towers could come to market from VimpelCom and TeliaSonera / Turkcell

Thousands of towers are expected to come to market across the CIS in the next couple of years, triggered by the extension of VimpelCom’s tower monetisation programme to the region. At the recent sell-out TowerXchange Meetup Europe, TowerXchange hosted a panel session on Emerging European tower markets and a subsequent roundtable focusing on the CIS. With thanks to the moderators and participants of those sessions, here’s what we learned.

Spotlight on Kazakhstan

With a 2.7mn km² and only 18.2mn population, Kazakhstan is not densely populated. However, as the third largest of the CIS member and associate member States, it is home to one of the region’s more investible tower markets.

The Kazakh mobile market consolidated from four to three operators when Kazakhtelecom’s Altel merged with Tele2 in 2015. The combined entity is 51% owned by Kazakhtelecom but Tele2 has operational and management control. Altel’s 4G monopoly is currently being opened up to competition from the country’s other operators, Beeline (VimpelCom) and Kcell (TeliaSonera+Turkcell). LTE spectrum auctions in 2016 will introduce license obligations requiring provision of coverage to all settlements with a population over 500. This means 800-1,000 new towns will need to be connected, requiring the erection of 1,000-1,500 additional towers.

Kazakhstan currently has around 25,000 base stations located on various structures including around 7,000 cell sites, ~5,300 of which remain MNO-captive. A further ~700 towers are owned by fixed line operator Kazakhtelecom, while around 1,000 privately owned structures are also in use. Participants in the CIS roundtable suggested over a thousand towers could be erected in Kazakhstan in the next two to three years, driven by next generation network rollouts and big infrastructure projects like providing coverage along the main railway lines and along the highway from China to Western Europe finished last year.

Logycom, currently Kazakhstan’s only independent towerco with a recently signed contract to build 77 towers for Altel, reported that it can take up to four months just to acquire land for Kazakh towers, but that land can often be secured at a very favorable rate. There is then the usual assortment of “around ten” further permits required to fully legalise the towers. The complexity of permitting in Kazakhstan means many existing towers may not be fully legalised.

Logycom operates a ‘steel and grass’ business model – MNOs retain responsibility for power, and O&M is outsourced to proven subcontractors.

The fixed line incumbent operator Kazakhtelecom has a network of around 700 towers. While the network is no longer used by Kazakhtelecom themselves as they use fibre, the towers are widely used as the default choice for other MNOs’ rollout. Informal estimates suggest there could be an average of 2.5 to three tenants on each of these towers, but they may be leased out at rate significantly cheaper than a commercial independent towerco rate. Increasing separation between the State and Kazakhtelecom, reducing the company’s access to low cost interest rates, may provide an impetus to monetise the towers, which are currently seen as something of a cash cow by the operator.

While TowerXchange anticipate tower transactions in Kazakhstan in the coming 12-24 months, a substantial sale and leaseback would need to preceded by a period of ‘paperwork cleansing,’ otherwise the valuation realised could be compromised.

VimpelCom’s tower monetisation programme is rumored to be extending to CIS States in the near future, which could bring their 3-4,000 Kazakh structures to market, of which around 1,500 are believed to be ground based towers, with the rest likely to be rooftops and other urban infill solutions such as lampposts.

TeliaSonera’s proposed exit from Kcell could prompt the monetisation of their ~650 towers, particularly if Turkcell is successful in buying out TeliaSonera’s majority stake in Fintur, the joint venture holding company which manages their stakes in Kcell. Turkcell recently commenced a process to IPO their carve-out Turkish towerco Global Tower, illustrating the company’s current thinking toward tower monetisation.

While access to capital in Kazakhstan suffered during recent political turbulence, the climate for international investment into the country is increasingly attractive since the introduction of the “Incentives Law,” implemented in January 2015. The law provides a number of incentives to invest >US$20mn in qualifying new businesses, including customs duty exemptions for up to five years; State grants potentially including free land use; tax incentives including potential profit tax and land tax exemptions for up to ten years and property tax exemptions for up to eight years; and investment subsidies by way of reimbursement of up to 30% of expenses incurred.

The biggest challenge for international investors interested in Kazakhstan remains exchange rate instability. After spending US$28bn propping up the value of the Tenge, the Kazakh government allowed their currency to float in August 2015, resulting in significant currency devaluation (in August 2015 you’d have got 185 KZT to the dollar, at time of writing that figure had doubled to 330 KZT). While Kazakhstan’s MNOs owned by international players have reduced capex, the effect of currency devaluation on the tower industry’s cost base has not been as pronounced, with reports that the cost of tower manufacture increased only 10-15%.

Estimated cell site count, Kazakhstan

Kazakhstan-cell-count

Spotlight on the Ukraine

The Ukraine is the largest of the CIS States with a population of around 44.4mn. GSMA Intelligence suggests there are 63.5mn connections in the Ukraine, giving SIM penetration of 142%.

The country is host to four MNOs: Kyivstar (VimpelCom), Vodafone-MTS, lifecell (Turkcell) and Intertelecom, the latter being a CDMA operator focused primarily on the Crimea.

Nationwide fixed line operator UkrTelecom, part of SCM group owned by the country’s richest man Rinat Akhmetov, has a 3G mobile subsidiary TriMob, which has recently been the subject of an acquisition attempt by MTS. SCM had previously been a shareholder in lifecell (then known as Astelit) before that was bought out by Turkcell.

The Ukraine has one of the least developed mobile networks in Eurasia, with 3G rollout having only reached the big cities to date. For example, market leaders Kyivstar announced their 3G network achieved almost 40% population coverage by April 2016. The Ukrainian national communications regulator, NCCIR, has reserved 4G spectrum for auction.

There are around 11,000 towers in the Ukraine. Kyivstar owns around 5,500 and Vodafone-MTS has a further ~4,500. Ukraine’s only towerco UkrTower has around 1,200 towers and 290 IBS, serving all the MNOs and ISPs in Ukraine. UkrTower recently acquired lifecell’s 811 towers for US$52mn. UkrTower is 100% owned by Turkcell, and is a subsidiary of Turkcell’s captive towerco Global Tower, which is slated for IPO later in 2016.

“We’re renowned for our indoor coverage,” said Zafer Ozbay, General Manager of UkrTower in a panel session at the recent TowerXchange Meetup Europe. “The MNOs all come to us and appreciate the value of sharing IBS.” UkrTower operates a ‘steel and grass’ business model; they connect sites to the grid, but the batteries and backup DGs remain owned by the MNOs or their subcontractors.

The Ukraine is in the grip of a political and economic crisis. The cost of living is increasing but salaries are not increasing, leading to a significant reduction in disposable income (one result of this is an increasing level of theft from cell sites, with site security a growing priority). ARPU is falling, so Ukrainian MNOs are cautious to deploy capex; very few new towers have been built in the last five years.

Population of current and former CIS members and associate members, excluding Russia

CIS-population

Other CIS markets

The CIS tower market remains immature. One participant in the CIS roundtable at TowerXchange said: “It’s great to see towercos going into this space. While build to suit (BTS) tower businesses offer more gradual growth, we need bigger tower divestitures to make the CIS more interesting to international investors.”

To an international tower investor, many CIS states are too small on their own to be a viable investment, but if towers were consolidated, the region would be of greater interest, making first mover BTS towercos potentially interesting platforms, given their founding base and local know-how.

Looking simply at the scale of the CIS member States, associated members and former member, only the Ukraine, Kazakhstan and Uzbekistan are likely to offer sufficient scale for international investment in an indigenous towerco, and investment in Uzbekistan seems unlikely in the near term given the recency of the MTS-VimpelCom scandal.

In order for a CIS tower industry to reach scale, we’re going to have to see some multi-country sale and leasebacks.

Vimplecom-map

The appetite of MNOs in the CIS to monetise their towers

The MNOs in the CIS case be grouped into three categories: State owned operators like Kazakhtelecom; multi-national MNOs like Turkcell, Vodafone and T-Mobile; and regional MNOs whose largest opco is in Russia.

The largest of the latter group, VimpelCom are known to be considering selling tower assets across region as part of a global tower monetisation programme. TowerXchange has heard unconfirmed reports that VimpelCom is in the early stages of a CIS process, while their process to monetise the MNO’s Russian towers continues.  BAML and TAP Advisors are believed to be leading the VimpelCom Russia and CIS processes. With Telenor exiting their stake, there is added impetus for VimpelCom to restructure their balance sheet.

Turkcell is listing their captive towerco, and has made a binding offer to buyout TeliaSonera’s stake in joint venture Fintur, the Scandinavian operator having openly discussed their intention to exit Central Asia. We’ve seen several opco sales recently which have shaken loose the towers (O2 Czech Republic and more recently, Viva in the Dominican Republic), so MNOs acquiring CIS opcos from their peers have the option to raise capital by monetising towers.

Fintur-map

Investors’ perspectives on CIS towers

Beyond macro economics, the usual questions apply for investors interested in telecom towers in the CIS: who are the MNOs, and how comfortable are you doing business with them? What is their anticipated investment in 4G (or in the case of the Ukraine, 3G)? Given that you live and die by the MSA, are you comfortable with rule of law in the country concerned? And of course, how far are you prepared to put your faith in the management team? If you’re investing in emerging market towers there will always be more homework to be done to understand the regulatory framework, asset ownership and registration.

“The biggest issue for us has been the dominance of State owned incumbents,” said one participant in the CIS roundtable at the TowerXchange Meetup Europe (April 2016). “Even where private investors own a significant stake, if former State owned incumbents remain linked to the government there is a risk that telecom is seen as a cash cow, which can result in investments being put under extreme taxation pressure.”

Despite these concerns, investors increasingly see towers as relatively safe class of assets, so if the country concerned has developed a framework which makes real estate a relatively safe harbor, savvy investors will see beyond short term macro economic challenges and may still be interested in CIS towers.

The geopolitical and macro economic risks of investing in Russia and the CIS have become more visible recently. Currency devaluation has had the most concrete impact on financing, bringing local currency financing into focus as an option, particularly given that contracts are likely to be local currency based. But there isn’t always sufficient long term funding available from local banks, and local banks may be less familiar and comfortable with the towerco business model, and thus can be inclined to take a more conservative view of contracted revenues. Organisations like the IFC, EBRD or Asia Development Bank can educate local banks and improve access to local currency financing where available.

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