Russia and CIS FAQs (updated May 2016)

As the largest country on the planet, Russian telecom networks are made up of ~42,100 towers and ~75,000 rooftops across its populated regions, most of which remain operator-captive. In a fiercely competitive MNO landscape with relatively few shared sites, only Russian Towers, Vertical and a couple of other smaller towercos are steadily creating an independent towerco market in the country.  That may all be about to change. Each of Russia’s three leading MNOs has carved out their own towerco: VimpelCom has created ‘National Tower Company’ which they intend to sell and leaseback the towers if their valuation can be met, Megafon has carved out ‘First Tower Company’ with a view to a future sale to a strategic buyer, while MTS has injected 5,500 towers into ‘MTS Towers.’ Even Tele2 Russia are rumored to be selling their towers. This update combined TowerXchange research with insights gleaned from the Russia roundtable at our recent European Meetup.

How many towers are there currently in Russia?

TowerXchange estimates that there are around 42,100 ground based towers (GBTs) in Russia. Megafon has the most extensive network with ~14,000 towers, MTS and VimpelCom each have around 10,400 towers, while Tele2 has around 3,500. Russian Towers owns a further 1,800 towers, newer entrants Vertical claim to have 1,600 sites, and a handful of smaller towercos including Link Development and Service Telecom account for a few hundred more.

How many rooftop and streetpole masts are there in Russia?

TowerXchange estimates there are around 75,000 urban mast solutions in Russia, mostly rooftops and streetpoles. However this number is hard to pinpoint as asset registers and contractual documentation is often incomplete as far as these assets are concerned.

What is the current situation for urban masts?

A lot of the urban capacity in Russia is currently provided by rooftop and pole solutions. MNOs find it easier to secure licensing for streetpoles and are subsequently more inclined to put points of service on existing high buildings. However there is no standard for agreements on rooftop space and dealing with multiple private landlords across urban areas is a logistical nightmare for operators. There are also a lot of question marks over the legality of new and existing rooftop masts and the permitting situation is not always clear. Although rooftops and streetpoles would probably not be included in a potential tower divestment, TowerXchange believes there may be room in the market for a standardised and legal solution provider for Russian rooftop points of service.

How extensive is current LTE coverage?

LTE population coverage in Russia is now significantly in excess of 50%. MTS reportedly has coverage in 83 Russian regions, MegaFon 77 regions and VimpelCom 58 regions.

How has the recent decline of the rouble affected the Russian telecoms market?

On one hand the unstable currency and resulting economic turbulence is causing operators to reassess their capital expenditure, but on the other hand devaluation of the rouble is a disincentive for divestiture of passive infrastructure assets as MNOs won’t want to sell if they can’t get full value. Russian tenants would pay their bills in roubles and although raw materials and rent for towers are bought in roubles, and Russia has plenty of domestic energy resources, technology tends to be bought from overseas and is thus effectively building and maintaining towers becomea more and more expensive as a function of devaluation.

With at least the first Russian tower transaction, and possibly subsequent transactions, priced in roubles and with lease revenue in roubles, this narrows this field of prospective investors.

What is the current status of the Russian mobile market?

A competitively balanced market between MTS, MegaFon and VimpelCom has been shaken up by the consolidation and refinancing of Rostelecom and Tele2, whose investment in infrastructure (leveraging co-location where possible) and launch in Moscow has shaken up the market. A further new entrant, LTE-only Antares, is scheduled for launch in the second half of 2016.

SIM penetration sits at a whopping 173% among Russia’s 140mn+ population, but mobile broadband penetration is still only 38% (statistics courtesy of GSMA Intelligence, Q4 2015 and the World Bank). ARPU sits in the 220-290 rouble range (US$3.20-4.20).

What is the status of the VimpelCom tower divestiture?

The process, led by BAML, has been ongoing since 2015 and is nearing conclusion. An initial shortlist of eight bidders has reportedly been whittled down to three: Russian Towers, Vertical and a consortium led by the Russian Direct Investment Fund also including Mubadala and Baring Vostock Capital.

At the core of the process is the sale and leaseback of VimpelCom’s 10,400 Russian GBTs. The portfolio could be supplemented by up to a further 19,000 rooftop and streetpole sites, or through the addition of as many as 40,000 VimpelCom sites in CIS countries. However, it seems increasingly likely that any CIS deal may be closed subsequent to a Russian tower sale.

Whilst there may still be a gap in valuation (TowerXchange latest intel suggests that the latest round of bids are believed to be in the US$550mn range, while VimpelCom drives for a $600mn+ valuation), we feel there is a strong probability this deal will close. VimpelCom has placed tower monetisation at the heart of a global strategy to reduce debt, with parallel processes under way in Pakistan and Bangladesh, with a new process mooted in Algeria, and with €693mn already pocketed from the sale of 7,377 Wind towers in Italy.

What is the status of the MegaFon carve out towerco?

In November 2015, Megafon carved out their ~14,000 towers into a captive towerco, First Tower Company. Motivated by the high valuation multiples commanded by towercos relative to their MNO parents, MegaFon CEO Ivan Tavrin has since explained his intention to “have an SPV with a service agreement, properly executed towers and management. We’re absolutely convinced that this will enable us to get the best price and a high quality buyer. People will see that they are investing in a well-managed business and not just in a collection of steel towers.”

More recently Tavrin provided further hints as to the potential means and timelines for monetising MegaFon’s towerco: “We are not going to put our tower company on the bourse.” It seems that a partial or complete sale to a strategic investor may be the more likely outcome: “It primarily depends on conditions, on how the tower company works with your towers, from the financial climate and other factors,” said Tavrin. “We don’t think that if we are the first to sell our towers, we will be able to earn the most money and sign the best deal. We believe that if we thoroughly prepare, we’ll manage to pocket a high-quality investor and win a high-quality future operating history.”

Could the other Russian MNOs also monetise their towers?

Russian publication Vedomosti reported in February 2016 that Tele2, Russia’s #4 MNO, was seeking to raise US$500mn through the sale of 10,000 towers. While TowerXchange has not been able to verify this report, it would seem logical for Tele2 to monetise their tower assets before they became stranded on their balance sheet, although reports that Tele2 is selling 10,000 towers may be erroneous – our intel suggested Tele2 had a little over 2,000 towers a year ago and, although they are building fast, TowerXchange estimate Tele2 has ~3,500 GBT’s with their rooftop count bringing the total to 10,000.

As recently as November 2015 MTS indicated that they saw no business case to sell their towers: “Tower companies enjoy profitability of 60–70% in other markets. A question arises: who creates this profitability for tower companies?” Asked MTS President Andrei Dubovskov. “It is created by lessees, and the lessees are cellular companies. For the latter, it will be a constant, stable, huge and always growing expense.” However, at the end of April 2016, MTS announced the carve out of 5,500 towers (around half their network) into “MTS Towers”, with intent to lease those towers to other MNOs and third parties. While it seems MTS has decided to participate in the towerco business, there is no indication that this carve out is the first step toward a divestiture. Further assets, potentially including fibre, may be injected into MTS Towers: “By the end of 2016 and beyond, MTS may gradually offer to rent additional towers and antenna support structures to meet potential rental demand,” said MTS VP Andrey Ushatsky.

Where is the capital to finance one or more Russian tower transactions going to come from?

The combination of forex challenges and trade sanctions make it difficult, if not impossible, for US or Western European investors to participate in the current round of Russian tower transactions. However, that will not significantly reduce the number of credible bidders at the table as a significant local operational footprint was always likely to be required.

Russia has no shortage of it’s own investors with an appetite for telecoms and/or infrastructure assets. Foremost of which the RDIF has been linked with Russian tower transactions since last mooted in 2012 (when a prospective joint venture towerco between Russia’s leading MNOs failed to materialise). Middle Eastern and Far Eastern investors could also be attracted to invest in Russian towers, as well as smart money investors who have achieved good returns from Southern Asian towers.

What is the most important market in Russia?

Moscow is the biggest market in Russia, with by far the greatest population density and the highest ARPU, however there are still significant coverage gaps in the area and MNOs are keen to add capacity to improve their quality of service to Muscovites.

Which regions are the hardest for Russian operators to cover?

Due to a much lower ARPU and population density than the rest of the country, the far east is the hardest area to cover and sustain operationally and MNOs are much more open to infrastructure sharing in this area to try and minimise opex. All operators are under pressure from the government to provide service to rural areas and 4G licenses require that Russia’s MNOs cover all areas with a population of 10,000+. Leveraging the Rostelecom network then delivering the ‘last mile’ helps them to do this.

How has the Russian tower market evolved?

As mobile penetration has exploded in Russia over the last ten years, the three major MNOs engaged in something of an ‘arms race’ in order to gain competitive advantage through better network coverage. However MNOs are now being more cautious about this kind of capital expenditure and over the last couple of years Russia’s operators have started to focus on bilateral swaps and leasing space where possible, and only built new infrastructure where there was a clear revenue stream. A large MNO in Russia told us they currently spend around US$1bn per annum (a figure quoted before the rouble crashed) on their network to develop coverage and capacity.

Where is tower growth needed in Russia?

The main priorities for operators in the short term is the LTE roll out and infill in Moscow.

In sparsely populated parts of Russia offering network coverage is commercially unattractive, however MNOs are able to use Rostelecom’s fixed-line infrastructure and focus on providing the ‘last mile’ of network connection in order to fulfil license obligations.

What does sharing look like now?

Currently tower sharing does take place to a limited extent in the form of bilateral swaps. Tele2 is generally excluded from this, particularly in Moscow where the most value is to be found, as they are unable to offer attractive tower locations to the most established MNOs.

There are substantial network sharing agreements between VimpelCom and MegaFon, to cover ten Russian regions and over 1,300 4G base stations, and between VimpelCom and MTS, with MTS deploying in 19 regions and VimpelCom in 17.

What is the current tenancy ratio and how many towers are shared?

TowerXchange sources suggest that less than 30% of towers are currently shared, typically through bilateral swaps and some through existing towercos such as market leaders Russian Towers. Existing tenancy ratios on independent towers are thought to be around 1.2.

Who are the most likely prospective tenants on Russia’s towers?

Tele2 have the most to gain from a tower transaction, provided the MLA does not prohibit them from co-locating on many sites. Tele2 would not take on tenancies on the towers wholesale – they would pick and choose according to when the towers became available, their locations and local competition.  Nonetheless, Tele2’s appetite to rollout represents a potential near-term spike in tenancy ratio growth.

In Q3 2015 Russian publication Vedomosti reported that Russian Towers received 37.6% of its revenues from Tele2 compared to 19% from VimpelCom, 17.7% from MTS and 13.1% from MegaFon.

The oft-delayed entrance of LTE-only MNO Antares into the Russian market could add a further MNO hungry to accelerate time to market through co-location, particularly in Moscow.

What is the current state of asset registers in Russia?

A year ago, the majority of asset registers were blighted by poor maintenance, poor record keeping, complex legislation and unclear information about land ownership. Since then a significant amount of work has been undertaken to prepare Russian tower portfolios for monetisation, certainly by VimpelCom, whose asset register has already been exposed to the rigors of several due diligence processes, and likely at MegaFon as they professionalise their management of towers under the First Tower Company entity, in advance of a potential trade sale in the next 6-18 months.

Russian Direct Investment Fund (RDIF)

RDIF, a US$10bn government fund established in 2011 to make equity investments in their domestic market, heads up a consortium of investors believed to include Mubadala and Baring Vostock Capital. RDIF’s ideal deal size is US$50-500mn, with up to 50% ownership. RDIF was previously linked with investing in a Russian joint venture towerco, mooted by MTS and VimpelCom in 2012.

Russian Towers

Russian Towers was established in 2009 by both Russian and Western professionals with substantial telco experience in Russia.

Russian Towers is backed by both Russian and international investors, including ADM Capital, EBRD, IFC, Macquarie Russia & CIS Infrastructure Fund, Sumitomo Corporation and UFG Private Equity.

Russian Towers’ current portfolio of around 1,800 towers are spread across 50 regions of Russia, counting all MNOs as tenants. Leveraging relationships with key partners including Russian Railways, the business grew over 90% YOY organically, adding 950 towers in 2015. The company are also deploying light poles with capacity for two to three tenants, particularly as an urban infill solution.

Russian Towers’ appetite for acquisitions extends to the CIS in the immediate term, and beyond thereafter.

Vertical

Formed in 2013, Vertical experienced rapid growth in 2015, adding the acquisition and refurbishment of 500 street poles to scale to a portfolio of 1,600 sites. Their assets primarily consist of 30-35m street poles in Moscow and the surrounding region.

Vertical has developed in-house tower building capability to accelerate time to market, and now has around 250 staff. Serial entrepreneur, Vertical Founder and owner Georgy Chumburidze is also a Director of Massive Multiplayer Online Games company 4game and content distribution management company Pladform. Strategy Director Egor Bykov has a background investing in telecommunication infrastructure at Macquarie.

Other interested parties

Other parties which could be interested in future Russian tower opportunities, either as direct bidders or participants in a consortium, include local Russian towercos Link Development and Service Telecom, one or more Chinese towercos, and Quippo International, the international investment subsidiary of SREI Infrastructure, which recently agreed the sale of their stake in Viom Networks to American Tower India.

TowerXchange don’t expect Cellnex, American Tower or any of the other listed U.S. towercos to be direct bidders for Russian towers in the near term.

Towerco penetration could reach 100% of GBTs by 2017

It is not difficult to foresee a Russian tower market where independent and operator-captive towercos might own 100% of Russian ground based towers by 2017, with independent towercos owning 75%. Such a forecast would depend on the closure of the current VimpelCom process, the sale of MegaFon’s First Tower Company to a strategic buyer, the injection of MTS’ remaining towers into MTS Towers, and the continuing organic growth of Russia’s existing tower companies. The level of towerco penetration could only reach 100% if a Tele2 Russia tower sale were also completed. One of Russia’s tower companies will be among Europe’s largest towercos by 2017 – although which one, we’re not sure!

Expect upwards of US$1.5bn (100bn roubles) to be spent transferring Russian towers from MNO-captive to independent towercos in the coming 18 months. We’ve seen Russia get to the brink of tower deals before, only to step back, but the process has gone farther than before, the drivers are real, the assets are ready, the buyers are ready, the capital is there. It’s an exciting time for Russian towers!

Tenancy ratio growth could approach 0.2 per year

Given Tele2’s ongoing need for network expansion, and the continuing rollout of 4G, the tenancy ratio in Russia could achieve a healthy annual growth rate near 0.2, and eventually exceed two, although would be unlikely to go beyond three. We would expect a substantial difference, in the order of 0.5 or greater, between the potential tenancy ratios in major urban cities compared to smaller towns exceeding 10,000 population. Infrastructure sharing in rural areas may be more likely to be facilitated by RANsharing that by substantial involvement of independent towercos.

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Extending infrastructure sharing beyond towers to fibre

There has been growing discussion in the market that selling towers is the first step toward the integration of end to end approach to telecom infrastructure management, with some experts suggesting we’ll see fibre optics and active equipment divested, leaving only spectrum control and customer relationship management to the operator, with the rest outsourced.

Fibre backhaul is seen by many as a natural extension of the towerco business model towards being a netco model, but the majority opinion at the Russia roundtable seemed to be that fibre represented a new challenge that we were unlikely to see independent towercos engaging with for the next 5-10 years in Russia. “Fibre is less relevant for towercos now than new macro tower and infill site builds,” said one towerco.

“I can see Russian towercos getting into microcells and DAS, but I can’t see them getting any more involved in active equipment than that,” said another participant. “Fibre can cannibalise revenue from existing microwave dishes, so it’s not as easy as just adding another set of infrastructure to share – the whole business model has to be re-examined.”

“We are less interested in owning the cabling, but are more interested to control the ‘last mile’,” added the towerco.

The value of Russian rooftop sites

It is believed that 60-65% of Russian MNOs’ active equipment is based on rooftops while the rest is on towers. Rooftops were reportedly transferred to a towerco for free in Germany –does this set a precedent. Will rooftops attract a similar valuation to regular towers, or be given away for free in Russia?

“The rooftop business has been shunned by towercos in Russia due to the complexity of dealing with landlords,” suggested one towerco. “We don’t have any rooftops in our portfolio,” said another Russian towerco. “MNOs are moving away from using rooftops toward using towers due to these problems,” said a third towerco, who continued: “Frequently the landlords are individuals, not even companies, and there are a lot of complaints from residents on residential buildings.”

“In India this isn’t an issue,” contributed another participant. “Once a site is operating no one can stop it." Apparently Indian rooftop sites attract a different price tag but still have a positive value: “rooftop sites are also shared and can be as productive as towers. In urban areas the problem isn’t about securing extra structures, it’s about getting another lease from a landlord in prime territory.”

“How do MNOs achieve coverage at low signal propagation spectrum bands if they don’t have rooftops?” Asked one participant.

“The MNOs have thousands of rooftops, but it’s a very labour intensive part of the portfolio. While tower contracts are for 20 years, the duration of the rooftop contract might be only 11 months, which generates a huge amount of paperwork.”

“In India the rooftop contracts are the same as for towers – 15 years. In India the problem is that the key rooftop sites have already gone. Light poles and camouflaging are growing trends in India. So the old rooftops are a prize catch as they have a long lease already agreed.”

“When comparing we should bear in mind different nature of proprietary rights,” said another towerco from the Russia and CIS region. “In Kazakhstan rooftops represent about 20% of the network. Towers are movable property and rooftops have a different legal status. Could towercos change the legal status of rooftops to be more similar to towers, establishing longer term contracts for five to ten years? As towercos we can propose very good service because rooftops are a headache to MNOs.”

“On the operational and legal side there’s a lot which would make that impossible,” said an experienced tower transaction advisor. “On the other hand I love rooftops – if there is a way to make the rooftop business work it could be quite attractive. The value is all in the relationships, there’s very little capex in this. It’s all about making sure you have the right to attract new tenants and making sure that adding those new tenants doesn’t double your cost base.”

“So we’re back to the first question; will MNOs give away this headache for free, or do Russian rooftop sites have value?”

“It depends if you can lease them up,” said the advisor. “If you can’t lease them up then the MNO should give away the rooftops: a one-year lease is not really an asset. Especially if you’re then tied into a long term contract with the MNO, there’s not much value to be created.”

How many new sites will be built in Russia?

Russia needs another 15,000 base stations in the next two to three years. Russia’s two largest towercos are building around 100 new sites per month, a combination of ground based towers and lampposts.

Should Russian towercos diversify beyond steel and real estate to provide power, a/c etc?

In markets with low grid coverage what makes the business case for towercos to provide power as a service is that the consumption of a generator isn’t proportional to output – so if you have two tenants it won’t cost you more than one tenant. So in Africa they were able to add additional tenants without additional diesel consumption. In markets where the lions share of opex comes from maintenance rather than energy, it depends who owns the shelters, and whether MNOs are happy to share those shelters. If so, significant efficiencies can be unlocked by optimising air conditioning.

“Batteries are not currently part of our offering,” said one Russian towerco. “There are very few sites without electricity. And any battery backup is provided by the operators.”

“Electricity supply is a matter of cost,” said another towerco “All operators want lower tariffs so they decided to keep the headaches to keep the costs down.”

It seems most European towercos are not responsible for power, although in some cases a sister infraco is responsible, as is the case with Deutsche Funkturm.

Russian tower association proposed

During the Russia roundtable at the recent TowerXchange Meetup Europe, Alexander Chub, President of Russian Towers, proposed the creation of a community to present a united front to the regulator and other stakeholders, and to utilise resources more efficiently. The idea was supported by all participating towercos. Any other Russian towercos interested in joining such an association please feel free to contact TowerXchange and we’ll connect you with Alexander.

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CIS towers

While the Russian market gains momentum toward the adoption of the independent towerco model, it’s earlier days for the tower industry in the CIS. However, TowerXchange still anticipate tower deals in the CIS within the next 12-18 months.

VimpelCom has made no secret of their interest in divesting tens of thousands of towers in Armenia, Kyrgyzstan, Uzbekistan, Tajikistan, Kazakhstan, Ukraine and Georgia during or, more likely, following their Russian tower sale process.

“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,” said the IFC’s Eric Crabtree in a recent TowerXchange interview. “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.”

MegaFon has only one CIS subsidiary, in Tajikistan. It is not known whether their towers are included in First Tower Company. MTS also operates in Ukraine, Belarus, Armenia, Uzbekistan and Turkmenistan, but seemingly has little appetite to monetise towers.

TeliaSonera and Telenor’s appetite to exit their CIS investments may precipitate transactions which could be part financed by tower divestitures.

While there is little towerco activity in the CIS at present, there are a couple of interesting exceptions. Turkcell has transferred 811 towers from it’s Lifecell subsidiary in Ukraine to it’s Ukrtower subsidiary in the same country, for US$52mn. Ukrtower now has ~1,200 towers, representing 11% of the country’s total tower stock. Turkcell are known to be exploring the monetisation of their tower assets, so the restructuring of their Ukrainian assets could precede a sale or IPO. Meanwhile, Logycom has secured a contract to build 100 towers in Kazakhstan.

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