Carving out O2 Czech Republic’s infrastructure business

Ceská Telekomunikacní Infrastruktura (CETIN) manages the largest telecommunication network in the Czech Republic comprising of 5,300 towers, with access to a further 5,000 through a network sharing agreement with T-Mobile,  20,000,000 km of metallic cable pairs and 38,000 km of optic cable. The company was formed in 2015 following a spin out of O2 Czech Republic’s infrastructure business. Following a brief stint trading on the Prague Stock Exchange, CETIN is now wholly owned by investors PPF. In this interview we talk with CETIN CEO, Petr Slovácek to discuss the details behind the successful carve out and delve into the company’s business strategy in the Czech Republic.

TowerXchange: Please can you provide a brief introduction to your background and how you got into the telecoms sector?

I graduated from the Technical University, Prague, with a degree in telecommunications and then obtained a postgraduate Master of Business Telecommunications at the Technical University of Delft in the Netherlands. After graduation I joined the Telecommunications Research Institute in Prague, prior to joining SPT TELECOM (the previous commercial name of O2 Czech Republic) in 1989, working in switching, technical development, network management projects and OSS. In O2 Czech Republic, I was in charge of the Infrastructure and Wholesale Division and a member of the Board of Directors from 2003, serving as Vice Chairman from June 2008 - March 2014. Since June of last year I am now the  Vice Chairman of the Board of Directors and CEO of CETIN

TowerXchange: Please introduce CETIN - how would you describe the company’s business model? Do you see yourselves as a ‘towerco’, an ‘infraco’ or something entirely unique?

CETIN (short for Ceská telekomunikacní infrastruktura) was created in June of last year when it separated out from O2 in the Czech Republic. We manage and operate the largest telecommunications network in the Czech Republic, consisting of 20,000,000 km of metallic cable pairs, 38,000 km of optic cables, 5300 macro towers and 750 micro-sites. We would class ourselves as an infrastructure provider rather than a towerco as we also own and operate both the active and passive infrastructure as well as the connectivity between towers. We are an autonomous and fully independent wholesaler, entirely separate from O2 out of which we were separated through corporate spin-off as of June 2015. We provide open access to the network offering fair and equal conditions to all operators (B2B). We do not sell to end customers (B2C).

TowerXchange: What motivated O2 to separate the CETIN as an infrastructure business from their retained retail business?

The decision was suggested by the O2’s board of directors to separate the business for a couple of reasons.  As a former CTO at O2 I appreciate the advantages offered by the separation very well (both for O2 and CETIN).

Firstly, decision-making within a vertically integrated company always involves a number of compromises – the telco and infrastructure part of the operator have to certain extent different business targets with different investment horizons and different amount of customers. Separating these two parts of the business enables each to make decisions independently which are in their own better interests.

Also from the regulatory point of view it is better to have these two businesses separated – most of the regulation applies to CETIN, O2 in the future will only be slightly regulated. This frees up O2 to make decisions in relation to retail prices determination, balancing of the services portfolio, etc. But that is enough of O2, what is crucial for CETIN, as we are not active on the retail segment, fulfilment of our regulatory obligations will be easier.

The separation was completely voluntary and based purely on business merits. CETIN  can now plan on more appropriate investment horizons, looking for an ROI within a longer 5-10 year period which better suits our business model. This helps significantly with setting our network plans - we have, for example, just approved a seven year investment of US$900mn in backbone and FTTC.

What is necessary to emphasize from the competition office and other regulator´s points of interests – the separation of O2 and CETIN is not only of a corporate character. The separated companies have the same owner but apart from that they are fully independent. PPF, as the owner of majority amount of shares in both companies, does treat O2 only as a financial investment, only CETIN is part of the PPF group. After the separation was completed, we have separated HR and legal teams, we have moved to separate premises, there is no overlap in our boards of directors or supervisory board and so we are two entirely separate entities. We are also different economic units from the competition regulation perspective.

This whole process was realized within less than a year. You know very well about other attempts to make similar (although not that total) separations in various countries – none of them was completed in such a level as ours as well as in such record time. I recall that O2 has been granted several awards for the completion of the separation.

TowerXchange: How has the regulator responded to the creation of CETIN? For example, how is the business licensed? 

The telecom regulator has been generally favorable to the separation and has adopted a very pragmatic approach to the assignment of regulatory obligations between O2 and CETIN. We have been registered with the Czech regulator for the provision of fixed network and services.

TowerXchange: I understand O2 and T-Mobile have had a deep network sharing partnership (governing both active and passive infrastructure) since your joint 3G rollout, extending to accelerate time to market for 4G. How does the creation of CETIN affect that partnership with T-Mobile? 

O2 set in place a network sharing agreement governing both passive and active infrastructure with T-Mobile across 10,000 macro sites (of which 35-40% are targeted to be decommissioned). The creation of CETIN did not affect the cooperation. We act as a complete network outsourcing provider for O2CZ in terms of RAN and took over the network sharing agreement in full. From that point of view nothing changed in the operating model or management of different areas. We are only now the only contractual partner to T-Mobile instead of O2.

We continuously look for ways to deepen and expand the cooperation with other operators in order to bring better services to more customers, accelerate deployment of 4G, reduce environmental impacts of the networks, etc.

TowerXchange: Beyond the aforementioned network sharing agreement, is there a culture of infrastructure sharing in the Czech Republic? Do you foresee opportunities for more co-locations beyond T-Mobile?

Whilst the CETIN - T-Mobile network sharing agreement is a major one, even before this hundreds of sites were used by multiple parties – I would estimate at least 20% of towers in the Czech Republic have multiple users.

When it comes to additional partners accessing oure networks, yes there are more operators and we want to attract more of them to use our infrastructure. Generally speaking we continue to offer and further develop fair, reasonable and transparent conditions for tower access.

TowerXchange: Are there other independent infrastructure providers in the Czech Republic?

Nearly all other towers are owned by respective MNOs or by broadcaster, Ceské Radiokomunikace, which operates in particular a DVB-T networks. The state has some of its own infrastructure, for instance for the operation of Tetra integrated emergency communication systems, but this is of relatively small scale in comparison to commercial networks. CETIN is the only company focusing exclusively on telecommunication infrastructure with the exclusion of retail.

TowerXchange:  I understand CETIN will invest just under US$900mn over the next seven years, in backbone and FTTC. What do you see as the synergies between sharing towers and networks and sharing backbone and last mile fibre - should all these assets be managed by the same company and provided on a wholesale basis to all retail operators?

I do not see a reason why not. Although this is not the case in the Czech Republic, not all or most assets (towers, backbone and last mile fibre) are held by one company, CETIN or other. We believe that investment in the both backbone and FTTC is a natural direction of a company as CETIN, being active on both these infrastructure markets.

We do offer both last mile wholesale access as well as fibre optic backhaul on a transparent and non-discriminatory basis to all interested parties and we are convinced this is the most efficient and effective way to bring high quality services to the end customer. We believe that the investments to be made will only help the end users in this respect.

In terms of towers, there is significant reuse of these assets for other forms of last mile radio access in the enterprise market, e.g. via high capacity microwaves to locations which are difficult or costly to reach with fibre.

TowerXchange: CETIN listed on the Prague Stock Exchange on 1 June 2015 - what can you tell us about the ownership and investability of CETIN?

CETIN is not listed on the regulated market of the Prague Stock Exchange. It was the activity of other independent parties which registered our shares to be traded on the un-regulated market of the Prague Stock Exchange and we had no influence of the fact. In any event, since 4th January 2016 trading of CETIN shares on this market was terminated due to the squeeze out of minority shareholders at the General Meeting of CETIN in December 2015. PPF (who had originally bought O2 from Telefonica) is now the sole owner of the company.

TowerXchange: Please sum up your impressions of the CETIN carve out - and should other European countries and MNOs consider following O2’s lead to carve out a infraco?

It was a great and unique step for us, as it enables better business and investment planning for both telco and infrastructure company. We do not necessarily advise other operators abroad to follow our example, as every market is slightly different and such a fundamental decision must be taken in light of an individual company’s strategy, national regulatory framework and economic situation, but it was a good solution for the Czech Republic. We can see even now (some few months after the actual spin-off in June 2015) that both the market as well as the regulatory bodies do acknowledge the positive effects of the separation and we are confident that this approach will only grow/expand.