67% of the world’s 4.04mn cell sites are now owned and operated by specialist towercos and infracos rather than MNOs, but half the world’s cell sites are owned by towercos and infracos that are themselves majority-owned by MNOs. While that statistic is somewhat distorted by the huge operator-led towercos of China (China Tower Company) and India (Indus Towers, Bharti Infratel), the last couple of years in the tower industry have been characterised by an increasing global predilection by MNOs to carve out and retain control of their towercos.
The drivers behind the carve-out of operator-led towercos
While the efficient consolidation of parallel infrastructure, co-building and the acceleration of rollouts incentivise infrastructure sharing, the main driver for MNOs to carve out towercos is more strategic than operational.
On an MNO balance sheet a telecom tower is a depreciating asset serving the needs of one customer. Take that same tower asset and transfer it to a towerco balance sheet and it becomes a source of long term, recurring revenue from a growing number of credit worthy tenants. That same tower asset also benefits from the towerco’s renewed focus on creating efficiencies and scale in passive infrastructure management. The capital markets recognise the fundamental difference in business model, and appreciate the separation of telecom infrastructure from retail risk, thus a tower on an MNO balance sheet might be valued at 3-6x, whereas on a towerco balance sheet it might be valued at 12-22x.
This relative valuation arbitrage has also been the driver for the sale and leaseback of operators’ towers, but in 2016 only 6,295 towers were sold and leased back by MNOs worldwide, whereas in the same year new operator-led towercos were carved out and retained by MNOs representing a total of 1,761,357 towers. Again, that statistic is distorted by China Tower Company, which represents 1.7mn, but even excluding CTC, carved out towers outnumbered sold and leased back towers by almost 10:1, thanks to the creation of Telxius, Telesites, First Tower Company, National Tower Company, MTS Towers and Powercom in Namibia.
The world’s top 21 MNO-led towercos and joint venture infracos (by site count)
Will MNOs eventually monetise their carve-out towercos?
While many MNO-led towercos are carved out as a first step toward monetisation of the assets, either through sale to a strategic buyer such as American Tower or Cellnex, or by selling a stake to an infrastructure investor or pension fund, an increasingly proportion are monetised through IPO, while some MNOs are choosing to retain a majority stake their carve-out towercos.
The main incentive to monetise towers? Restructuring balance sheets – many MNOs are seeking to reduce with growing debts amidst shrinking margins and pressure to prop up their own share prices with dividends.
The main incentive for MNOs to retain a majority stake in a carve out towerco? Control.
Consider this example: Telecom Italia Mobile (TIM) carved out towerco INWIT, then listed a 36% stake in on the Milan stock exchange in 2015, raising €780mn. TIM then entered negotiations to sell their controlling stake in INWIT, but stepped back from the deal when the gap between the value they ascribed to retaining control was not reflected in the premium offered by prospective buyers.
Rather than being created to relieve debt, some operator-captive towercos trace their origins to government or regulatory pressure. China mandating the co-construction and sharing of telecoms infrastructure forced the carve-out of China Mobile, China Unicom and China Telecom’s towers to China Tower Company, while regulatory pressure to ease the competitive dominance of Telcel in Mexico was a major driver behind the carve out of Telesites. Telesites has already listed, China Tower Company seem set on a path to IPO in late 2017.
So are the vast majority of those 2,077,223 operator-led towerco towers destined to be sold to trade buyers, or monetised through IPO?
Macro economic factors made 2016 a tough year to IPO any business successfully, and the tower business suffered it’s own setbacks with the cancellation of operator-led towerco IPOs in Spain by Telefónica (Telxius) and in Turkey by Turkcell (Global Tower).
Combined with traditional overvaluation, political and economic uncertainty in 2016 knocked the confidence of entrepreneurs and investors which harmed IPO prospects in every sector. However the outlook for 2017 is more positive. Equity indices are at an all time high in many markets, and volatility has fallen, both of which are positive signals that 2017 could be a good year for IPOs. The strong momentum from Q4, where IPO activity rose by 25% compared to Q3, is another positive sign.
What does this mean for the tower business? TowerXchange expect 2017-18 to be better years for towerco IPOs, not least because some high quality towercos are maturing toward their next major liquidity event: we could see China Tower, IHS, Eaton, Helios, edotco and Guodong come to market in the next two years, while Telxius, Global Tower and Deutsche Funkturm could reconsider IPOs in a more receptive climate.
In 2016 TMT, Industrials and Healthcare were the top three sectors for IPO. It is more than likely that TMT will be the main sector coming to the equity markets in 2017. EY say they “expect some unicorns in the US, and this may drive some other big tech IPOs in other regions”.
Who owns and operates the world’s 4.04mn cell sites?
global-cell-sites ‘Schmuck equity’ and in-house towercos
Our sizing of the operator-led towerco segment does not capture the whole picture. MNOs also have significant stakes in several independent towercos, ranging from Millicom’s ‘schmuck equity’ stake in Helios Towers Africa, from which they are reportedly seeking to exit; MTN’s 29% stake in IHS; Tata retaining 34.5% of the former Viom Networks, acquired by American Tower India in 2016; to MTN’s 49% stakes in joint venture towercos with American Tower in Ghana and Uganda.
‘Schmuck equity’ is a term we first heard used by tower-industry veteran Chuck Green, now Executive Chairman of Helios Towers Africa. It refers to the practice of MNOs retaining a minority stake in their tower assets during a sale and leaseback, piggy backing on the value being added as a towerco enhances and leases up the towers. If the towerco business model is a good idea, it’s a good idea to keep some ‘skin in the game’ to avoid looking like a schmuck!
An increasing number of MNOs are behaving like towercos by leasing space on their towers to their peers on a commercial basis. “Internal towercos” such as those run by Safaricom in Kenya, where the wholesale department is leasing space on 800 of their 4,000 towers, and Vodacom in South Africa, which reportedly has a tenancy ratio of 1.8, are not included in our total of operator-led towerco sites.
Vodacom’s internal towerco is one part of a larger story in South Africa where many of the local opcos have become disenchanted with lease rates offered by the country’s leading towerco, prompting some to boycott further co-locations, whilst selling co-locations to each other and other spectrum holders in the market.
We’re hoping to soon have a success story illustrating the monetisation of an ‘internal towerco’. First movers Mobilink, part of the VimpelCom family, have the biggest tower network in Pakistan, which they were reluctant to share whilst it remained a source of competitive advantage. Recognising that other MNOs had closed much of the infrastructure gap, Mobilink took the opportunity to create an internal towerco profit centre in 2011, and began leasing up their towers at a commercial rate, achieving a tenancy ratio of 1.25. Now ~9,000 Mobilink towers are set to be sold, potentially for as much as US$1bn, as part of VimpelCom’s tower monetisation programme. Significant tower cash flow has been added, enhancing the value of the asset.
Back on pause in Russia
Despite being seemingly days away from the divestment of their towers in Q117, Veon (formerly known as VimpelCom) have pulled back yet again from a deal in the Russian market. At the current time, the towers remain carved out into the National Tower Company, and it is as yet unknown whether they will roll the towerco back into the larger organisation or aim to operate as a towerco on a more commercial basis (with ~13,000 towers, this could make them the largest towerco in Russia by a large margin).
Competitors MegaFon have carved out 14,000 towers into First Tower Company and are open about the fact that they do not intend to be first movers in the market when it comes to selling their towers. Meanwhile, MTS has carved out around half their towers into MTS Towers, although their CEO claims to have no interest in monetising the asset – only in creating a new profit centre as Russia’s culture of infrastructure sharing takes root.
Russia’s fourth MNO, Tele2, are still rumoured to be seeking the sale and leaseback of their ~8,000 towers, although rumour suggests they may prefer a manage with license to lease deal structure in which they retain ownership and partner with a towerco to lease up the assets.
Beyond direct ownership, TowerXchange are aware of an increasing number of MNOs with an appetite to invest in towercos – and that appetite more often than not extends beyond the MNO’s existing footprint. It makes sense of course – it’s an asset class MNOs understand.
Conclusion
In some (not all) tower markets, MNO tenants have vociferously and publicly complained about towerco lease rates and escalators and the pressure they put on the MNO’s operating margins, firing angry letters at their landlords. But in many cases those same MNOs negotiated a higher lease rate to maximise cash released when they sold the towers, or secured a discounted new build based on a healthy lease rate. Towercos are deploying capital to build and acquire towers with a long horizon to achieve a return on capital invested – sometimes as long as 20 years. In very few other industries will you find a business partner pricing based on a 20 year ROI. If it were a better deal to build not rent, MNOs would build not rent.
MNOs should be less anxious about how profitable the tower business is, and focus their efforts on partnering with, and participating in, the tower industry. Carve out, keep and lease up your towers; carve out and monetise; sell and leaseback – whatever MNOs do with their towers, any tower retained captive on an operator balance sheet and not being offered for commercial co-location is an underexploited asset.
Ten critical considerations when carving out a towerco
1. Hire people with experience running a towerco. A towerco is a fundamentally different business from the property / network management department of an MNO. It’s not just about managing towers; it’s about selling space.
2. Your asset register almost certainly is not accurate enough to optimally facilitate co-location sales, nor to survive the rigorous analysis of due diligence during monetisation. Appoint a specialist company to audit and improve your asset register – you’ll be surprised how much capacity can be found in your tower network (and how much more equipment there is on your sites than you might have been aware of!)
3. Get all the permits for all your towers.
4. Consider converting bilateral swaps to commercial leases, even if it means paying tax.
5. Get your towers professionally monitored. Especially if the grid is unreliable (or if some sites are off grid), if you can’t professionally measure the performance of the energy equipment on your towers, you can’t professionally manage the energy equipment on your towers.
6. Deferring maintenance is a bad idea. If you plan to carve out and lease up or monetise your towers, it might seem like a good time to postpone non-critical maintenance, but these towers are going to be the life-blood of the towerco – look after them!
7. Don’t retain any more reserve space than is absolutely necessary. Too many operator-led towerco’s parent MNOs reserve far more space than they need in the short term – that space could be converted into recurring revenue from another client. Take more space when you need it, but don’t reserve it up front.
8. Draft the Master Lease Agreement (MLA) with extreme care – better still, appoint a law firm with experience of drafting these documents – all the value is captured in the MLA. ‘Most favoured nation’ clauses guaranteeing your parent MNO the best lease rate could limit a towerco’s ability to negotiate bulk deals. Restrictions limiting competitors’ access to strategic sites directly harm valuations. And provisions allowing RANsharing can be tremendously value destructive; include them if you must, but draft them with great care.
9. Consider buying the land under your most valuable towers. This enhances margins and protects you against the dual threats of escalating lease costs and ground lease aggregators.
10. If you’re going to list your carve out towerco, don’t rush it. It takes time to change mind sets and to think like a towerco, it takes time to clean up your asset register, it takes time to upgrade structures to accommodate multiple tenants – and most of all, there is often “pent up demand” for tenancies on your towers – give yourself a year, preferably two, before IPO – your towers will be more valuable if you take time to lease them up and to professionalise management. If you need cash sooner, sell and leaseback.
