David and Goliath: how agile private towercos can survive and thrive in competition with the tower industry’s giants

This article serves as a world tour of private towercos, extracting lessons learned in China, India, Latin America, Africa, Europe, Myanmar, USA and Indonesia. We explore three key growth vectors for private towercos: organic growth, rollup and diversification into alternate site typologies. And we examine some of the perils and pitfalls facing tower entrepreneurs, and offer advice on how to overcome them.

According to TowerXchange’s proprietary research, 2,936,086 (68.2%) of the world’s 4.3mn towers are owned by the 264 towercos we’ve identified to date. Of that total, 22 towercos that are either publicly listed, or soon to be listed, own 2,310,689 towers. A further 53 towercos with institutional owners (State or MNOs) own 417,683 towers. A ‘long tail’ of 190 private towercos own 207,714 towers, or 5% of the world’s total.

Just a handful of towers can generate a healthy, pensionable income – indeed there are many hundreds of small, often family-owned portfolios of 1-10 towers that are not included in TowerXchange’s count of 190 private towercos. But scaling beyond a single digit tower count means competing with listed and institutionally-owned towercos for locations, search rings, and acquisition opportunities – competing with companies with decades of experience, and access to low cost capital.

One of the growing pains most cited by private towerco entrepreneurs is the challenge raising capital to progress from the first dozen or so towers, to the 500-1,000 towers which makes a towerco investible by the 100+ private equity firms identified by TowerXchange as having an appetite for the asset class.

Private towercos typically progress through multiple rounds of private equity, supplemented by debt, before scaling to the point they can either consider their own IPO, or sale to a strategic acquirer.

TowerXchange has created our InvestmentXchange service to ease this growing pain by facilitating introductions between private towercos and prospective financial and strategic investors.

The livelihood of hundreds of tower entrepreneurs in China may be under threat. Three years ago, the State mandated the carve-out of towers from the country’s three MNOs, creating what is now a 1.9mn site monster towerco; China Tower Corporation. China’s 200-300 independent towercos, who own and operate ~50,000 sites between them, were both excited at the crystalisation of a culture of shared infrastructure, but at the same time threatened by the emergence of their giant State-owned competitor.

China offers a challenging path to scale for local tower entrepreneurs. Raising debt from Provincial financial institutions is complex, time consuming, and expensive. While private, domestic investment is gradually becoming more available to debt-funded infrastructure firms with contracted long term cash flows, like towercos, Chinese capital markets have historically been predisposed to invest only in profitable companies, at the expense of business models like telecom towers that naturally lend themselves to a degree of leverage. TowerXchange are aware of at least three private Chinese towercos which are at various stages of public listings – their experience will provide a bellwether for their peers. Small Chinese tower companies in particular struggle with the fact that towers are not securable, while State and provincial level investment funds may not be inclined to invest in entities which compete with State-owned CTC.

TowerXchange has worked directly with a couple of international private equity investors studying investment opportunities in private Chinese towercos. Both firms reached the same conclusion; private, independent towercos in China can be perceived as operating in a ‘grey market’, at risk of the Nationalisation of their assets if private towerco competition with CTC is forbidden. While the likelihood of assets being Nationalised seems to be receding, the best way to mitigate this risk would be for China’s private towercos to be licensed under a fair and equitable scheme.

China’s private towercos may own less than 3% of the country’s towers, but they play a pivotal role in several Provinces, and serve to amplify the construction capacity of CTC – China’s private towercos are estimated to have built 10% of the country’s new towers in the last year.

The formation of the Chinese Independent Towerco Alliance (CITA) is a promising step in conferring a voice to the important private segment of the Chinese tower industry – experiences in India illustrate the value of creating a trade body to represent towerco interests.

In 2008 the emerging Indian tower industry formed its own trade body, the Tower and Infrastructure Providers Association (TAIPA). TAIPA enabled the tower industry to speak with a unified voice, lobbying State and Federal government, enabling industry stakeholders to influence regulation and taxation including clarifying rights of way, accelerating permitting, and ensuring fair fees and Federal and local levels.

While India is a useful benchmark for China illustrating the importance of forming trade bodies, the country also provides the world’s closest comparison in terms of the influence an MNO-led towerco can have in defining the business model. Much like CTC does in China, India’s MNO-led towercos (led by Vodafone-Idea-Bharti Airtel joint venture Indus Towers and Bharti Airtel’s own Bharti Infratel) instigated a contract structure that shares the benefits of infrastructure sharing by discounting leases when additional tenants are added to towers. In India lease rates are relatively low compared to global benchmarks (typically Rs 30,000-35,000, around US$500pcm).

Most recently, TAIPA facilitated an important refinement to the Indian business model and Master Service Agreement; instead of escalators of 2.5% being applied annually, the rate card price is now increased by 2.5% annually – this ensured price parity where previously anchor tenant lease rates had escalated beyond those of new tenants, and in doing so eased the path to lease renewals.

It should be noted that, due in large part to the aforementioned tenancy discount structure, Indian towercos typically trade at a multiple which is around a 40% discount compared to their North American peers.

With the Indian tower industry approaching its ten-year anniversary, it can be considered relatively mature. This is evinced by the relatively small number of remaining private towercos, many of which have been acquired by consolidators, particularly American Tower.

The monetisation of private towercos in India reveals one universal truth in M&A: timing is critical. After inflating to a high of over US$133,722 per tower prior to the restructuring of India’s MNO licensing in 2012, Indian towers are now changing hands at valuations closer to $76,000 per tower, and valuations remain under downward pressure due to the proposed merger of #2 and #3 MNOs Vodafone and Idea, and the associated surplus of towers coming to market. TowerXchange heard reports that, five years years ago, one of India’s remaining private towercos rejected an offer that probably represents twice their current valuation.

Central and Latin America (CALA) is home to one of the largest and most successful pools of private towercos, some of which are growing at 30-50x the speed of the listed towercos in the region. Yet CALA is also the source of several cautionary tales of private towercos that deviated too far from the established towerco playbook, to the detriment of their profitability and investibility.

While private towercos own just 12.5% of CALA’s towers, between Q115 and Q117, private towercos added 47% of the new towers added to portfolios.

While private towercos can out-build public and institutional entities, CALA also provides many examples of the perils of competing on price, and/or cutting corners on quality, permitting and contractual terms. The tower markets in Colombia and, to a lesser extent Brazil, became a “race to the bottom” in terms of lease rates, leaving many towercos uninvestible with too little margin between ground rent and lease rate to create adequate tower cash flow to attract a successful exit.

The same private towercos that competed too aggressively on price were also often guilty of meddling with Master Lease Agreement best practices: discounting or omitting escalators, granting anchor tenants excessive reserve space thus limiting the amount of wind load capacity that could be sold to new tenants, or granting RANsharing rights at little or no cost. Perhaps most importantly, concessions were often granted in cancellation and transferability clauses, which in the event of acquisition by a large public or institutional towerco, would enable tenants to transfer off the private towerco towers onto the larger entity’s portfolio.

CALA’s most successful private towercos are not deviating far from the established towerco playbook – companies like Torrecom are building quality structures in attractive locations, in investible markets, and leasing them up to credit worthy tenants. Other towercos are even ‘cleansing’ smaller portfolios of less investible towers – rolling up assets at a discount, investing improvement capex to enhance structural capacity, investing time to plug gaps in permitting paperwork, and to renegotiate terms with landlords and tenants. Digital Bridge trades as Mexico Tower Partners and Andean Tower Partners, and achieved a compound annual growth rate in tower count in excess of 50% between Q115 and Q117. Leveraging substantial M&A, Phoenix Tower International is growing even faster, achieving a tower count CAGR of 506% over the same period.

When TowerXchange first studied the Sub-Saharan African tower market in 2011, towercos owned less than 5% of the continent’s towers. That figure has now risen to 39%, of which 31% are owned by private towercos! Despite less than 50% penetration, the SSA tower market is approaching ‘sold out’ – why? Towercos don’t want all the towers – there is finite value in acquiring parallel infrastructure, and there is considerable risk in acquiring towers from an anchor tenant that might not prove credit worthy. Africa’s towercos have acquired the majority of towers from MTN and Airtel, plus a significant proportion from Millicom and Orange, and have little appetite to acquire towers from ‘tier two’ MNOs who often struggle to achieve good market share and margins.

Africa illustrates how well-funded private towercos can scale rapidly by buying and leasing back established MNOs’ towers, while at the same time absorbing the majority of new build. The three largest private towercos in SSA (IHS, Helios Towers Africa and Eaton Towers) are on the brink of being classified as “soon to be listed”, having scaled from near zero to 22,961 towers, 6,477 towers and 5,000 towers respectively.

The towercos in Africa provide more than vertical real estate: much of their complexity – and value add – is derived from energy management. Africa’s towercos would contend that as a function of improvements in uptime and time to market, they have proved they do a better job of managing towers than the MNOs from which they were acquired.

Apart from MENA, Europe is the world’s least mature towerco market. Apart from a few local tower builders and a couple of small buy and leasebacks, the European tower industry kicked off in 2012 with the first of a series of acquisitions by Cellnex, which had a successful IPO in 2015.

Cellnex and American Tower are acquiring many of Europe’s largest private towercos (Cellnex acquired Protelindo Netherlands and Shere Group, American Tower acquired FPS), driving valuations to the point where Europe looks very much like a seller’s market. These acquisitions notwithstanding, many towers remain on MNO balance sheets or on the balance sheets of MNO-captive towercos and infrasharing joint ventures in Europe.

Moreso than in other regions, European towerco value creation is driven as much by decommissioning of parallel infrastructure as it is by new build. Europe’s largest towercos are consolidating hundreds of towers per year, saving opex and driving the tenancy ratios and profitability of remaining sites.

Another innovation for which European towercos are renowned is engagement with alternate site typologies, from relatively conventional rooftop poles (which are more prevalent in Europe as a function of urbanisation), to deployment of small cells and DAS, and even use of electricity pylons, smoke stacks and church towers.

Russia offers some particularly interesting lessons for private towercos. Here the likes of Russian Towers, Vertical and Service-Telecom are rolling out hundreds of ‘city poles’ every month – urban infill sites to densify networks for 4G that increasingly provide an holistic set of information services beyond cellular connectivity. But Russia also offers up a cautionary tale: beware investing time and money chasing MNO tower sales – millions of Rubles and countless hours of management time has been spent pursuing the acquisition of Russian MNO towers, with no acquisitions yet realised.

Europe’s towercos have also created a trade association; the European Wireless Infrastructure Association, which facilitates networking, promotes investment and represents the industry’s interests in matters of public policy with the European Union and other regulatory stakeholders.

Private towercos can play a critical, and highly rewarding, role de-risking virgin tower markets. Myanmar stands out as the obvious example.

With 46% of the country’s towers, private towercos play a larger role in Myanmar than almost anywhere in the world. Why? They were lead by tower entrepreneurs, and backed by investors, with a higher risk tolerance than institutional or publicly listed towercos, and they were prepared to invest in an unproven market with an immature regulatory environment (now much improved). Myanmar’s private towercos, led by Irrawaddy Green Towers, Apollo and PAMEL, have quickly built high quality sites in good locations, leveraging local expertise and relationships.

Check in with Myanmar in five years and expect to see a different market dynamic: with towers being leased up and local suppliers and O&M contractors trained, and with a fourth MNO MyTel entering the market with the promise of increasing tenancy ratios, Myanmar’s private towercos may be ripening toward exit, with edotco at the head of a queue of prospective acquirers.

The world’s oldest independent towerco market, the USA, may be dominated by the three publicly listed towercos American Tower, Crown Castle and SBA Communications, but the country also hosts over 120 private towercos. Private towerco entrepreneurs range from owners of local tower portfolios who have no intent to monetise their ‘pensionable assets’ to serial ‘build to flip’ specialists, who build or acquire portfolios of hundreds or indeed thousands of towers with a preconceived notion of selling them to one of the publics (for example Richard Byrne is on the third iteration of his simply named ‘TowerCo’).

The U.S. tower market was also birthplace of the roll-up towerco, most famously represented by Global Tower Partners (GTP), which painstakingly rolled up and built 15,700 towers in North and South America, eventually selling them to American Tower for US$4.8bn. GTP has since effectively been reincarnated as the aforementioned Digital Bridge, while Phoenix Tower International has much management DNA in common with GTP.

Another tower-related business model that originated in the U.S. is the ground lease aggregator. Sometimes seen as the nemesis of the towerco, ground lease aggregators target the land leases under the most attractive towers, offering landlords a lump sum to buy them out, thus securing control of a highly lucrative piece of real estate for which they can increase rental fees. Towercos increasingly mitigate the threat of ground lease aggregators by extending leases, securing rights of first refusal, or buying outright the land under their most lucrative towers – indeed investing in the land under towers can generate excellent returns at relatively low risk, albeit a painstaking process to negotiate site by site, landlord by landlord.

Public and private towercos in the U.S. are brought together by their trade association, the Wireless Infrastructure Association, under whose wing the Infrastructure Developers Forum represents the interests of the country’s private towercos.

Many of the lessons to be learned for private towercos are summed up by an Indonesian tower market so mature that most of the private towercos are now listed (albeit many have a relatively small float on the Indonesia Stock Exchange).

Indonesia’s most successful towercos have utilised every strategy we’ve discussed to drive to impressive scale. From an early stage, pioneers like Protelindo and Tower Bersama have rolled up dozens of smaller private towercos. Outside of China, there are no other tower markets where towercos regularly build 3,000 to 5,000 new towers, rooftops and infill sites every year. Tower Cash Flow growth is healthy thanks to 4G-driven impressive lease-up, with tenancy ratios typically in the 1.6-1.7 range. Towercos like Protelindo, STP and Balitower have diversified beyond towers into microsites, BTS hotels, small cells and fibre. And Indonesia’s largest towercos have deployed over US$2bn to buy and leaseback over 12,000 MNO towers since 2008, growing to the point where towercos own almost two thirds of the towers in the world’s fourth largest mobile market.

While Indonesia’s towercos have ridden successive waves of growth, the market is not without its challenges. MNO margins are shrinking, putting downward pressure on lease rates, whilst increasing ground rent pinches towerco margins. Indonesia’s mobile market is dominated by State-owned Telkomsel, whose own towerco Mitratel captures the lion’s share of new build, and has scaled to a portfolio of 13,113 towers. Tower Bersama tried to buy Mitratel in 2015, using an innovative share swap agreement, but the politics proved too complex and the deal was overruled by government.

However, regulatory policy has been key to towerco success in Indonesia since tower sharing was mandated in 2006. And Indonesia’s towercos have formed their own trade body to lobby for their interests too – the Asosiasi Pengembang Infrastruktur Menara Telekomunikasi (ASPIMTEL).

Entrepreneurs have generated both wealth and efficiency by creating hundreds of private towercos worldwide. But not all have succeeded. TowerXchange would humbly advocate that entrepreneurs take one of three clear paths when founding, or investing in, a private towerco.

1. Build to keep a small portfolio of low risk, pensionable assets – an entrepreneur can retire on the cash flow from 10 towers

2. ‘Build to flip’ – raise debt and equity finance, build, buy, drive to scale (typically 500+ towers), then sell to a consolidator, typically a larger listed or institutionally owned towerco, or a rollup towerco

3. Or become a rollup towerco, leverage organic growth, but be prepared to painstakingly acquire dozens of small portfolios of towers, be prepared to ‘clean up’ bad contracts and incomplete sets of permits. Some rollup towercos achieve the scale necessary to list, others ultimately sell to a consolidator

Whichever pathway to growth you choose, here are ten lessons learned from the private towercos worldwide:

1. If you have a tower industry association, join it. If there isn’t one, create one

2. In most cases, the market sets standard lease rates and contractual terms. Don’t compete on price or on escalators; compete on time to market and quality

3. Don’t deviate too far from contractual norms; be particularly wary of the value destructiveness of concessions in reserve space, RANsharing, cancellation and transferability clauses

4. But do deviate from the standard vision of macro towers – a significant proportion of the world’s new sites will be microsites, small cells and DAS – consider adding these to your catalogue

5. Urban rooftop sites can be as valuable as ground based towers, but it is critical that the towerco control all four corners of the rooftop to ensure exclusivity

6. Consider leveraging alternate site typologies such as electricity pylons, transportation structures, smoke stacks and street furniture

7. Seek to control the cost of the land under your towers, either by extending leases or buying out the land

8. A transparent tower industry is a more investible tower industry. If tower transaction and valuation benchmarks are readily available to prospective investors, the asset class becomes more attractive

9. Proactively manage your industry’s profile with prospective investors – communities like TowerXchange can help connect you with hundreds of experienced tower investors with US$billions to invest in new tower and small cell ventures

10. Private towercos must be faster, more agile, and take greater risks than their listed and institutional-owned competitors – seek first mover advantage and create lean operations and strong local partnerships to accelerate time to market.