TowerXchange market studies: Ukraine, Kazakhstan, Armenia and Georgia

Teasers are reportedly out for the sale of 12,400 Veon (formerly VimpelCom) towers in Central Asia, with TAP Advisors believed to be running the process. With 4G only rolled out to half the population in Kazakhstan, Armenia and Georgia, and with the Ukraine still lagging in 3G rollout, demand for data will soar and demand for points of service in these markets could double in the next ten years. And with few existing towercos in the region, VimpelCom’s process could inaugurate a new era of shared infrastructure in Eurasia.

Veon is reportedly seeking to monetise towers in four diverse countries with a total population comparable to the United Kingdom. Demographics are generally similar across the four countries, with the exception of Kazakhstan, which is less densely populated yet generally wealthier. The Kazakh and Ukrainian towers may prove more attractive as a function of market size and of the strength of the local Veon opco anchor tenant.

The Veon process is particularly significant as, if successful, Fintur and Tele2 may monetise their towers in the CIS in response.

The absence of a strong existing culture of infrastructure sharing, with only one towerco of scale across the four countries (UkrTOWER), means any acquiring towerco would have to win hearts and minds of network planners, but would also have the opportunity to set market lease rates, subject to the usual constraints that MNOs may build rather than lease towers if the price is prohibitive.

The immaturity of mobile broadband rollouts offers a long runway for growth for interested towercos, with 4G population coverage around 50%, except in the Ukraine where there is no 4G and only around 40% of the population has 3G.

Political instability stymied network investment in the Ukraine, where in a normal year around 750 new points of service (PoS) would be added. But the country is emerging from recession, and more than 2,500 new PoS could be added to MNO networks before the end of this decade.

Veon’s Kyivstar is the market leader in a four MNO market. Kyivstar’s primary competition comes from an MTS subsidiary, which trades under the Vodafone brand, and Turkcell’s lifecell. TriMob, the mobile brand of fixed line incumbent UkrTelecom, completes the landscape.

Last year Turkcell carved out and transferred 811 lifecell towers to UkrTOWER, the local subsidiary of their captive towerco Global Tower. UkrTOWER’s current site count is 1,201, including a number of in building solutions, and the company boasts a healthy tenancy ratio. Outside of UkrTOWER, only 3-5% of towers and rooftops in the Ukraine are shared, mostly at nominal prices or under barter arrangements.

A further 1,000+ leased third party structures, such as smoke stacks and water towers, are utilised by Ukraine’s MNOs, while the core site count includes around 60% ground based towers, 40% rooftops, bringing the total unique site count (excluding co-locations) to around 21,600.

The Ukraine is one of the last countries in Europe where MNOs have not yet been granted spectrum for LTE – indeed 3G is accessible to only around 40% of the population (expected to rise to 60% by year end 2017), partly as a result of an exclusivity arrangement held by TriMob until 2016.

Kazakhstan is also emerging from recession, compounded by high inflation that is now falling. Oil wealth drives GDP per capita significantly higher than the other three countries in the Veon process.

The MNO market in Kazakhstan consolidated from four to three with the merger of Altel and Tele2. The merger has been legally approved, but network integration has only just commenced. Veon’s Kar-Tel is a close second in market share to Fintur’s Kcell. Joint venture partners Telia and Turkcell have been exploring a joint divestment of Fintur, and are hopeful the assets will be disposed during 2017. This uncertainty has stymied the market leader’s network investment.

Altel had a 4G monopoly until Summer 2016, after which date Veon and Kcell commenced a shared 4G rollout. This partnership notwithstanding, only a very small proportion of Kazakhstan’s existing towers are shared: less than 5%.

600-1,000 PoS are added per year in Kazakhstan, and the need for urban densification and rural coverage, compounded by coverage obligations that came with 4G spectrum, could see total PoS in the country double in the next ten years. However, additions may be offset somewhat in 2017 by decommissioning of duplicate locations in the Altel-Tele2 networks.

The legality of cell sites in Kazakhstan can be challenging – TowerXchange understand a subcontractor had been touting the sale of some 200 sites they had been unable to legalise. Any new owner seeking to legalise a site may have to settle backdated penalties, and three successive breaches can cause significant tension with authorities.

The dispersed population and scale of Kazakhstan, at 2.7mn sqkm, makes economic rural coverage a challenge, so third party structures play an even greater role in Kazakhstan’s mobile networks than in the Ukraine. In particular fixed line incumbent Kazakhtelecom has around 700 sites which are leased up to MNOs at a low lease rate. Estimates suggest these sites could have a tenancy ratio as high as 2.5. The only formal towerco TowerXchange has identified in the country is Logycom, which has secured a build to suit contract for one of the MNOs, while we have heard reports of small portfolios (~10) of privately owned sites. Alongside the usual assortment of water towers, smoke stacks and oil industry structures, MNOs also co-locate on a number of Kazteleradio’s broadcast towers.

TowerXchange have never encountered such a wide deviation between suggested site counts from multiple sources on a market, so there is a significant margin for error in our site counts. While all parties agree Veon has around 3,500 sites, around 60% of which are rooftops and 40% ground based towers, our best estimate is that Kcell owns around 5,500 towers and rooftops, with Altel and Tele2 combining a total of around 4,200 towers and rooftops. Third party structures make up around 30% of Kazakhstan’s mobile networks, and total at least 1,500, perhaps significantly more. Of the third party structures, one contact told TowerXchange "Rooftops and chimneys (in CIS countries, smoke stacks and water towers are often consolidated under the term “chimneys" as a standard term for a build-to-suit sites with “balcony" on such a stack) are not technically owned by MNOs, but given that they own the cabinets, batteries, air conditioning, fibre transport lines and even the balcony itself, many will prefer to count such sites as effectively owned."

The smaller Georgian and Armenian tower markets consist of around 3,000 and 2,200 sites respectively. Around 65% of sites are rooftops, but less alternate site typologies are used than in Kazakhstan: just a handful of broadcast tower co-locations. The Veon tower divestiture is believed to include around 800 sites in Georgia, 650 in Armenia.

Both countries host three MNOs: Magticom (privately owned) has over 40% market share in Georgia, followed by Geocell (Fintur) and Beeline (Veon); while Veon, again trading as Beeline, is #2 in the Armenian market, joined by VivaCell (MTS) and Ucom. Veon entered the Armenian market by acquiring the former State monopoly fixed line operator, so they have several strategically important rooftop locations.

Spectrum holdings in Georgia and Armenia were quite asymmetrical until 2016, when all MNOs were granted 4G spectrum, without however fully aligning the holdings between the MNOs. The effect is more pronounced in Armenia where locally owned Ucom (formerly Orange Armenia and now vying with Beeline for the #2 position) has a lot more spectrum than either market leader MTS or Beeline. In Georgia, market leader MagtiCom has the largest spectrum holdings. LTE rollout is well under way, with population coverage around 50% in both countries, and 3G at 70-80%.

There is very little existing infrastructure sharing in either country. The only towerco TowerXchange has heard of operating in these countries is GIS, but requests for information from the owner have been ignored. We suspect it’s very small.

Veon are reportedly open to selling cell site energy assets (batteries, DGs, DC power and air conditioning systems) as well as their towers and rooftops. If the energy equipment is sold, the structure of the contract, as a straight power pass through or with a chance for the towerco to make a margin, may be at the discretion of the investor.

Participants at the CIS roundtable at the recent TowerXchange Meetup Europe suggested that the towerco SLA would apply only to AC power, and that MNOs had experience of sharing backup gensets when swapping sites.

Almost all sites in the Ukraine, and over 80% of sites in Kazakhstan, Armenia and Georgia, are on reliable electricity grid connections, although a few sites are powered by the landlord or other third party.

Investor appetite

 Interest rates are generally high in the region – e.g. 25% in the Ukraine – and contracts would be in local currency, with escalators tied to local inflation, so any deal either would likely either require the investor to take significant FX risk, or complete an all equity deal.

Participants at the recent CIS roundtable at the TowerXchange Meetup Europe felt that it may be possible to take some leverage in the CIS, providing contracts and tenants are good – it would be a matter of structuring international debt versus the local currency revenue stream, but would require that investors were compensated for taking the FX risk. The feeling was that there might be a relatively shallow pool of prospective investors beyond the EBRD, potentially the IFC, and some local private equity. But the region’s towercos would likely have to be majority investors.

While we wouldn’t rule them out entirely, TowerXchange doubt Europe’s largest independent towerco Cellnex will bid aggressively for these Veon towers. Cellnex has history with Veon, having acquired towerco Galata from Veon’s Italian subsidiary Wind, but Central Asia seems a little exotic for a towerco with an investment thesis focused on Western Europe.

In addition to the usual assortment of infrastructure and pension funds, who are the more likely towerco bidders for Veon’s Central Asian towers? In alphabetical order…

American Tower: Since forming a joint venture with PGGM, American Tower has renewed appetite for European towers, having recently announced the €697mn acquisition of FPS Towers in France which will bring their European tower and rooftop count to around 5,000. American Tower has unfulfilled aspirations to expand into Eastern Europe and may take a look at the Veon towers.

Digital Bridge: The latest venture from Marc Ganzi and Ben Jenkins, the brains behind Global Tower Partners which was sold to American Tower for US$4.8bn in 2013, Digital Bridge has built up a portfolio of around 6,000 towers across subsidiaries in North and South America, with an appetite to expand into EMEA and beyond.

Eurasia Tower: Construction firm with experience of building over 5,000 towers and rooftops in Central Asia, seeking to move up the value chain to acquire and retain towers.

Global Tower: Turkcell stepped back from an IPO of their towerco subsidiary Global Tower, and may seek third party investment to finance expansion into Central Asia. Global Tower currently owns and operates 8,067 towers and rooftops in Turkey, 1,201 in the Ukraine through subsidiary UkrTOWER, 828 in Belarus and 115 in the Turkish Republic of Northern Cyprus. Turkcell have been in discussions with TeliaSonera, who may wish to exit their Fintur joint venture, which could precipitate availability of further Central Asian towers. While the geographical fit between where Global Tower would like to expand and where Veon would like to sell is perfect, the politics of a tower transaction ostensibly between two MNOs would be challenging, if not insurmountable.

iTower: Dark horses in the race supported by experienced long-term players in the telecom market with appetite to acquire and own towers. This team has been secretive and low profile so far, and according to some sources is patiently designing a new towerco business model combining infrastructure with the latest technologies, protecting the whole process by numerous NDAs. In spite of their low profile, iTower already took part in the Veon Russia tower bid, and may own rights for rolling out small cell zones in important business areas of several large cities. The people behind iTower are also known as familiar with the Ukrainian tower market, having built and modernised most of the towers in Ukraine themselves. They have extensive knowledge of Kazakhstan market too, and have been rumored to be discussing their infrastructure roll-out in Astana and Almaty with Kazakh authorities and top managers at local telcos.

Quippo International: Original owners of Viom Networks, sold to ATC India, Quippo and backers Sunil and Anant Kanoria have an appetite for further opportunities in, and beyond, towers.

Russian Towers: Russia’s leading towerco, with over 2,000 towers, is believed to be in the final stages of acquiring 10,400 towers from Veon in their home country. While Russian Towers have an appetite to expand into neighbouring countries in the region, it remains to be seen whether they have the operational and financial digestive capacity to increase the size of their business 10x in 12-18 months by completing the Russian and Central Asian VimpleCom transactions. With more tower assets potentially coming to market in Russia, from Tele2 and MegaFon, Russian Towers have alternate assets to pursue closer to home.

Vertical: One of the fastest growing towercos in the world, Vertical came seemingly from nowhere to become a serious contender in the Russian tower processes. Vertical acquired and refurbished over 500 sites and added a number of microsites, lamp post solutions and rural towers, bringing their site count to 1,600 when TowerXchange last checked in with them.

Delays to 4G spectrum auctions and preferred MNO status agreements mean Ukraine, Kazakhstan, Armenia and Georgia offer interested towercos a time machine to travel back near the start of the mobile broadband era and to facilitate the efficient sharing of towers and rooftops, driving tenancy ratio growth with overlays by MNOs and incremental tenancies from the usual array of non-traditional MNO tenants. While a buyer would have to foster a culture of infrastructure sharing in the region, the healthy tenancy ratios of UkrTOWER and Kazakhtelecom sites bode well for lease up potential of sites currently with tenancy ratios very close to one.

While some prospective investors may balk at perceived country and counterparty risk in Central Asia, economic improvements and the prospect of securing an anchor tenancy agreement backed by the Veon parent company mitigate those risks.

Teasers have only just been released in the process to monetise Veon’s towers in the Ukraine, Kazakhstan, Armenia and Georgia, so transactions are unlikely to close before the second half of 2017 at the earliest.