Talking Turkey: an overview of telecoms infrastructure in the Turkish market

Turkey has had its fair share of disruption over the last few years, but beyond that is a young and data-hungry population, committed and ambitious MNOs and Europe’s fifth-largest towerco. In this article, we assess how the market has responded to both positive and negative developments and assess the state of telecoms infrastructure in Turkey as a whole.

Straddling the Bosphorous between Europe and Asia, Turkey looks both to the west and the east for its heritage, and for its future. Between 2005 and 2016, Turkey was in ongoing accession talks with the European Union, however as the country has slipped towards more autocratic rule, those talks have effectively come to a halt.

Ratings agency Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to Ba1 with a ‘stable’ outlook in September 2016, and again to ‘negative’ in March 2017 — placing the country’s credit rating in junk territory and saying ‘weaker growth is negatively impacting Turkey’s key credit anchor - its healthy public finances and low government debt. The government has taken a range of measures to mitigate the domestic impact of the sluggish economy, including providing wage subsidies to firms and postponing the due dates for their tax and social security payments. Stopping such support will be difficult since the factors weighing on consumption and investment, such as higher inflation and interest rates and declining productivity, are structural rather than cyclical’.

But it’s not just domestic political instability in Turkey contributing to economic troubles. The ongoing uncertainty around US relationships with the rest of the world, Brexit causing instability in Europe, increasing tensions between Russia and the West, and the migrant crisis in Syria, which has affected Turkey more heavily than any European country, are all unbalancing markets and economies, both on a local and global level.

There are three mobile network operators in Turkey; Turkcell, Vodafone and Turk Telekom (Avea).

Turkcell

??Turkcell has been listed on the NYSE and the BIST since July 2000 and is the only NYSE-listed company in Turkey. Turkcell Holding retains 51% of shares in the company, with Çukurova Holding owning a further 0.05% direct share. Teliasonera had owned a 14% direct stake in Turkcell, but this was sold in two tranches over the course of 2017 for a total of ~$1.2bn for various reasons, including Telia’s commitment to focussing on ‘home’ markets in the Nordics and Baltics and a long term spat between Telia and board members Mikhail Fridman’s and Mehmet Emin Karamehmet, both of whom have been trying to take control of Turkcell Holding for the last decade. The company’s indirect stake of 24% through Turkcell Holdings remains unchanged, with Fridman’s Alpha Group and Karamehmet’s Çukurova making up the remaining shareholders through Turkcell Holding, with 13.2% and 13.8% respectively.

Vodafone 

Vodafone, the fourth-largest global mobile network operator, entered the Turkish market in 2005 through the acquisition of Telsim, with the Vodafone brand launching in 2006. Vodafone is the second biggest direct international investor in Turkey and sits comfortably in second place in subscriber numbers.

Turk Telekom 

Türk Telekom is the formerly state-owned Turkish telecommunications company, privatised in 2005. The company listed in 2008 on the Borsa Istanbul with 15% of the company now listed on the stock exchange and the remaining equity split between Oger Telekom (55%) and the Turkish Treasury (30%).

Turk Telecom offers a full quad-play service to customers and the MNO arm, Avea, was founded in 2004. As the newest operator in Turkey, Avea has a 25% share of the country’s subscribers, but reaching 95.4% of Turkey’s population through a well built out network. Avea is growing fast both in corporate and individual services.

President Ergodan famously declared in 2015 that ‘It is not necessary to waste time with 4G.’, preferring instead to leapfrog 4G technology and roll out an extensive 5G network in order to place Turkey ahead of the rest of Europe.

This assertion did not, of course, hold much sway with the data-hungry Turkish population, whose median age is around 30, meaning Turkey has the youngest population in Europe. It also did not wash with the MNOs, given the fact that two years later 5G has still yet to be defined.

Luckily for everyone concerned, the auction for 4G licences took place in summer 2015, and 4G began to be rolled out in 2016. However, this rollout is not going as smoothly as could be hoped, primarily due to rows about the ownership and use of Turkey’s fibre network.

Partially state-owned Turk Telekom has thus far invested most heavily in fibre, spending $7bn over the last 10 years and laying 213,000km of fibre across the country. Currently Turk Telekom is able to set its own commercial prices for use of this network, meaning Turkcell and Vodafone feel they are losing out and paying over the odds in a market where increasingly mobile is bundled together with broadband and fixed line offerings.

With another 250,000km of fibre still needed to cover the Turkish market, Turkcell Chief Executive Kaan Terzioglu estimates that by working together, rather than investing separately, the Turkish operators could save $12.5bn. However Turk Telekom CEO Rami Aslan has thus far been uninterested in the idea of collaboration, particularly in urban areas, claiming Turk Telekom plans to invest another $2.8bn in the next three years.

This stalemate between the key players is hampering the rollout of 4G and could have a serious impact on getting 5G networks off the ground when the time comes.

The biggest operator of ground based towers in Turkey is Global Tower, owned 100% by Turkcell. Global Tower owns or manages almost all of Turkcell’s macro infrastructure, with TowerXchange estimating that around 3,500 of the towers are owned by Global Tower, 2,500 of their towers are leased directly from Turkcell and another 2,000 are managed by Global Tower on Turkcell’s behalf.

We estimate Vodafone to own around 6,300 GBTs and Turk Telekom a further 5,400, as well as using Global Tower sites across the country. Global Tower’s consolidated tenancy ratio across their international portfolio is 1.4x, demonstrating that the Turkish market is already comfortable with the idea of colocating on passive infrastructure.

The Universal Services Project is run by the Turkish Ministry of Communication and Transportation and aims to improve coverage to 99.99% of the country by 2023. The project has been implemented in two stages so far: phase one, for 1,100 RANshared sites, was auctioned in 2011 and won by Turkcell, who continue to operate them today. Phase two was auctioned in 2017 and was awarded to a joint venture between Vodafone and Turk Telekom, for a further 2,500-3,000 RANshared sites in rural areas. All three MNOs’ contractual and license requirements are predicated on the success of this project, meaning there is a significant amount of pressure to deliver results.

Founded in 2006 by Turkcell, Global Tower manages 10,241 towers in total: 8,067 towers in Turkey, 1,201 towers in Ukraine under subsidiary UKR Tower, plus a further 828 towers in Belarus and  115 in Northern Cyprus.

In April 2015, Turkcell appointed a new CEO, Kaan Terzioglu, whose background working for Cisco in the US and Europe is believed to make him more inclined towards outsourcing and lighter operations across the organisation. Turkcell also announced in June 2016 its plans to refocus away from declining Turkish revenue and to grow international revenues from 7% of total revenue to almost 40% by expanding into North Africa, Eastern Europe, the Middle East and Central Asia.

This appears to have had a knock-on effect for Global Tower, who were believed to have been exploring options for an equity sale as far back as 2015, then announced an IPO in Q216 which was postponed in October of that year. Despite Turkish MNOs traditionally being keen to hang on to their infrastructure as a competitive differentiator, Turkcell clearly saw potential in their Global Tower asset and was investigating ways to maximise this. As the towers are already carved out and managed as a separate entity, with many supporting multiple tenants and already generating revenues estimated to be around TRY$200mn (around US$60mn) and Global Tower posting an EBITDA of around TRY100mn (US$30mn) in 2015, the asset was already market-ready.

Following the success of the Cellnex and INWIT IPOs in 2015, interest in raising funds through the IPO of tower assets was high in the tower industry. However, unlike Cellnex, whose business revolves around maximising tenancies and profits, operator captive towercos such as Global Tower have additional hurdles to overcome to demonstrate their value in the market. Questions abound around operators’ ability to deliver the ‘best of both worlds’ and reserve space for their parent company and anchor tenant, safeguard their competitive position, while also extracting the maximum potential value from leasing up the tower network.

It seems likely that, if Turkcell were expecting to achieve Cellnex-like multiples of 16/17x EBITDA from the IPO, then the reality of a potentially significantly lower valuation may well have given them cause to reconsider the move.

Although at the time, Global Tower stated that the IPO was firmly ‘postponed’, there has been no further mention of floating the asset, and indeed, Global Tower seem to have turned their attentions to further international growth, particularly in Eastern Europe, the CIS and the Middle East. Whether this is a short term plan to build value before another IPO attempt or a change in strategy remains to be seen, but it would appear that all options remain on the table for this ambitious towerco.

There’s no doubt that Turkey has the elements of an attractive market, with a young, urban, data-hungry population and state-mandated investment in coverage. However, the current political situation means that any foreign investors will need a high tolerance for risk to get involved.

If the Turkish Universal Services project succeeds in its mission to achieve 99.99% coverage by 2023, Turkey become one of the most comprehensively covered countries in the world, and plans to build thousands of new towers create opportunities in the market. However, rivalries and stalemates over other critical infrastructure, as well as Turkey’s unfavourable political and economic situation mean that completing 4G rollout and beginning to put 5G infrastructure in place is not going to be plain sailing.

It’s possibly for these reasons that Global Tower appears to be looking to weight its portfolio more heavily towards non-Turkish assets, and is seeking out opportunities in neighbouring and nearby countries. This strategy may well deliver solid results for them, as their perspective on risk will undoubtedly be very different from the other large European towercos whose experience is drawn entirely from stable Western European markets.

TowerXchange continues to follow both the Turkish market and Global Tower with interest, although we believe that it will be Global Tower’s activity outside of Turkey which will bear fruit in the shorter term.