Towercos under competing tension

With experience of advising and guiding the evolution of the current tower landscape across Asia, Africa and Europe, Nick Elverston and Amanda Hale have been involved in some of the biggest tower deals to date. TowerXchange picked their brains about the challenges and opportunities facing towercos, MNOs and infrastructure owners today, and how investment into the vertical may change over time. 

TowerXchange: Please introduce Ashurst, your footprint and background in towers.

We have been in telecoms since the early 90’s, working through massive changes in the sector. Historically, we had a focus on working for MNOs but, increasingly, we have witnessed a move towards infrastructure based clients. This takes in towers, but also neighbouring digital infrastructure businesses such as small cells, fibre, undersea cable and data centres.

We are consistently ranked amongst the leading TMT practitioners by the major legal directories, in particular as a result of our involvement in some very ground breaking deals. One of the most significant and complex of these was “Cornerstone”, where we acted for O2 in its joint venture with  Vodafone, involving the creation of a captive towerco, CTIL, and the sharing of active infrastructure on a regional basis. Other clients have included Essar and Bharti, who led the way in India, as well as IHS, who we advised on deals in three territories in Africa.

More recently, we worked on a very large UK tower process and subsequently with Digital Colony on their acquisition of Digita in Finland. What they are planning is really quite exciting, evolving from being principally players in steel and concrete, to becoming suppliers of increasingly converged services, with more intelligence and data storage capacity in their tower sites. Advising businesses going through this kind of evolution plays well to our vision as lawyers with a special focus on digital infrastructure and digital transformation.

As a firm, we are active from here to Australia and everywhere in between, advising clients as diverse as Facebook, New York’s Metropolitan Transport Authority and Australia’s National Broadband Network on digital infrastructure matters. We have a global practice which extends across all the legal disciplines you need for this work. You start with regulation, then the commercials and putting together MSAs, the legal aspects of real estate and M&A, not forgetting helping with the financing and, hopefully, in the not too distant future, exit through IPOs. Our digital infrastructure team sits alongside our wider infrastructure practice which covers more traditional infrastructure such as roads, rail and airports, all of which are becoming “smarter”, for which read digitalised.

TowerXchange: Only 15% of European towers are owned by independent towercos – much less than in many global markets. Why do you think this is and will it change?

One major driver is need. Divesting a tower portfolio can require something akin to a religious conversion, away from being vertically integrated, engineering led organisation, towards far more of a service led model. That process can be accelerated where there is economic pressure on an MNO. In markets such as those in Africa and India operators adopted a low cost model from the get go out of necessity. Another, linked, reason is financial engineering - towers are often worth larger multiples than the underlying telecoms businesses and being able to divest a tower portfolio at 10-15x EBITDA may help an MNO make the decision to focus on core competencies. 

Will there be more SLB in Europe? We think so. We’ve just seen the Altice portfolios sell in Portugal and France, and there is a queue of players interested in assets such as CTIL and MBNL in the UK. Operators’ revenues are declining but the need to roll out and enhance networks continues (both next generation networks and for increased capacity as data usage grows). This creates pressure for more network sharing - do we really need four incumbent operators rolling out four 5G networks in European countries? There simply isn’t enough room on the lampposts! The days of the vertically integrated operator would seem to be numbered.

TowerXchange: I’ve heard operators and towercos described as ‘frenemies’ before. How justified do you think operators’ concerns are?

This is one of the generic problems with outsourcing, interests are aligned in some places and not in others. Operators have to accept that using a third party is different to when you do it yourself. There’s a hoped for cost saving, and a towerco may even have the competencies to do the job better, but the operators are handing over a certain amount of power and getting the model right is a challenge.

There’s also an issue about creating a competitive dynamic in each country, and the influence of regulators. Whilst regulators like infrastructure competition, it can be economically unsustainable and, hence, put a lot of stress on operators, leading to consolidation. We have seen it before in the UK when there were two players in broadcast transmission serving six DTT multiplexes, the competitive dynamic drove prices down, then the two towercos merged and you were in the world of regulation. In other infrastructure, such as electricity or water, the networks are regulated and they live with that. However, regulation is more complicated with regards to towercos and is only likely to get more so as they move deeper into other services.

TowerXchange: You mention services. At Meetup Europe 2018 we discussed the potential for change in towerco business models in some depth, and there was plenty of disagreement about how they should evolve. How do you think towercos will evolve?

Our sense for a long time has been that there is a gradual movement towards neutral networks and neutral infrastructure. Add to this the fact that convergence is here and we come to the conclusion that if a towerco wants to up revenues, it needs to look hard at where it should play in the value chain.

In a lot of auction processes, you get an IM saying the company is doing something new and exciting, like IoT, but often the growth story barely registers with potential buyers, or worse it can scare them off because they look at the asset and wonder what it is. The Telxius process ran into some complications because of the mixture of towers and sub-sea cables. Some bidders will shy away from businesses including broadcast transmission towers as a result of scepticism around the future of DTT. There is pressure on Towercos to diversify, but this complicates the model, causing a competing tension.

There’s something of a feeding frenzy at the moment in European towers over each asset, but often in these transactions people fall away due to this lack of purity, with the result that the processes end up not being as competitive at the end of the day, but they are still happening.

We’d also note that operators have been trying to diversify into a wider range of digital services for years, but in our experience a lot of those initiatives have floundered, particularly where existing business models throw up nice steady cash, whereas doing something new takes time, effort and money and quick results are rare.

As a side comment, it is worth noting that African towercos are, by their very nature, diversified businesses, they are something like 50% towers and 50% logistics for shipping diesel around. What is their business and how much of it is infrastructure? 

TowerXchange: Towercos are looking to futureproof their business models by moving into adjacent assets – which are the natural next steps for European towercos?

There is a lot of interest in fibre, which seems to make sense as an evolutionary step. So we do think that towercos will get more involved in the creation of transmission networks, as well as processes such as those we are seeing around road, rail and other transit networks.

Beyond that, there’s a lot of uncertainty about the future – we know big changes, such as smart cities, are coming but who will run the infrastructure the smart cities will rely on? Towercos would seem well placed to play a part, but doing so will move them further from their traditional model of buying existing infra assets from a telco, entering into a long term MSA, running those assets and building out new ones. Once they put data centres at the bottom of their towers, for example, they will take on much more complexity and, potentially, liability for things such as cyber security and data breaches. 

Do we think a lot of players from adjacent verticals will move into towers? Probably not, but there’s already plenty of interest in towers and, as towercos move into adjacent markets, they will face competition. Fibre networks and datacentres are already very active areas. Also, the consequences of the arrival of Google, Facebook and Amazon as major players in digital infrastructure are significant. We are doing a lot of work for these types of businesses as they roll out networks for their own purposes. They’re not in towers per se, but they are becoming active in datacentres, undersea cable, terrestrial fibre – every adjacent vertical – either building themselves or in partnerships with market incumbents. From the investors’ point of view these kinds of players are less cash constrained and therefore, currently, less open to outside investment, whether that remains the case is worth watching.

TowerXchange: Towers are seen as a solid infrastructure investment. What effect has the investment large infrastructure funds such as PGGM or KKR had on European towers? How compatible is this kind of investment with towercos’ move into a more service-oriented business model?

One challenge around moving into services is that a lot of money in the sector comes from infrastructure funds which are constrained in what they’re supposed to be doing by their mandates – this could create pressure on certain towercos to stay close to the traditional model. Though some investors may be stretching what they can do in terms of defining infrastructure. Four years ago, with a few notable exceptions, infrastructure funds generally didn’t seem that keen on towers, but now there is clearly a huge amount of interest – we are seeing big names in every process.

There’s also a tension between what makes sense from a commercial point of view and changes to accountancy standards which can affect the economic basis for doing SLB deals in the first place.

TowerXchange: There have been reports of European towercos looking at management contracts with MNOs. Do you think this model will be more prevalent in future? 

Yes, outsourcing can work when it doesn’t transfer ownership, but outsourced service providers use their skills and resources to run a business more efficiently. It’s been done before, not least in the African model. In Europe we already have entities like the MBNL JV between EE and Three, where the MNOs still own the bulk of the towers, but they are managed by the JV.