The devil is in the detail – the detail of painstakingly constructed and hard negotiated Sale and Purchase Agreements (SPAs) and Master Lease or Service Agreements (MLAs) that define the main terms in any tower transaction. Jeff Eldredge and Rob Dixon, Partners at Vinson & Elkins, have advised on numerous sale and leaseback transactions in the last few years across Africa, Asia and Europe. Rob and Jeff kindly agreed to meet with TowerXchange and to provide us with an overview of tower sharing SPAs and MLAs.
TowerXchange: What are the key components of a Sale and Purchase Agreement (SPA) in a tower transaction?
Rob Dixon, Partner, Vinson & Elkins:
There are of course many components common to all SPAs, but let’s concentrate on those components which are unique to towers deals. A key example is the structure and content of the conditions to closing. First, we’ll typically have a set of transaction conditions precedents that need to be fulfilled before the deal can happen at all. These would include any over-arching regulatory requirements (for example an operating licence or a competition approval). It’s in the tower company’s interests, however, to close as swiftly as possible to minimise asset deterioration in the interim period.
Secondly, we’ll typically have a set of conditions precedent that need to be fulfilled (or waived) before a specific tower can be transferred. These would normally include good title, satisfactory ground lease arrangements (for example, the right to sub-lease the tower to third party co-locators and to assign leasing arrangements in security) and compliance with regulatory requirements (for example, building permits and environmental consents)… It’s potentially a long list!
The buyer will require a certain number of towers before the deal is economically viable. Typically, therefore, the deal will be structured so that closing does not happen unless and until a certain number of towers are ready to be transferred (i.e. the tower-specific conditions precedent are satisfied or waived).
Jeff Eldredge, Partner, Vinson & Elkins:
One key point in the process is the extension of ground lease terms. Towers deals can involve thousands of different parcels of land. Different ground leases will expire at different times, giving uncertainty on future costs. The buyer will therefore seek to have the ground leases extended for a reasonable period as part of the transfer process.
Rob Dixon, Partner, Vinson & Elkins:
As a result of that and certain other conditions taking time to satisfy, there are typically a number of closings as the tower-specific conditions are gradually satisfied. In the interim, the buyer might take over the operation of the non-transferred towers on a managed services basis. Different deals are of course structured differently – some deals go further to synthesise the buyer’s ownership of non-transferring towers from first closing.
TowerXchange: What happens to any towers for which the CPs cannot be satisfied?
Rob Dixon, Partner, Vinson & Elkins:
The treatment of ‘stub sites’ depends on the deal. The operator is unlikely to have the ongoing capability (or desire) to maintain and operate the sites so the towerco may agree to manage the sites (with the operator retaining ownership). The buyer is likely to conduct legal diligence on a representative sample of sites so that it has a reasonable idea of the position before signing the deal. The SPA is, of course, only one part of a sale and leaseback deal. It’s relatively short-lived compared with the MLA which will often govern the parties’ relationship for many years. The MLA needs to be as future proof as possible.
Phased close
It’s common practice to have at least two phases of closing a sale and leaseback transaction, giving extra time to finalise documentation for troublesome towers. As Alan Harper, CEO of Eaton Towers explained “With Warid, 90% of the towers were included in the first close, but we take over 100% of the towers whilst the last complicated paperwork is finalized.”
TowerXchange: So tell us about the critical consideration when drafting Master Lease Agreements.
Jeff Eldredge, Partner, Vinson & Elkins:
The MLA is where the real value is for the tower company and where most of the real complexity lies in a deal. It’s a long term contract (with a significant initial term and then options to renew) and a large value contract. The operator needs sufficient flexibility to manage its needs to deploy and maintain equipment, while the towerco needs sufficient control to maximise the co-location opportunities and create a robust long term revenue stream – that’s how they build value. Thus, there’s a natural tension that needs to be resolved to everyone’s satisfaction. Effective governance mechanisms are important.
The MLA is an umbrella agreement which – traditionally – defines the operator’s rights as anchor tenant in terms of leasing space and capacity (wind load) on the transferring towers and the towerco’s obligations to the anchor tenant in terms of such space and capacity (including the service levels which apply). Different rights and obligations typically apply to different towers. For example, network planners can get very nervous about sharing particularly critical towers with other operators and therefore a small number of the towers might be identified as exclusive to the anchor tenant.
Rob Dixon, Partner, Vinson & Elkins:
The service levels for different classes of towers are also likely to vary and be closely negotiated. These will typically be set out in a service level agreement, which may form part of the MLA. The impact of IFRS16 on the way in which tower companies provide services is a key topic. There are also of course other agreements which are important in most towers deals – for example the Build to Suit Agreement – but perhaps all of that is for another time!
Capacity crunch
Operators err on the side of caution when it comes to reserving capacity on towers for future upgrades. But every square meter the operator reserves is a square meter less for the towerco to sell, and that goes directly to the value of the tower. When it comes to the Master Lease Agreement, “it’s important to help operators avoid reserving more capacity than they really need for upgrades”, to use the words of one senior towerco executive.
