Saudi Arabia round table reveals imminent transition to towerco business model

All the leading stakeholders in the emerging Saudi Arabian tower sharing market participated in the inaugural TowerXchange Meetup MENA in January 2019. Several of the county’s leading MNOs, towercos, investors and suppliers contributed to discussions at a revealing Saudi round table, which covered ground leases, lease-up plans, new build, decommissioning, regulation, fibre and urban infrastructure deployment. Here’s what we learned.

All three Saudi MNOs are exploring significant changes in their tower strategy:

- Zain has announced the sale and leaseback of 8,100 towers with African market leading towerco IHS Towers, agreeing a US$647.7mn transaction which remains subject to regulatory approval before closing. Zain are believed to have an existing tenancy ratio of around 1.15x.

- Saudi Telecom Company (STC) is now getting serious about monetising its tower assets, and has carved out captive towerco “Communication Towers”. STC is interested in partnering with (but not selling to) a third party towerco to lease up the towers, and will create a lean organisational design substantially leveraging outsourcing. After Communication Towers is established, STC may explore capital markets recognition of the value of the asset.

- There have been conflicting reports as to the status of the Etisalat (Mobily) towers. At the TowerXchange Meetup MENA Etisalat were suggesting they would retain and lease up their towers, while other sources suggested they had carved out a separate towerco – although creating a towerco newco does not necessarily indicate a full carve out or sale and leaseback is imminent. “Mobily have had interest to consolidate or share towers for a long time, especially for new build,” commented one round table participant.

With active infrastructure sharing proving too politically complex to be agreed in KSA, there is a widespread recognition that there may be no better time to monetise passive infrastructure, with global towerco valuations at an all-time high, and with 5G already being trialled, carving out towers reduces rollout and maintenance complexity.

Land lease rental is very expensive in the Kingdom of Saudi Arabia (KSA). Land ownership is diverse, but the land under most sites is privately rather than government-owned. As KSA is a relatively mature mobile infrastructure market, many underlying ground leases are up for renewal, with significant upward pressure on rental fees during renegotiation. However, even at sites with a significant period remaining on the leases, terms and conditions often enable the operator to liquidate the tower, and with significant parallel infrastructure in the country, an increased culture of infrastructure sharing could result in rapid tower network consolidation. “The Saudi tower market is generally overbuilt with ample capacity to share 60m monster towers,” commented one round table participant. “Both STC and Mobily build towers to British standards, so there is sufficient excess capacity at many sites to enable decommissioning of adjacent towers.”

With IHS poised to begin leasing up Zain’s towers, STC’s carve out of Communication Towers ongoing, and Etisalat making noises about leasing up Mobily’s towers, the race to secure “low hanging fruit” co-locations in Saudi Arabia is about to begin. With responsibility for provision of power seemingly likely to be transferred to towercos, uptime, structural capacity, and the idealness of a tower’s location within network plan will determine which tower is leased up. With 5G imminent, fibreization will also represent a significant attraction for co-location.

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STC’s existing procurement model is largely consolidated through three vendors. That arrangement is likely to be opened up as carve-out towerco Communication Towers establishes its independence and unique governance processes, so prospective new suppliers should be on the lookout for new procurement agreements. Some alignment with STC is likely to continue, however, as Communication Towers seeks to leverage volume and knowledge benefits.

Communication Towers may initially absorb many existing STC contracts and processes, but many will be revisited as the entity endeavours to create new efficiencies.

It should be noted that regulations in KSA increasingly favour local manufacturing, and that localisation may continue to earn extra points when bidding for procurement contracts. “We’ve proved many times that local steel is available at the best price in KSA,” commented one round table participant, “although it’s less a steel purchase centric issue now; tower owners want an installed solution.”

Manpower remains a perennial challenge in KSA communications infrastructure, so the ability to recruit and retain a skilled workforce can be a differentiator, particularly again if there is a significant local component.

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Amid increasing pressure from the Saudi regulator the Communications and Information Technology Commission (CITC) to open up fibre, the revenue model and optimal partnership structure to deliver fibre to the tower (FTTT) remains unclear.

The CITC has published a regulatory framework on Wholesale Infrastructure Sharing. Wholesale Infrastructure Sharing licenses permit the deployment of towers, masts, small cells, DAS, dark fibre, ducts and wholesale data connectivity, albeit each under different categories. The CITC has also instigated the transfer of Saudi Electricity Company (SEC)’s fibre assets to subsidiary Dawiyat, which has 70,000km of fibre and a robust balance sheet. Dawiyat could be a prospective landlord for new towers. Dawiyat has 200 telecom towers as well as fibre. KSA’s MNOs also have substantial fibre holdings.

The CITC has been an advocate of infrastructure sharing for several years, and regulation has prohibited the building of adjacent towers, while requiring that new towers be built with adequate capacity to be shared. However, those regulations have not always been enforced.

At the time of the TowerXchange Meetup MENA it seemed that the Wholesale Infrastructure Sharing license regime had been confirmed, but they licenses themselves had not yet been received by towercos. When the new towercos are carved out and licensed, it is anticipated that those entities, rather than the MNOs will build the majority of the Kingdom’s new towers.

As noted previously, the Saudi tower network is generally overbuilt – there may as much decommissioning as new build as a culture of infrastructure sharing takes root. As such, there may be less new tower build, and more smart engineering projects to strengthen existing macro sites, or in rare cases to replace towers with stronger structures (as mentioned above, Saudi’s towers often have excess capacity).

That said, both IHS and STC’s Communication Towers will build to suit for third parties. It should be noted that STC are committed to demonstrate the independence of Communication Towers, which is likely to have its own management team and governance processes – it must be a separate company to ensure third parties in KSA are comfortable assigning search rings or co-locating on existing towers.

Around 60% of KSA’s existing cell sites are macro towers, 40% rooftops, but as much as 75% of new build is likely to be in urban environments, particularly densification sites for 4G/5G.

New build volumes are likely to be highest within several ‘Giga projects’ in KSA, such as the King Abdullah Economic City (KAEC), NEOM, a 5G-enabled city of the future in the Northwest, and The Red Sea Development Company. Such projects call for less macro towers – rather, they will demand smart cities infrastructure such as small cells and IBS, and may be hotspots for pioneering edge data centre deployments.

In conclusion, the Saudi Arabia round table painted a picture of a mobile and tower market on the brink of transition. The biggest obstacles have been overcome: deals and carve outs have been agreed, the regulatory regime is ready. KSA will be a unique tower market: a power-as-a-service tower market with pervasive and reliable grid, a tower market with a preponderance of decommissioning over build-to-suit projects, and a need for innovative urban infrastructure solutions for 5G-enabled smart cities.