Ashurst are one of the leading legal advisors to the tower industry. Following April 2019’s TowerXchange Meetup Europe, TowerXchange sat down with partners Nick Elverston and Amanda Hale to discuss how legal and regulatory changes are affecting the industry. Three big changes dominated the conversation: how negotiations are changing as the profile and volume of buyers and sellers changes; how convergence of digital infrastructure classes is affecting valuations and the operational constraints faced; and how the tower industry will change as regulators, governments and municipalities ramp up their support for mobile network and fibre roll outs.
TowerXchange: Since we spoke last year, what has Ashurst been up to in the telecoms infrastructure space?
Nick Elverston, Partner, Ashurst:
Ashurst have been busy, thank you for asking. The digital infrastructure sector remains extremely active, we are still seeing plenty of activity in towers but have also been dealing with expansion in adjacent sectors, like fibre in all of its various guises.
We remain active in towers across Europe, Asia and the United States and have worked on tower deals in Australia and Southeast Asia too. In Europe, there have not only been tower sale and leasebacks, but also tower activity in the form of reorganisation of tower portfolios, even if they haven’t yet changed hands. For example, in the UK you have two joint ventures (Cornerstone and MBNL) which are MNO owned and one of which at least is undergoing internal changes. It is no secret that Cornerstone has been looking at what it can do following Vodafone’s announcement that they will think about tower deals, and there has been lots of interest in what happens next.
TowerXchange: Is it neutral host and adjacent sectors where you’re seeing the most interesting new flow of work for you?
Amanda Hale, Partner, Ashurst:
Yes - new workflows are emerging as towercos evolve from passive infrastructure providers to neutral hosts, targeting not only event spaces like stadiums and shopping malls, but also bidding for bigger projects like rollouts along transport routes or in cities. 5G and the increased volumes of data also require fibre, which is becoming another increasingly attractive market for infrastructure funds. We are seeing deals in this space using a similar model to the sale and leaseback model in towers. Towercos are also targeting the IoT sector, but this will be a longer-term game as the ecosystem is still in its infancy.
TowerXchange: Your panel at Meetup Europe addressed the different models of monetising/creating efficiency in towers for MNOs. What are your personal thoughts on what MNOs should be looking to do with their assets?
Nick Elverston, Partner, Ashurst:
What should MNOs do? It’s horses for courses. It depends completely on the strategy of the MNO, so there is no blanket recommendation. For example, Deutsche Telekom’s towerco Deutsche Funkturm (DFMG) appears comfortable in its position as captive but with a healthy degree of independence. They can leverage being a subsidiary of a very strong operator, whilst also having the independence to provide access to third parties.
From what we heard at the TowerXchange Meetup, MBNL benefit from the insights into MNO strategy they get from being a joint-owned captive towerco.
Clearly independence is important whether the towerco is captive or independent. You want to create a professionalisation of the tower function, and that has happened at both DFMG and MBNL. They are no longer just part of the parent organisation, just a cost centre. But beyond the formal separation you need to create a culture of independence. So the first stage would be to create a more efficient delivery organisation, to make your towers perform as they should, then you can look at how to monetise them by opening them to third parties. At that stage do you then need to bring in outside investors? I think you probably wouldn’t bring in outside money if you didn’t need to, so once you’ve set up your separate tower function, it becomes a question of access to funds.
you have to ask if there is a risk that the market may become flooded? Towers are still selling for good multiples, but if you’re planning to sell them, it might best not to wait for waiting’s sake
Towers are sold when businesses need the capital and are usually kept when they don’t.
Amanda Hale, Partner, Ashurst:
… and MNOs will be needing money! The 5G auctions are, to date, proving to be expensive (Italy is an example), which may push operators to monetise their towers and, potentially, their fibre assets, in order to pay for the network densification needed for 5G (just as the 4G spectrum auctions incentivised network sharing).
However, I would sound a note of caution - there has been intense bidding to date in tower auctions by infrastructure funds and independent towercos, but now a significant number of operators look to be preparing to sell sizeable tower portfolios across Europe (including Vodafone, Orange and potentially Deutsche Funkturm) you have to ask if there is a risk that the market may become flooded?
Towers are still selling for good multiples, but if you’re planning to sell them, it might best not to wait for waiting’s sake.
TowerXchange: So, besides more towers coming to market, what other new trends do you think will be important over the coming years?
Nick Elverston, Partner, Ashurst:
I would say that the Master Service Agreement and Master Lease Agreement (MSA/MLA) are gaining in importance in the deals we are seeing. You have more sophisticated sellers coming to market, just as some potentially less sophisticated buyers are putting up money for towers (compare a serial acquirer like Cellnex to some infrastructure funds who are doing their first deals).
We have recently seen sellers retaining a lot more control over how their towers are managed post-sale and more provisions around where towercos rollout, when they build and who is going to do the building and maintenance. Whereas some tower deals can be seen as relatively straightforward financial transactions, these new agreements dictate operational terms to the acquirer and gift greater control to the anchor tenant - that will have knock-on effects for valuations.
TowerXchange: With the latest speculation about Huawei’s role in UK 5G rollout being limited, what’s your take on the role macro-political issues will play on the development of digital infrastructure? Do you foresee more changes to regulation or policy?
Nick Elverston, Partner, Ashurst:
Well, Huawei tend to be both good on price and proactive on new developments, so their exclusion could push up costs and slow down rollout which could, in turn, mean build-to-suit and densification happens more slowly.
Amanda Hale, Partner, Ashurst:
Even where no ban has been imposed, there are still question marks over security issues and, whether or not the concerns are valid, there may be reputational risks associated with using Huawei equipment which may become relevant to neutral hosts – this is a question we see being asked in due diligence.
However, I think there is a broader point around cybersecurity that is worth raising. As neutral hosts move into adjacent sectors and deploy active equipment, they open themselves up to greater regulatory scrutiny which could cascade through all their operations, in particular around cybersecurity, data protection and interception. If towercos aren’t already doing so, they will need to start focussing on it.
TowerXchange: The shape of infrastructure is changing, as are the relationships between infrastructure owners and their customers. Can you talk to us about some of the legal implications of these shifts and what towercos need to be aware of as they diversify?
Amanda Hale, Partner, Ashurst:
A key change as towercos move into neutral host service provision is the government’s focus on the rollout of 5G and ultrafast broadband. This has substantially increased the engagement of infrastructure providers’ with public bodies.
The UK government is funding infrastructure rollouts through subsidies; whilst municipalities are granting access under long term concessions to street furniture in return for rolling out mobile and Wi-Fi networks. Municipalities are also encouraging hospitals, schools and libraries to give access to their buildings and act as anchor tenants. These projects result in a range of different customers for the towers; not just mobile network operators, but other corporates and the public sector as well. The contracts differ accordingly and, importantly, will often be shorter term than a typical MSA.
Nick Elverston, Partner, Ashurst:
Governments are also looking to rollout connectivity along the rail and road networks, to enable innovations including driverless cars, digital railways and smart communications. In the UK, we’re working on Transport for London’s procurement for the rollout of a mobile and fibre network on the London Underground. Network Rail is also interested in doing something similar on the mainline network. This is a global trend and we are doing the same type of project in the New York subways.
More generally, a lot of Ashurst’s work in the U.S. is on public sector projects, for example involving the construction of telecoms infrastructure along the public highways under a concession. A neutral host will build and operate that concession for 15 years to certain specifications. That’s a very different model to selecting sites, permitting, building, operating and leasing them yourself.
TowerXchange: What legal challenges could result from a closer relationship between municipalities and towercos?
Amanda Hale, Partner, Ashurst:
Public bodies are often new to connectivity projects and don’t always appreciate the commercial or operational challenges that towercos will face when rolling out 5G. The government is trying hard to bridge the knowledge gap with guidelines and template documents.
From a legal perspective, engaging with the public sector is very different from doing deals in the private sector – public procurement rules apply, state aid issues need to be dealt with, transparency requirements are significant, profitability and returns often heavily scrutinised and timelines can be extensive. It is important to be prepared and to get involved in the process early, to ensure you can influence how the deal gets structured and the concession terms.
Beware of the concept of “exclusivity” in concessions. In the early days, public bodies were often unaware that regulations exist that cut across exclusive arrangements. Concession agreements are now being rewritten to grant exclusivity “subject to regulatory requirements” which is quite a different thing.
TowerXchange: We talked a lot about the relationship between infrastructure owners, MNOs and local government at Meetup Europe this year. It’s clear there is a lot of frustration on both sides. Do you see any events or actions which could catalyse better access to street infrastructure? What should digital infrastructure players be thinking about in the mean time?
Nick Elverston, Partner, Ashurst:
From a legal perspective, in the UK, the Electronic Communications Code is the key tool to facilitate network providers’ rollouts by giving them rights to access to land and streets (see sidebar for further details). Landlords, aware of operators’ rights under the Code, have generally reached agreements with operators voluntarily and operators have not had much recourse to the tribunal deals with any Code disputes.
However, recently, the Code was updated to change the basis on which landlords could charge for access to their land. The government’s clearly stated intention was for this to significantly reduce rental charges. There have been test cases involving the updated Code to get access to local authority infrastructure (the first by Virgin Media in late 2018), which will help other operators understand what they can do. That could reduce costs for towercos but it could also be a threat to people with existing portfolios who are priced out because someone without legacy assets can quickly build out a network with an inbuilt cost advantage. That could really change the dynamic.
Amanda Hale, Partner, Ashurst:
In addition to the Code, there are some less well known regulations which Ofcom brought into force a few years ago (the Communications (Access to Infrastructure) Regulations 2016). These require utilities such as power, gas, water, and local authorities to allow access to their infrastructure to rollout fixed and mobile networks.
The government have admitted they have had limited success in the UK to date and has stated its intention to carry out a review of these Regulations in 2019 to assess if there are improvements that could be made to further boost investment in infrastructure. It has also called upon Ofcom to work collaboratively with other regulators to ensure that these opportunities are explored, and barriers addressed. Whether or not this will result in significant change in practice remains to be seen.
Infobox: “The Code” and its impact on UK digital infrastructure
In the UK, the Electronic Communications Code (the “Code”) regulates the legal relationships between site providers and operators. The Code confers rights on network operators or network infrastructure providers to install equipment in streets and benefit from simplified planning procedures.
Rights to install infrastructure on public and private land are normally subject to an agreement between the site provider and the operator. Where this cannot be achieved, the Code allows either party to apply to a tribunal for an agreement to be imposed. To get the benefits of the rights under the Code, an operator has to make an application to Ofcom.
