On 6 September 2021, VEON announced that it had reached a deal to sell its 15,400 site Russian tower portfolio to Service-Telecom for a total consideration of RUB70.65bn (EUR848mn). The deal marks the first major sale and leaseback transaction in Russia’s vast tower market and is the first big step in VEON realising the value of its 50,000 towers across Russia, and its European and Asian markets. TowerXchange examines the transaction, the Russian tower market, and the implications for VEON’s future tower strategy
In their Q4 2020 results, VEON announced that it would create towerco business units in each of its markets, looking at ways to better realise the value of its 50,000 site strong tower portfolio. How the operator planned to realise the value remained open, with the rollup into a single towerco, the formation of joint ventures or the sale of a minority or majority stake all options under consideration.
Russia was always the most advanced of the markets in terms of formation of the towerco business unit, and was a top priority market in which the operator was looking to crystallise the value of its assets. VEON had carved its then 14,500 sites into National Tower Company back in 2016, reportedly reaching advanced discussions to sell the unit (with Russian Towers understood to be the front runner), before the plug was pulled on the sale. Interest however always remained in the portfolio, with a healthy towerco market already in place in the country.
Service-Telecom formed in 2015, headed by CEO Nikolay Berdin, and with the backing of the top three Russian banks. Within its first year of operations the company built 350 sites, and has continued to rollout new sites whilst also completing a handful of towerco acquisitions (Link Development in 2018, Technoresource in 2019 and Neva Telecom in 2021). The towerco’s portfolio currently stands at 2,851 sites, the majority of which are located in the investment attractive regions of Moscow and St Petersburg, although the company continues to expand nationally. Service Telecom’s sites are all ground based towers and have a tenancy ratio of 1.9x, with revenue deriving from each of Russia’s four MNOs equally.
The deal will add 15,400 sites to Service-Telecom's portfolio, propelling the towerco to just outside the top 20 largest towercos in the world (21st place). The portfolio they are inheriting includes ground based towers and tall shareable rooftop sites (VEON's smaller, non-shareable ones were not included in the deal). Currently the tenancy ratio of the inherited portfolio is 1.3x, although non VEON tenants have typically been agreed on a barter rather than commercial arrangement - Service-Telecom's priority will be to commercialise the assets rapidly, leveraging the systems in place from their existing operations.
The deal between VEON and Service-Telecom marks an important landmark for the Russian tower market. A handful of strong independent towercos (Russian Towers, Service Telecom and Vertical) as well as a long tail of smaller players (collectively owning around 3,000 sites) had emerged, and new build and M&A between towerco players had created decent growth opportunities, but a 15,000+ tower deal is a game changer.
Plus further deals appear to be on the horizon.
Megafon has already carved out its 17,000 towers into First Tower Company and announced that it would come to market in 2019. With ex-MegaFon CEO, Ivan Tavrin buying a stake in Russian towerco, Vertical – the latter was tipped to be a front runner in the sale process although several other players were linked with the deal, including a European towerco. Despite a number of talks in late 2019, all has been quiet for a while but the VEON deal may stir things up once again.
MTS had always been the least keen to divest towers but had taken steps to share their infrastructure, making around a third of their total tower portfolio available for co-location. Earlier this month however it was announced that there would be a vote at an extraordinary general meeting (EGM) on 30 September to approve the separation of MTS’s towers into a wholly owned subsidiary, Tower Infrastructure Company (TIC). Whether TIC could come to market remains to be seen.
As for Russia’s newest market entrant, Tele2 – the operator had previously discussed a potential tower sale, but since a takeover by Rostelecom no further tower sale discussions have emerged.
With close to 78,000 ground based towers and a further 65,000 rooftop sites – and the vast majority of towers still captive on MNO balance sheets – the potential for tower M&A in Russia huge. Whether we see the emergence of MNO-owned towercos akin to Vodafone’s Vantage Towers and Orange’s TOTEM in Europe, or whether we see Russia’s other MNOs following in VEON’s footsteps and selling to an independent player remains to be seen. Whilst an undisclosed European towerco had been linked to the Megafon sale, the close relationships between Russia’s existing towercos and the country’s MNOs means a sale to a domestic towerco feels more likely than a sale to an international player (should a sale materialise).
Speaking on the deal between VEON and Service-Telecom, Service-Telecom CEO Nikolay Berdin noted: “The agreement reached with VEON is a key achievement for Service-Telecom on its way to becoming the leading telecommunication infrastructure operator in Russia. With PJSC VimpelCom, as our partner, we expect to drive sustainable long-term growth in Russia while constructing the infrastructure backbone of the digital economy and helping to enhance mobile broadband connectivity for consumers”
Sergey Airapetov, Partner at Aspring Capital (Aspring Capital having acted as the exclusive financial advisor to Service-Telecom) added "We are very pleased to win in a highly competitive process and organize a unique and large-scale transaction for the Russian market”
Progress with VEON’s tower carve outs in other markets
In addition to Russia, VEON has completed the legal separation of their tower assets in Pakistan and has made significant progress in Bangladesh and the Ukraine. These three countries mark VEON’s next top three priorities in terms of value crystallisation of their tower portfolios.
In Pakistan, Jazz’s (VEON’s local opco) 10,500 shareable towers are held in the towerco unit Deodar. Jazz had previously commenced tower sale proceedings with edotco and Enfrashare, and more recently IHS Towers, linked to the sale but for now, no deal has been done. VEON remains committed however to crystallising the value of their assets in the country.
In Bangladesh, the towerco market is very much starting to take off with four towercos (AB-Hightech, edotco, Kirtonkhola Towers and Summit TASC) licensed and receiving BTS contracts from the operators. VEON’s Banglalink owns a portfolio of around 5,500 shareable sites, sites which would be very attractive to the four players looking to gain scale in the country.
In the Ukraine, the towerco market is less developed, with Turkcell’s wholly owned subsidiary UkrTower (part of Global Tower) being the sole towerco operating. Kyivstar, VEON’s local opco, has a portfolio of around 8,700 ground based and shareable rooftop sites which are now held in a separate towerco unit.
VEON also has plans to carve out its assets in Kazakhstan and Uzbekistan, with 1,600 greenfield towers being carved out in the former and 3,100 shareable sites in the latter. TowerXchange is aware of one towerco operating in Kazakhstan, but the towerco markets in each country are yet to really be established. Whether VEON's carve out plans could attract international towerco interest, or whether a local investor expresses an appetite, remains to be seen.
