Devid Gubiani, President and CEO, PhilTower speaks exclusively to TowerXchange about the new JV formed with MIDC, set to transform Philippines’ tower market.
The Philippines is home to a distinct three-MNO market formed of Smart, Globe Telecom (Globe) and new entrant DITO, underpinned by a common tower policy. The favourable regulatory framework, immense build-to-suit (BTS) opportunities and the prospect of significant sales and leaseback (SLB) deals with Smart and Globe spurred huge interest in the country.
However, its towerco market is bloated with some 21 independent tower companies (or common tower companies as they are known locally), consisting of KKR-owned Pinnacle Towers – the country’s largest towerco – pan-Asian heavyweights EdgePoint Infrastructure and EDOTCO, followed by PhilTower, MIESCOR Infrastructure Development Corporation (MIDC), Unity, CREI Management Services, and a long tail of middle market towercos. Two of those towercos, PhilTower and MIDC, looks set to alter that dynamic. In February, both organisations announced that they will merge, creating the second largest towerco and the first public consolidation in the Philippines. The transaction is subject to regulatory approval from the Philippines Securities and Exchange Commission and the Philippine Competition Commission.
The JV would have Philippine-wide coverage and is well placed to support the growing connectivity needs of the country, providing a platform for 4G and 5G mobile network infrastructure across the country.
Both towercos are heavily transacted with Globe. MIDC purchased 2,180 towers from Globe in August 2022, with 1,348 of those currently in its hands. This consists of 72% ground-based towers and 28% rooftops. TowerXchange believes MIDC’s overall site count to be 2,654.
PhilTower operate close to 1,500 towers – its assets are comprised of an approximate 1,350 (990 of which are already in the hands of PhilTower) sites which come from acquiring Globe assets in the southern part of the country, with another 450 towers built by PhilTower themselves. A third of the total sites are in the Luzon region, in the north, and the other two-thirds situated in the south.
In terms of the organisational structure, Devid Gubiani, President and CEO, PhilTower will front the new organisation as Group CEO, with a senior leadership team that will include a CFO and CCO being appointed by the shareholders, the largest of those being investors Macquarie and Stonepeak, and Meralco (who own MIDC and is the largest power co-operation in the country, managing grid connections across much of Metro-Manila).
Its aspirations are high. The new operation is committed to build 2,000 BTS towers within the next three years, potentially lifting its tower count to upwards of 5,000 towers by then if its BTS commitments are honoured from past SLB transactions.
Smart and DITO run into issues
The expansion of towercos’ businesses hasn’t been seamless, with financial irregularities curtailing digital infrastructure development in the Philippines. DITO has experienced financing issues. DITO was required to cover 70% of the Philippines by July 2022, a target which they hit, but preferred to keep their tower deployment in-house to reduce the risk of their licence being revoked if the new towercos were not up to the task.
Secondly, Smart’s parent company PLDT was rocked by a probe into a US$886mn budget overrun. The operator could not account for 12.7% of its capex investment in the past four years, which resulted in the senior leadership team being suspended or leaving the company.
PhilTower’s Gubiani said that the lack of growth in the MNO space has had a destabilising effect on the tower market in the Philippines. “The hard reality was nobody within the industry was happy with that situation.
“The DITO business model is different than any typical MNO in which they build their own sites and went on their own build approach rather than heavily relying on towercos. We had a second largest co-location order from DITO on our BTS portfolio, but very marginal on the SLB that we had acquired. So, DITO wasn't really going to save the day,” he added. “And Smart was missing in action through the whole of 2023 and a very good part of 2022 because of internal governance issues. And so there was very little build-to-suit to work on because Globe was the only one active.”
However, even with Globe, there were still operational challenges. Globe took the decision to focus more on co-locations than new sites in 2023. After building 2,000 towers a year between 2020 and 2022 with towerco partners this dipped to just 500 in 2023. And with the market slowdown, PhilTower looked at options as to how other towerco market assets would complement its overall portfolio in the event the MNO market would stimulate once again.
“Of course there was the Smart portfolio,” said Gubiani. “EdgePoint was a realistic candidate. Looking at where everyone is going on their cycle of investment, MIDC represented the closest match through Stonepeak’s investment with Meralco.”
Gubiani continued explaining the origin of the idea to merge with MIDC: “We decided in the tail end of last year to look into the possible combination of these two portfolios, while keeping the Master Lease Agreements that we had in place (MLAs – 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). Once synergies are created, we will then operate those two sets of MLAs with the respective operators.”
Just in time
With the expectation that Smart would come back to life, said Gubiani, the JV would then be suitably placed to meet any rollout plans. Its SLB portfolio of close to 3,000 and BTS network giving it the scale needed. “We thought we would come out with a very aggressive structure and a very professionally run team to be of extremely good use when the Smart turnaround was going to happen – including the management reshuffle within their organisation,” he noted.
Smart’s new management, to regain its position as market leader by mobile SIM subscribers, came with strong intentions to build its co-location presence by ordering 1,000 sites that are distributed with their partners. Despite a lengthy five-month process of deliberating on the valuation of the merger and the converged entity’s business plan, the JV was then formed early 2024. “We started seeing signs of life, with market responding positively to what we were doing, and so we knew the merger was going to have a productive outcome from day one,” expressed Gubiani.
He said the JV will be very much akin to the JV being formed between Pan Asia and Apollo Towers in Myanmar. In this circumstance, both companies retained the contractual commitments it had with their MNO customers. The only core element of the organisation that merged was both the management and operations team.
Keeping the companies operating separately once the JV is finalised would mean contractual obligations, debt structures, build commitments, and MLAs will be kept separate, ensuring less complexity. He also emphasised the importance of no overlaps or duplications in its operations, with parallel infrastructure from MIDC nor PhilTower created near the other’s sites. MIDC’s towers in the Luzon region complement the locations of the 450-site portfolio PhilTower has there. “As long as we are in those operating conditions we are in no rush to change that business model,” adding that the JV will spend the first six months to complete organisation integration and transformation processes.
Consolidation to follow in the Philippines?
Gubiani predicted that the JV could have a knock-on effect for the Philippines tower market. Despite the feeling the MNO market could turn a corner with Smart and DITO potentially on the cusp of making a bounceback, towerco challenges remain. He believed that the merger could instigate a period of consolidation in the market, and possibly one or two smaller towercos formulating an exit strategy. “We see SkyTowers Infra selling 30 towers and CREI undergoing a sale process,” he said.
“We are in an environment where cost optimisation in the operation is really biting hard because of escalating costs. When you have a portfolio of sites scattered around the country versus somebody that has a big chunk of few hundred sites in one single geography it’s difficult to be cost efficient. That’s why smaller towercos are looking to executing their exit and abandoning the market.”
Operationally and commercially, the JV may be a productive force, as the organisation will be helping to support Philippines’ goal to hit 50,000 tower sites to achieve the ideal ratio of mobile subscribers per tower. TowerXchange estimates that 35,226 towers are currently installed in the country. The JV is further complemented by the fact that Meralco operate in the energy space, adding a feather to their cap.
Towers in Philippines are heavier in comparison to other countries to resist adverse weather. The large majority of towers carry standard 2G, 3G or 4G spectrum, with many upgrades earmarked with either more 4G bands or 5G being introduced into those sites. “The issue in the Philippines was that site acquisition was so painful that operators wanted to put too much frequency and technology on each site. This gives the perception that those towers need to be heavily loaded and heavily power consuming sites,” Gubiani said.
“The new BTS orders are now slightly lighter from a structural perspective and slightly lower in consumption as they are more infill. We haven’t seen networks going wide, but we see the networks going deep, meaning a lot of infill, a lot of additional 4G and 5G capacity coming into the existing coverage areas,“ he added.
MNOs are keen to see 4G and 5G capacity densify into the networks, but higher speed coverage, at least for now, is limited to urban and suburban sites, potentially benefitting locations such as the Metro-Manila area in the north, and Cebu City and Davao in the south. To support coverage development, he said his organisation have developed skill sets in designing street poles and street furniture that are uniquely catered for 4G and 5G infill.
“From our side we will continue seeing this happening and probably seeing more execution and capability on that front because the areas in which this type of infill is required correspond to the areas where Meralco is very strong,” Gubiani said.
He concluded that there are good times ahead when DITO and Smart come back to the fold. He said that by the end of the year DITO will expect to hit 15-16mn mobile subscribers, helping them to break even. “With our operational excellence in those territories that we have developed demonstrable strength, we would be able to get a better chunk of the build-to-suits that are awarded above and beyond the build-to-suit commitment from Globe. Equally with Smart coming back to play the key focus for them is co-location.
“We hope that over the short to mid-term, they will become a build-to-suit partner and being ideally positioned for certain geographies, which makes it equally interesting for Smart.”
Read the latest of what is happening in the Philippines, inside TowerXchange’s Q1 2024 Asia Regional Guide.
Meet companies such as PhilTower and other Asia towerco stakeholders influencing the region’s tower landscape at Asia’s leading tower event – TowerXchange Meetup Asia – 26-27 November, Shangri-La Kuala Lumpur. Click here for more details of this year’s event.
