The new shape of the Russian tower market

Formats the Html codes.FormatFix the Html to be XHtml compliantFix Write Validate that the text is XHtml compliant.Validate Proofing In the past three months, three of Russia’s operators have revealed plans for their tower portfolios. VEON was the first to move, selling 15,400 sites to Service Telecom; MTS came next with shareholders approving the formation of wholly owned towerco, Tower Infrastructure Company; then MegaFon announced the formation of a new independent towerco in conjunction with Vertical and Kismet Capital Group. TowerXchange examines the developments and the lay of the land in the Russian tower market.

In early September, VEON announced the sale of its 15,400 site Russian tower portfolio to Service Telecom marking the first major tower transaction in the Russian tower market. In spite of no major tower sales by Russian operators, Russia already had a healthy towerco landscape as independent players rolled out new sites across Russia’s vast landscape, also rolling up the portfolios of a fragmented towerco ecosystem in the process. VEON’s tower sale had long been in the making, a previous attempt having reached advanced stages prior to being pulled. Their 2021 deal signing set off something of a domino effect with both Megafon and MTS announcing their own tower plans shortly afterwards.

At an extraordinary general meeting in early October, MTS’ shareholders approved the spin-off of MTS tower assets into a separate wholly owned subsidiary, Tower Infrastructure Company. Of Russia’s operators, MTS had always been the least keen to divest towers but a few years ago announced that they were taking steps to share their infrastructure, making around a third of their total tower portfolio available for co-location. The extent to which this had got off the ground is unclear, but the formation of Tower Infrastructure Company places a targeted focus on driving up co-locations of their portfolio of assets, signifying a major step for the operator.

The formation of operator owned towercos has become something of a major trend in the global towerco landscape at present. In Europe, numerous high profile carve outs have been announced in the past couple of years – Vodafone's formation of Vantage Towers, Orange’s formation of TOTEM, Telia and Telenor’s formation of Telia Towers and Telenor Tower Holdings respectively, plus Deutsche Telekom’s extention of their Deutsche Funkturm strategy into Austria with the formation of Magenta T Infra. In the Americas, América Móvil had previously carved out their Mexican assets into Telesites but in 2021 announced the carve out of 36,000+ sites in 15 markets to form Sitios Latinoamérica. Australia has also seen the formation of two operator owned joint ventures – Telstra's Amplitel and Optus’ Australian Tower Network.

In many instances, the operators have looked to monetise stakes in their towercos, either through an IPO (as was the case of Vantage Towers) or through the sale to long term investors such as infrastructure, sovereign wealth and pension funds (for example, Brookfield’s acquisition of a stake in Telia Towers, or Telstra’s sale of a stake in Amplitel to an investment consortium involving Australia’s Future Fund, Commonwealth Superannuation Corp and Sunsuper).

Monetisation appears to be very much on the mind of MTS. In documents surrounding the formation of TIC, MTS stated that “If MTS’s tower assets were to be monetised, the Company could gain additional proceeds that could be used to reduce debt and/or further invest in the development of MTS’s client-facing digital ecosystem.” Whether MTS would look to divest a majority stake and relinquish operational control or whether the would prefer to sell a minority stake remains to be seen.

MegaFon had previously carved out their 17,000 towers into a separate business unit, First Tower Company although TowerXchange understands this to have been more of a legal asset separation than the formation of a fully functioning towerco. First Tower Company was to be the exclusive new build agent for MegaFon, although this did not materialise.

As an interesting side note, First Tower Company was headed up by Alexander Teremetsky who has recently been announced as the CEO of MTS’s Tower Infrastructure Company.

In late October, MegaFon however announced new plans for their tower assets. Whilst VEON has announced the complete sale of their tower assets to an independent towerco, and MTS has announced the formation of a wholly owned towerco subsidiary, Megafon has opted for something in the middle. Megafon has announced the formation of a new towerco venture with Russian independent towerco, Vertical. Megafon will transfer ownership of its 17,000 towers to the venture, securing a 25% stake in the entity, whilst Vertical will contribute its 5,000 sites to the joint venture, with the towerco’s main shareholder, Kismet Capital securing a 65% stake in the entity. As part of the deal, First Tower Company was valued at RUB94.2bn (1.14bn).

The new, as yet unnamed towerco, will retain full independence, with MegaFon stating that “the structure of the combined company assumes that neither MegaFon nor any other telecom operator will be able to gain control of the company or a majority in the board of directors.” Kismet Capital Group will have five representatives on the board of directors, whilst MegaFon will have two.

A tie up between Vertical and MegaFon had been expected since Ivan Tavrin’s Kismet Capital Group secured a controlling shareholding in Vertical in 2019, with Ivan Tavrin having served as CEO of MegFon from 2012 to 2016. To date, Vertical’s experience has been restricted to the Moscow region, with their 5,000 sites having been built as part of a single project to deploy light poles in the city. The new venture will give the company’s shareholders a more national reach. As a closed process, few details have emerged on the structure of the deal. One question mark is whether the new towerco will handle all new build on the part of MegaFon, or given the inexperience of Vertical and their shareholders in working with local authorities outside of Moscow, whether new build will continue to be given to other towercos operating in the market.

Russia’s newest mobile market entrant Tele2 had previously discussed a tower sale, but since its takeover by state-backed national telco Rostelecom in 2020 no further details have emerged. It is widely expected however following the steps of the other operators in the market, that Tele2 will follow suit. Tele2 are understood to have a portfolio of around 13,000 towers in the market and continue to expand their network to deliver nationwide coverage.

Figure one shows tower ownership in the Russian market when all announced carve outs and tower sales have been completed. In addition to TIC, the towerco being formed by Vertical and Kismet Capital Group and the newly enlarged Service Telecom, further towercos operate in the Russian market, the most notable of which being Russian Towers.

Whilst Russian Towers has missed out on recent tower sale activity by the operators, the towerco has built a strong presence in the Russian market, having continued to build new sites at a fast pace whilst rolling up the portfolios of a fragmented ecosystem of smaller players. Beyond Russian towers, other independent towercos and developers operating in the Russian market are understood to collectively own around 3,000 sites, with Russian Towers looking to roll up the majority of such players. As of the end of 2021, Russian Towers owns 7,500 towers in the Russian market and is focusing on both fibre and DAS, having completed recently completed a flagship project on the latter, with further high profile projects in the pipeline.

In addition to ground based towers and larger shareable rooftop sites, there are around 65,000 non-shareable rooftop sites in usage in the Russian market, for the most part owned by the country’s MNOs.

Another feature of 5G discussions in the Russian market is the government’s specification that operators must use domestically manufactured equipment. As a result, Nokia, Ericsson and Huawei are setting up production facilities in the country, whilst local conglomerate, Ros Technologies is involved in the design and manufacture of their own equipment.

In mid-2021, Russia’s Deputy Prime Minister Dmitry Chernyshenko announced that 5G networks would be launched in the largest cities in the next three years suggesting a 2024 commercial launch of the technology.

Whilst 5G rollout has been subject to delays, new site rollout and co-location growth continues apace in the Russian market. In terms of coverage most work has been done, bar road and rail networks where coverage has been limited to date. Beyond extending coverage to such transport routes, the main driver of new site rollout is improved capacity in dense urban environments, with some sources suggesting that mobile data traffic to be growing by as much as 45% per year.

One insider in the market gave an estimate that two thirds of the network in Russia is yet to be built. With over 150,000 mobile sites already live in the Russian market, this gives an eye-watering 300,000+ sites to be added – a healthy pipeline by anyone’s standard! AcceptReject