TowerXchange had an opportunity to interview Tony Dolton, CTO of Vodafone Egypt, who was CTO of Vodafone Ghana from Vodafone’s acquisition of the Ghana Telecom in 2008 through July 2011. Vodafone Ghana’s operational lease deal with Eaton Towers was Tony’s brainchild.
TowerXchange: Thanks for taking the time to speak to us Tony. First of all, please could you tell us a little about your background and the how your experiences at Vodafone Ghana motivated you to agree this landmark tower sharing deal?
Tony Dolton, Vodafone:
I’ve been involved in tower sharing on both the buy-side and sell-side for many years. I was first involved when I was Director for EMEA Managed Services at Motorola, where we were trying to buy towers and get involved in tower sharing. I was subsequently involved in putting together the Orange-Vodafone towerco in 2007, which was probably a case of too much too early. We completed the deal with Eaton Towers in Ghana, and are considering how a tower deal in Egypt might work. So I have a reasonable view on the expectations and objectives of tower sharing from both the vendor and operator perspective, and on both counts I consider Ghana a success.
Vodafone bought Ghana Telecom in 2008, and there was very limited tower sharing at that time. Vodafone’s priority was to expand and clean up a poor quality network – it needed investment and we needed to reduce costs. A limited tower sharing deal with MTN was agreed pretty quickly that helped with rapid network expansion but did not address the legacy costs issue. We needed to reduce cost of both network delivery and operations, so we issued an RFQ to several Tower Companies including American Tower, Helios and Venture Towers (later acquired by Eaton). None of the initial bids met our objectives – at the time the TowerCo business cases were focused on build or buy, with a 10-15 year payback and I felt the opex levels being offered were unacceptable to our long term business in Ghana.
Our legacy towers were generally in poor condition and very expensive to run. We knew that opex could be reduced by making the sites more efficient, through using more efficient generators and by tightening up on fuel security. So we wanted to create a model where a TowerCo would invest to make the sites more efficient and thus reduce the operational cost of running the site whilst at the same time make the sites more attractive to other operators to share with us – creating a revenue stream, which effectively could be seen as a further cost reduction in operating the site. So we came up with a different deal structure: an operational lease with the “right to use” the towers for a period of time; a requirement to invest to generate efficiencies; and by selling space to other tenants, creating the revenue stream.
We ended up agreeing a deal with Eaton Towers, although the final selection was very close. The deal meant a lump sum cash payment was invested to upgrade the legacy towers, and for us an immediate opex reduction of over 30%. The TowerCo made money by firstly reducing the operation cost of running the site and secondly by selling the space on the site.
TowerXchange: What were the advantages of the operational lease model you chose?
Tony Dolton, Vodafone:
We kept the asset which took a huge amount of complexity out of the deal, (site valuations etc were removed) and opex was secured. At that time our focus was infrastructure efficiency and reducing our operating costs. Of course the option to sell the towers at a later date is still available if circumstances change.
I believe it was a good deal for the tower company as well since whilst they did not own the asset they did have a long right to use contract, and they didn’t have to fund the cost of acquiring the towers, so they weren’t saddled with that debt. They got the contract, which is a valuable asset in it’s own right.
TowerXchange: Structuring tower sharing contracts isn’t just about financials, but is also about transfer of risk – tell us who had responsibility for what.
Tony Dolton, Vodafone:
We had to do something about opex – among other things we had a problem with diesel theft. Working with the TowerCo, we only pay for diesel actually consumed, so passing on responsibility and risk to the TowerCo for the site monitoring and security.
The TowerCo also has responsibility to upgrade the passive elements such as DC and AC power, battery and generator replacements through the life of the contract. We included suitable break clauses in contract in the event of new technology that would make a significant reduction in opex; in addition we had contract break points where the fees would be benchmarked across Africa and adjusted downward in the case where fees were reducing, according to a formula.
The TowerCo invested to make towers more efficient, and were motivated and better positioned to increase the third party tenant rate – in fact, we structured the deal such that we believed the TowerCo could only make a profit if they achieved efficiencies and co-locations.
The deal took a long time to agree as Tower Companies were used to realizing value by buying towers. It took time to understand each other’s needs, and to agree various safeguards suitable for both sides.
TowerXchange: Why did an operational lease suit Vodafone Ghana’s objectives better than say a sale and leaseback or Indus-style joint venture
Tony Dolton, Vodafone:
Every tower deal is different, depending on what is motivating the deal. Sale and leaseback deals do not always end up in a reduction of opex as the TowerCos have got to pay back the cost of borrowing to make the acquisition. I would rather they used their cash to invest and make the network more efficient. From the TowerCo’s point of view, the sale and leaseback business case is based on borrowing money to buy towers for which they control recurring revenue. The way TowerCos create value is in selling the space and reducing operating costs.
I feel that if you want cash then a high priced sale and leaseback deal is effectively a financial deal. Your opex doesn’t go down, and once the assets are sold you may find yourself in a weaker negotiating position.
The operational lease deal structure worked well for us in the circumstances we were in and I would certainly consider it again if it was the right thing to do for the business.
TowerXchange: To what extent was it part of your motivation in working with the TowerCo to secure specialist skills and people to look after passive infrastructure?
Tony Dolton, Vodafone:
A CTO has many areas to manage whereas a TowerCo’s entire focus is on delivering a cost effective site, so I believe there are good synergies and benefits for OpCos to work with Tower Companies. The TowerCos still use local skills and suppliers to deliver their product, and often the Operator will outsource the local team to the Tower Company. There was a lack of expertise initially Ghana, but with the right focus and training the local team can perform very well.
TowerXchange: Tell us a bit about the transfer of assets to the TowerCo.
Tony Dolton, Vodafone:
The greatest challenge in any Tower deal is the transfer of sites – ensuring you’re giving them what you say you’re giving them. In Ghana, we did a snapshot audit, which was easier since we owned the sites. We handed over about 100 sites per month, and had built another 1,000 sites by the time the deal was done, a mixture of brand new and original very old fixed network sites. It was important to have a good governance process, controlled through regular meetings.
TowerXchange: Is infrastructure sharing working in Ghana? Is it a good or a bad thing that the three leading operators each worked with different TowerCos?
Tony Dolton, Vodafone:
On the whole competing operators don’t work well together, so I’m not greatly surprised that three of the OpCos’s ended up working with different TowerCos. I am surprised however that there are three incumbent TowerCos in Ghana chasing six operators, two of which are new. I would have expected to have two Tower Companies for the size of business in Ghana, but it seems each of the three are doing well.
If a TowerCo pays too much for towers and do not achieve good co-locations and a reduction in opex, they could lose money. So Ghana is still probably a challenging environment.
TowerXchange: Are there any transferable lessons from your experiences in Ghana to other countries in Africa?
Tony Dolton, Vodafone:
Every market is different. In Egypt we have three operators with similar networks, and I believe it would be difficult to make a traditional TowerCo business case without some sort of network consolidation so for a TowerCo model to work in a country like Egypt we probably have to have a slightly different model than the traditional one.
I think when looking at taking advantage of a tower opportunity, it is important to establish what you’re trying to achieve – return of cash to the business is great or often necessary in in the right environment, but if you can reduce your requirement for short term cash, it might be better to structure a deal more likely to give a reduced opex, such as the deal we completed in Ghana – and lower opex is always beneficial to the long term business.
Eaton’s verdict on their operational lease deal with Vodafone Ghana
“A deal structure which allows the operator to retain ownership of their towers, gets around many complexities that a tower sale deal presents, and is the best way for operators to reduce opex significantly and immediately, as well as escape the capex requirements for site refurbishment, and new roll out” – Keith Boyd, Business Development Director, Eaton Towers
Egypt market overview
Population: 82.5m
Mobile subscribers: 83.4m
Mobile penetration: 101%
GDP per capita (PPP current USD): $6,324
Internet users per 100: 35.6
(Source: World Bank, 2011)
