Vimpelcom’s sale and leaseback process in Russia could be nearing conclusion, with 10,400 of the country’s ~37,000 ground based towers coming to market. The transaction could be swelled by the inclusion of up to a further 19,000 rooftop sites – Russia has 80-95,000 sites including rooftops. While forex and trade sanctions may limit the appetite of Western investors, demand for co-location created by the expansion of Tele2, Antares and by the incumbent MNOs’ 4G rollouts makes Russia’s towers highly sought after.
Russian MNOs have traditionally been reluctant to look at infrastructure divestment with previous tower sales processes having amounted to nothing. Yet as Merrill Lynch, Vimpelcom’s nominated advisors for a potential tower divestment, closed the process for new bids this December with seven proposals received and an eighth asking for an extended deadline, 2015 has seen a major step forward when it comes to the opening up of the tower market.
Vimpelcom, headquartered in Amsterdam, is Russia’s number three mobile network operator behind MTS and Megafon. Along with Russia’s other MNOs their revenues have been hit as a result of Russia’s ongoing economic crisis linked to lower oil prices and Western sanctions over Russia’s role in the Ukraine. Globally the company is believed to be US$25bn in the red with a pressing need to restructure debt.
No stranger when it comes to the sale of their tower assets, Vimpelcom’s Italian subsidiary WIND sold 7,377 towers to Cellnex in 2015 freeing up €693 million in capital (realising €93,941 per tower). In September at an investor summit, Vimpelcom’s CEO of the Russian Business Unit, Mikhail Slobodin called a sale of their towers a “mere opportunity to get more money” referring to them as a “non-core asset”.
What is known about the proposed sale of Vimpelcom’s towers in Russia?
Back in August of this year, Vimpelcom appointed Merrill Lynch as advisors to oversee a potential sale of 10,400 ground based towers (GBTs). The first week of December it was reported that seven bids had been received, each in the order of US$500mn with the highest bid submitted at around US$800mn (US$48,047-US$76,923 per tower). There have further been rumours that the number of sites for sale may increase (an optional 19,500 rooftop sites could take the count to nearly 30,000) and investors have also been asked about their interest in Vimpelcom’s CIS towers.
Which companies are believed to have participated?
Whist details of all the proposed bidders have not been released, Russian newspaper, Vedomosti reported bids from Russian towercos Russian Towers, Vertical and from the Russian Direct Investment Fund in conjunction with UAE Mubadala.
Sources close to two other domestic towercos - Link Development and Service Telecom, have also revealed that they too have bid in the process. Whilst tower counts for these two are in the order of 100-200 (rather than 1500+ of Russian Towers and Vertical), with a big financial partner such companies are interesting platforms. Furthermore rumours of a local Russian tower builder looking to move up the value chain could represent another prospective bidder.
ESN, one of Russia’s largest private companies, established in the early 90s by Grigori Briozkin, is widely thought to have an interest in the Vimpelcom towers. Active in multiple sectors from energy to media through to high tech, ESN have stayed away from the build to suit market, waiting for a big transaction to mark their entry into the tower sector. 10,400 towers for sale could well mark that major transaction.
Whilst current trade sanctions make it very difficult to invest European and US money in Russia at present, Indian, Far Eastern and Arabic investors with fewer restrictions may well have had an appetite to participate in the bidding process. The UAE’s Mubadala represents one such company whilst Quippo Telecom, fresh from the successful exit from Viom Networks in India, could represent another.
Table One: Prospective bidders in the Vimpelcom transaction
Russian Towers
Domestic towerco with over 1500 sites and the backing of investors including UFG, EBRD, Macquarie Russia Investment Fund, ADM Capital, Sumitomo and the IFC. Reported by Vedomosti to have bid in with Goldman Sachs as their advisor.
Vertical
A second domestic towerco reported by Vedomosti to have bid. Currently have 1600 sites and backing from state banks Skerbank & VTB.
Russian Direct Investment Fund, Mubadala and Baring Vostock Capital
Consortium of Russian and Middle Eastern investors getting a mention in reports in Russian papers.
ESN
One of the largest private companies active in multiple sectors, rumoured to have an appetite for a major tower transaction.
Link Development
Russian towerco with 200 sites, revealed by local sources to have bid.
Service Telecom
Domestic towerco aiming to have 120 sites by the end of the year revealed by sources close to the company to have bid.
Quippo Telecom
Successful exit from Viom Networks with access to Indian capital, could well have an appetite for Vimpelcom’s towers.
Russian tower builder
Rumoured to be looking to move up the value chain into owning a portfolio of towers.
Middle or Far Eastern investors
Unlike US and European investors not subject to trade sanctions.
Why does now represent a good time to be getting involved in the Russian tower market?
The Russian mobile market is fiercely competitive, with five MNOs including the long established Megafon, MTS and Vimpelcom, newer market entrant Tele2 and Antares, A Russian company yet to enter commercial operation but focused solely on data services. Both Tele2 and Antares are aggressively expanding their networks opening up strong potential for co-location, while 4G expansion rollout capex opens up further requirements for infrastructure expansion for Megafon, MTS and Vimpelcom.
With decent lease rates and a good potential for a Russian towerco to increase their tenancy ratio rapidly, the Russian market represents a very attractive proposition for an acquisitive towerco.
What potential complexities does the market face?
The devaluation of the Ruble and a project 15% inflation rate in 2016 represents one of the biggest challenges to the market (see figure one). With lease rates being paid in Roubles questions arise surrounding the appetite of international investors in owning towers in the Russian market. Simultaneously the cost of imported technologies will continue to rise affecting the economics of sites. As to whether this is prohibitive, attitudes are split. Whilst some view the market with scepticism others comment that the asset class is seen as stable and with long term contracts available and the right deal structure, investments in Russian towers can present an attractive opportunity, in spite of forex risk.
Figure 1: USD to RUB exchange rate 2011 – 2016
Trade sanctions on Russia following their involvement in the Ukraine represents a second challenge that creates a barrier for Western investors.
Further concerns exist around Russian MNO’s willingness to relinquish control of their sites with some observers believing management clauses may be stipulated in contracts to provide the MNO with some degree of control over prospective tenants. Any limitations on co-locations and tenancy ratio are sure to have an adverse effect on tenancy ratios.
Finally, the asset registers of Russia’s MNOs are reportedly poorly maintained, with particular concern over acquiring towercos’ ability to determine clear land title. The headstart Vimpelcom has over their competitive MNOs in tidying their asset register ready for sale could see the #3 operator realise a premium on their tower valuations.
Could we see further deals?
The sale of Vimpelcom’s Russian towers may not be the end of the story, there are strong hints that the company may be interested in divesting towers in their CIS footprint too, with Bloomberg having reported back in October that Vimpelcom were eyeing up a potential divestment of 50,000 towers across Kazakhstan, Armenia, Kyrgyzstan, Uzbekistan, Tajikstan, Georgia and Ukraine as well as Russia.
Within Russia, both MTS and Megafon have made noises surrounding potential tower carve outs or divestments, with Megafon looking at a potential carve out with a view to IPO. The appetite however of a towerco for both Vimpelcom and either MTS or Megfon assets may be seriously reduced with considerable overlap in networks particularly in well-served urban areas. There may be a marked advantage for the first MNO to bring their tower sale to fruition, creating healthy competition that should favour towercos in the market.
Whatever the outcome, the Russian tower market represents one of the hottest in Europe and 2016 looks sure to be an exciting year.
