It’s no secret that many MNOs are struggling under an increasing burden of debt. The crippling cost of spectrum, hefty tax burdens, declining ARPU, OTT players eroding revenue streams… monetising non-core assets like towers may be one outcome, but another outcome is consolidation. But while it may seem obvious that MNO consolidation lowers the glass ceiling on prospective tenancy ratios, in most markets a reduction in the number of MNOs may be good news in the medium term. Why?
Why shouldn’t the Brazilian tower industry be panicking about the bankruptcy of Oi?
Why are towercos seeking to acquire assets at the same time that MNO consolidation is taking place in Pakistan and Bangladesh?
Why is the European mobile market opening up to the towerco business model whilst simultaneously consolidating to offer less potential clients for those towercos?
It may be counter-intuitive, but MNO consolidation can be good news for towercos.
Putting spectrum to work
“It is not healthy for the industry to have ten operators, including five or six sitting on spectrum without the wherewithal and means to rollout,” said Bharti Infratel Chairman Akhil Gupta. “Consolidation remains a work in progress, but it will leave spectrum in the hands of companies that have the resources for rollouts.”
It is better to have one tenant paying rate card and signing ten to fifteen year leases to co-locate on 6,000 towers than to have five tenants scrabbling around for discounts and only able to sign three to five year terms on tens or hundreds of towers each. One healthy MNO might be able to extend connectivity deeper into rural areas, or might be better equipped to densify their network to improve QoS downtown, moreso than five struggling to establish a foothold in an over-competitive market.
Food for thought for some regulators intent upon stoking up over-competitive MNO markets.
The credit worthiness of tenants is key
Financial models might look nice with lots of prospective customers in the mix, but what really matters is whether those tenants can pay the rent – just ask any credit ratings agency!
The investibility of the tower industry is a function of the investibility of it’s customers; if you really want to diagnose the investibility of a towerco, look not just at Tower Cash Flow, but look who that cash flow is coming from.
The tower industry as an asset class is in vogue because investors appreciate the predictability of long term contracts with big companies, and the highest valuations are often to be found in rational, consolidated MNO markets, the USA being the obvious example.
The tier two towerco
In Senegal, a new towerco is being formed by Al Karama Investment Group’s M&A Capital, and is in negotiations to acquire 450 towers from Expresso Senegal, with a right of first refusal on a subsequent build of 200-250 additional towers.
Expresso has a solid 15% market share in a three MNO market in Senegal, thus representing one of the more investible “tier two” opcos in SSA. The opportunity is boosted by the prospect of rolling up a further 800 towers from Senegal’s #2 operator Millicom, itself a renowned challenger MNO.
The team behind M&A Capital has an appetite for further tower transactions with selected tier two towercos in West and Central Africa – it will be interesting to follow how this venture develops.
Genuine challengers
Having emphasised that strong towercos do business with strong MNOs, can challenger towercos do business with challenger MNOs and still be investible?
Much depends whether the towerco’s counterparties are genuine innovator-challenger MNOs, or whether they are labeled challengers in sympathy for their insurmountable task of capturing market share from dominant incumbents!
If your prospective challenger anchor tenant is at risk of not paying their monthly rent, risk can be mitigated with robust termination clauses, but the best way to minimise a risk is to avoid it altogether. But if your prospective challenger MNO anchor tenant has a genuine differentiation – they might be the first to rollout 4G, they might have a focus on the high yield Enterprise customer, a sticky mobile money service, or a low cost network strategy to make rural connectivity economical – if that innovative differentiator enables them to prosper with a minority market share, then a partnership with a towerco can be beneficial for both parties.
Ultimately sale and leasebacks with challenger MNOs may not be the domain of the world’s largest, listed towercos. Here’s Hal Hess, President of American Tower’s International business, talking about tier two MNOs as anchor tenants in a TowerXchange interview last year. “Since tier two MNOs typically have smaller portfolios, we become more sensitive to how compelling the market and transactions are. In Nigeria, for example, MTN, Airtel and Etisalat recently divested tower portfolios of thousands of assets, whereas the tier two MNOs’ portfolios number in the hundreds. Second, although acquiring assets from a tier two MNO may result in heightened credit risk, this can be partially offset as it probably means a greater proportion of future leaseup will come from tier one MNOs.”
Hess continues: “it’s easier to roll-up tier two MNOs’ assets in an existing market where it’s an incremental add on. It will be more difficult to justify the investment to enter a new market on the back of an acquisition from a tier two MNO as we need a minimum scale to justify the investment and the commitment of resources.”
Can infrastructure sharing transform struggling tier two MNOs into innovative challenger MNOs by leveraging co-location to accelerate rollouts and drive down total cost of network ownership?
In the Democratic Republic of the Congo, Africell leveraged co-location on over 200 Helios Towers DRC sites to accelerate time to market and reduce costs, enabling a disruptive price point which helped the new entrant challenger MNO grab 15% market share – one DFI TowerXchange spoke to heralded Africell as one of the most investible TMT plays in SSA.
Consolidation affecting anchor tenants
One off consolidation will still generate turbulence, making towerco revenues lumpy in the short to medium term.
Analysts rightly hold CEOs to account on behalf of shareholders in quarterly briefings, but SBA’s share price hasn’t flinched since Oi, the anchor tenant on many of their Brazilian towers, registered for bankruptcy. Perhaps the financial markets appreciate that mobile networks and their subscribers don’t disappear just because their owners’ balance sheets are in distress: someone is going to end up serving those customers, someone is going to need their equipment on those towers.
Whether debt is traded for equity, or a new ownership model emerges, what is important for towercos is that the balance sheet is cleansed of whatever ails the operator. In the case of Oi, the bankruptcy may offer a chance to relieve the operator of onerous fixed network maintenance obligations and a weighty payroll. Whatever the cause, the reality is that Oi had been unable to invest significantly in their network for a number of years, so whatever entity emerges from the bankruptcy process, it will be freed to catch up on network investment. Good news for all Oi’s towerco partners, particularly SBA.
Tenancies don’t just come from traditional MNOs
Whilst extra caution must be applied in selecting investible anchor tenants, the tower cash flow and tenancy ratio growth that comes from supplementary tenants is less sensitive, particularly the relatively small proportion of revenues that come from non-traditional MNO tenants. Indeed the towerco business model itself can make new entrant mobile broadband plays more investible.
“We entered Cote d’Ivoire after IHS had secured the rights to market MTN and Orange’s towers for co-location, and that has had a huge impact in terms of shortcutting our to time to market,” said Dov Bar-Gera, CEO of 4G broadband Internet provider YooMee Africa, in a TowerXchange interview last year. “Towercos enabling access to SSA’s towers, and new devices enabling faster broadband, herald the end of the era of MNO oligopolies controlling telecoms in SSA… As one of YooMee’s founders and investors, I feel that the independent tower story has a profound effect on startups like ours. A lot of prospective investors in our company were excited about our proposition, but ultimately didn’t invest because they felt the established operators had a competitive edge, particularly in terms of infrastructure. The moment independent towercos start providing access to SSA’s existing infrastructure, the competitive advantage of the traditional players is diminishing and innovative players like YooMee become more investible.”
Beware things that go bump in the night
While today’s relatively orderly re-organisation of the Indian MNO market may be good news for towercos, wholesale MNO market restructuring isn’t always good news for towercos.
Looking back on the cancellation of 122 MNO licenses in India in 2012, it’s clear that many towercos took years to claw back revenues lost overnight; some almost had to reinvent themselves.
“While the cancellation of 122 licenses had put the telecom industry in India on a stand-still mode with lot of uncertainty, the tower industry also faced a huge brunt with companies like us facing a setback of close to 15,000 tenancies,” Former Viom Networks President Umang Das told TowerXchange. “As a company, we decide to sit back and re-strategise the way business should be done and resultantly, we managed to record our maiden profit in one of the most difficult periods in the year 2012. The loss of all those tenancies helped us focus on cash flow, on reducing opex, and on consolidating our relationships with the incumbent market leading operators.”
Any MNO consolidation risks creating turbulence in the short term as assets are transferred and new management embedded; co-location sales and organic growth will be even “lumpier” than usual through such periods. But losing a double digit percentage of tenancies overnight is more than “lumpy.”
The good news is that one has to have a pretty irrational mobile market to require the scale of restructuring we saw in India in 2012 – the tower industry learned their lesson, I’m not sure they’d get burned again.
Towercos as the agents of consolidation
A new breed of towerco is emerging that positively courts MNO consolidation, positioning the towerco as a facilitator of network integration through efficient decommissioning.
Decommissioning parallel infrastructure to maximise the efficiency of MNO consolidation is a key component of Cellnex’s value proposition. The company has extensive decommissioning programmes to rationalise around 2,000 towers in their largest markets, Spain and Italy, effectively turning low yield single tenant towers into high yield multi-tenant towers.
The big question around decommissioning remains: how many years will it take to recoup the capital required to liquidate the remaining term of a ground lease and pull the steel and concrete out of the ground? From the experts TowerXchange has spoken to, three seems to be the magic number: if one can generate RoCI (return on capital invested) in decommissioning in under three years, it’s an attractive model for towercos. Most Cellnex decommissioning programmes are in their second year – let’s hope they share enough results for the rest of the industry to learn from!
Towercos playing a central role in MNO consolidation will not be a phenomenon limited to Europe. One towerco will soon be named as a primary agent of consolidation and decommissioning in Pakistan, where market leaders Mobinil are in the process of acquiring and integrating #5 operator Warid. In the process of the integration, the two entities’ combined ~14,500 towers will be divested to a towerco and consolidated down to 13,000-13,700. For more on the unique dynamics of the Pakistani tower market, read our market study in the red-framed Asia pages later in this Journal.
In Iran, towerco Fanasia has evolved specifically to consolidate parallel infrastructure. Originally a turnkey infrastructure firm, which built over 500 towers in the country, Fanasia started their decommissioning project in the free zone of Kish Island, consolidating 110 towers down to just 32 (the count will rise back to around 40 when the project is concluded). A further project has been specified to rationalise the 1,000 sites in the municipality of Mashhad down to 350 sites. Fanasia is targeting contracts for 1,500 sites by year end 2016.
You can read Fanasia’s story here.
Conclusions
MNO consolidation is not bad news for the tower industry.
It is better to have fewer, healthier tenants more densely concentrated on fewer, higher yielding towers.
The devil is in the detail; not just how many tenants are on the tower, but who are they? And how creditworthy are they?
Shared infrastructure is not so much the future as the present of telecommunications network planning, with 65.2% of the world’s towers now owned and operated by independent towercos and infracos. Shared infrastructure can be leveraged to maximise the efficiencies of consolidation through decommissioning of parallel infrastructure: eliminating duplicate opex and cleaning up skylines.
The efficiencies unlocked by infrastructure sharing can also foster healthy innovation, transforming tier two MNOs into genuine challengers, and facilitating the rapid, low cost market entry of mobile broadband innovators.
