Despite the world still waiting for a deal of scale in the Russian market, rumours, M&A and strategic moves still abound. For the first time, a Russian consultancy, Advanced Communications and Media Consulting, has produced a in-depth report on the market, complete with new data points and insights. We spoke with Managing Partner, Michael Alexeyev, about their experience of the market and what the report means for the future of the Russian tower market.
TowerXchange: Please introduce AC&M Consulting, your footprint and how the company was formed?
Michael Alexeyev, Managing Partner, Advanced Communications & Media Consulting:
We are a small group of people; just seven professionals in all, who have been focussing on the telecoms and media industry for the last 20 years. We grab people from the industry whenever we need to cover a specific area. Russians have a very unorthodox idea of conflict of interest so you can hire person for a couple of weeks to build a picture of a market, or hire in an expert when you need a specific skill set.
As a management consultancy we focus on telecoms and media, but telecoms has been our biggest area recently. There are three arms to our business: the first is proprietary market research. We physically manage the quantitative research and have an army of researchers who can go out and do focus groups, mass polls etc. We train, certify and manage all of our team in this area, plus we have been consolidating public and non public data on the Russian market over the last 20 years, so we can build extrapolations and create all kinds of forecasts. Secondly, we have an investment banking branch. Banks often won’t touch smallish deals as it’s not worth the effort to do thorough research on the subject matter, so often we mandate, and one successful transaction can bring in a fee comparable to our annual turnover. Thirdly we do everything associated with due diligence and second opinion, and are often employed by the ‘Big Four’ consultancies, who seek our expertise to provide services to their clientele.
TowerXchange: What made you decide to produce a report on towers?
Michael Alexeyev, Managing Partner, Advanced Communications & Media Consulting:
Passive infrastructure is a reasonably new area for us but we can see that the market is being shaken up at the moment and we decided we should initiate coverage with our first report. We do know the sector and were involved in it previously as we represented an interested party in negotiations when Vimpelcom brought 7,500 towers to market a few years ago.
TowerXchange: Tell us about the most interesting findings from your report.
Michael Alexeyev, Managing Partner, Advanced Communications & Media Consulting:
One of the most interesting things is how keen the operators were to share their data with us, and to contribute to an important hub of data exchange. We asked them to disclose as much information as possible on their passive infrastructure, and we didn’t have a hard time persuading them to release into the public domain. Although we have to put in place the usual provisos, the fact we obtained our data directly from the operators means it’s as close to accurate as you can find.
I feel the most important element of the report is the average revenue per tower per month figure. You can see from this that the purchase of a tower can only be justified if it’s under 2mn roubles (around €30,000); over this number you’d never be able to break even on the investment unless you got to an average tenancy ratio of 2x. Even if you hit 1.8x, which is the standard for independent towercos such as Russian Tower, you can only achieve around 50,000 roubles (around €730) per month, you end up at 600,000 roubles (~€8750) annual revenue per site, which I estimate caps the most you can pay for a tower in relative terms at about this 2mn roubles (€30,000 euros) number.
You can see from this that the purchase of a tower can only be justified if it’s under 2mn roubles (around €30,000); over this number you’d never be able to break even on the investment
TowerXchange: What do you think that means for the Russian tower industry?
Michael Alexeyev, Managing Partner, Advanced Communications & Media Consulting:
Hopefully operators will manage to depreciate most of their passive infrastructure but in reality on the balance sheet it might well be a transaction which is value diluting for the them. Building a 30m pole will cost them about €40,000 euros, so they have to sell at a price lower than cost of replacement. Because of this, I think that all this talk about major transactions is not for Russia.
The very high interest rate and cost of capital is one of the key reasons for this. The evolution of the market elsewhere was down to independent investors with a very low cost of capital, and obviously then you can justify massive investment in passive infrastructure as you can have guaranteed income for decades, and if you can increase the tenancy ratio then you’re made. MNOs are keen to part with their towers but the economics are such that in Russia it’s just not viable.
We think the Russian market will take a totally different curve. We think the independent towercos will try to out-build the operators and achieve critical mass through consolidation. Recent news of the consolidation between Link Development and Service Telecom is a part of this. We could also foresee a dialogue between Russian Towers and Vertical, which could put them up to 6,000 sites total by the end of the year. This number is comparable to the entire network of Tele2 already, and the value of the Russian Towers and Vertical towers is higher than MNO towers, so evaluating those sites is another important thing.
TowerXchange: How would you evaluate the sites?
Michael Alexeyev, Managing Partner, Advanced Communications & Media Consulting:
If you look at the average portfolio managed by an MNO it includes everything: street furniture, towers in god knows where in the Taiga, towers that are built to provide a footprint along major highways, where no one needs more capacity there where traffic is thinner and thinner. The likelihood for independent towercos to get an additional tenant on one of their street poles in Moscow is several times higher than getting an additional tenant in Ulyanovsk or Kamchatka. When you consider this, an 11m pole in Moscow is worth much more than a 55m tower on the outskirts of a small town, although the actual initial build investment in the passive infrastructure was several times higher.
Ironically, this means that the assets operated by independent companies may already have a significantly higher value than some MNO portfolios, although in sheer numbers their portfolios aren’t as big.
If you take this figure of 6,000 sites owned jointly by Vertical and Russian Towers together, and assume it could have a tenancy ratio of 1.6-1.65x, which is much higher than the Russian average of barely 1.3x. By multiplying the average tenancy ratio by the combined portfolio of the independent market players, these assets would generate more cash than the operator-captive towers. For me, that realisation came as a shock at first, I didn’t realise that before I did the maths. It gives a lot of hope to the independent players in the market. Of course, a lot depends on the international investment companies and if they come with more cash; if they stop investing for whatever reason then nothing will happen. Right now the name of the game is about who secures more deals with authorities in large cities.
