Who owns the world’s 4.4mn investible telecom towers and rooftops? What is a tower company and how have different business models evolved in different regions? Drawing upon TowerXchange’s exclusive and unique research, this article sizes and forecasts the future of this dynamic new US$300bn infrastructure asset class.
Once upon a time, telecom towers were depreciating assets, built to serve the needs of one MNO, occasionally (often reluctantly) shared on a site for site ‘swap’ basis. Even today, the management of over 1.4mn operator-captive towers is not a core, value creating business for those MNOs.
Almost 3mn towers have now been transferred from MNOs to tower companies (towercos), specialist telecommunications real estate sales and engineering firms that have professionalised the management of these assets, and added value by leasing up the space on those towers to multiple MNOs. Towercos have deployed improvement capex to improve efficiency; they’ve brought to bear operational excellence and standardisation programmes; they’ve accelerated rollouts; and in simple terms they’ve put more tenants on the towers, creating value and efficiencies.
TowerXchange estimate the average tenancy ratio (the number of tenants leasing towers divided by the total number of towers) of towerco owned towers to be around 1.75 globally, compared to less than 1.1 on MNO-captive towers.
The creation of the tower industry has inaugurated an era of passive infrastructure sharing. Since American Tower, SBA Communications and Crown Castle led the revolution in the mid-1990s, towercos today own 67.4% of the world’s 4.4mn towers and investible rooftops. In a little over 20 years, towercos have created a US$300bn, highly investible global infrastructure asset class, with valuations outperforming just about every comp.
There are currently 21 listed towercos worldwide, but the industry’s valuation index remains dominated by the spectacular performance of the three giant U.S. publics (American Tower, Crown Castle and SBA Communications). With up to another seven towercos potentially coming to the public markets in the coming 12-18 months, including three African towercos and the gigantic China Tower Corporation, the tower asset class is becoming more diverse and more international.
Figure One: The fragmented ecosystem of 279 towercos tracked by TowerXchange
The tower industry is a top-heavy ecosystem, with 56.1% of the world’s towers on the balance sheets of the dozen largest towercos, each of which has a portfolio of over 20,000 towers. A fragmented ecosystem of 28 further towercos own between 5,000-20,000 towers, and a “long tail” of several hundred sub-5,000 tower towercos, together own 11.3% of the world’s towers. The tower industry is both fragmented and diverse, with a range of business models, lease rates and contractual terms, particularly in that “long tail” of smaller, mostly privately owned towercos, which creates a challenge for larger towercos seeking to consolidate the smaller players.
With the sole exception of North and Eastern Asia (excluding China), towercos are now found worldwide. But not all towercos are based on the same blueprint first conceived in the U.S. in the mid 1990s. The contractual terms, particularly the fixed escalators in a low interest economy, negotiated in the USA by American Tower, Crown Castle, SBA Communications and their peers created a “gold standard” of investible contracts which may never again be replicated. Nonetheless the blueprint has been versioned to meet the needs of different operators, different market dynamics, and different regulatory regimes.
TowerXchange recognises three simplified sub-categories of towercos, as shown in Figure Two. The “pureplay independent towercos” category most closely follows the original US, mid nineties blueprint – they are public or privately owned towercos with little or no residual equity retained by MNOs. 242 pureplay independent towercos identified by TowerXchange, exemplified by American Tower, Cellnex and Protelindo, own 594,835 (13.5%) of the world’s 4.4mn towers, as shown in red in Figure Two. This figure is inclusive of an estimated 37,750 towers owned by several hundred private towercos in China, Indonesia and Vietnam whose existence has been confirmed by local trade associations, but which have not been uniquely identified and tracked by TowerXchange.
The orange segment in Figure Two represents “operator-led towercos”; towercos that are themselves at least 51% owned by their parent MNO or MNOs. 25 operator-led towercos own 2,312,227 (52.6%) of the world’s towers. That statistic is distorted by the sheer scale of China Tower Corporation (1.9mn towers) and Indus Towers (122,962 towers), but the fact remains that the carve-out and retention of operator-led towercos is a trend that is growing momentum.
Figure Two: Tower ownership by category
Operator-led towercos often utilise business models and contract structures calibrated to more equitably share value between towerco landlord and operator tenant, for example some discount the anchor tenant’s lease rate when a second tenant co-locates, others charge a nominal “loading” fee for the overlay of nextgen network equipment on a tower, as opposed to charging an additional tenancy, generating what U.S. pureplay independent towercos would call “amendment revenue”. There are exceptions to this generalisation, such as pureplay independent towercos utilising discounted second tenancies in markets like India where standard practices are defined by operator-led towercos, or indeed towercos that are technically operator-led but who don’t discount anchor tenancies when co-locations are secured, sticking more closely to the original U.S. blueprint.
The differences in business model between pureplay independent towercos and operator-led towercos are reflected in valuations, with healthy pureplay independent towercos often valued at EBITDA multiples between the late teens and mid twenties, whereas operator-led towercos have to date been valued in the low double digit to mid teens. This explains why the pureplay independent towercos can often outbid the operator-led towercos to secure sale and leaseback opportunities. This also explains why the demands of tenants of pureplay independent towercos seeking the kinds of more favorable terms offered by operator-led towercos will fall on deaf ears: if MNOs have been paid a premium for their towers by a pureplay independent towerco, they are going to need to pay a premium to lease them back. It should be noted that MNOs can choose to reduce their total cost of network ownership when selling towers to a pureplay independent towerco – they just won’t release as much cash up front.
Going back to Figure Two, the third category is joint venture infracos, shown in green, which is where two or more MNOs pool their passive (and sometimes active) equipment into a third party company which either manages or indeed owns the assets. 12 joint venture infracos own or manage 58,900 towers, 1.3% of the global total.
Joint venture infracos aren’t strictly towercos, if for no other reason than they seldom proactively market their sites for co-location beyond the joint venture partners, but they are very much part of the TowerXchange community and require their own category in the ecosystem. Until recently joint venture infracos were a phenomenon unique to Europe, specifically the UK, Scandinavia, Poland, Romania and Greece, but MCI, RighTel and Fanasia are in the process of creating the first joint venture infraco in MENA: Iranian Towers.
The origination, replication and consolidation of the tower industry in the Americas
The ‘original’ pureplay independent towerco business model emerged in the mid 1990s in the USA, where towercos now own over 80% of the country’s towers. TowerXchange doesn’t cover the U.S. market, but we do cover Central And Latin America (CALA), which was the first region to which the U.S. model was exported.
Towercos own 52% of the towers in CALA, led by American Tower, SBA Communications and Grupo TorreSur, more recently joined by America Movil and Telefónica’s operator-led towercos Telesites and Telxius respectively. TowerXchange are tracking 20 of the dozens of private towercos in CALA, who between them represent just over 9% of the region’s assets.
Organic growth has slowed in recent years in CALA, with just under 10,000 towers built across 2015 and 2016. It seems like a slight acceleration will have been achieved in 2017, but we are finalising our data set so cannot share the analysis yet. What remains clear is that government stakeholders who declared that tower inventories in Brazil and Peru needed to be doubled by 2020 will prove to have been very optimistic.
Inorganic growth has also slowed but is recovering faster in CALA. A little over 25,000 towers changed hands through M&A in 2013-14, the total dropping below 20,000 in 2015 and 2016, before a very quiet 2017 in which less than 5,000 towers traded.
The outlook for M&A in CALA is much rosier in 2018, driven by the continuing divestiture of Tigo towers, and an increasing number of well-built, private tower portfolios being sold to the publics and rollup towercos, exemplified by the sale of Highline do Brasil and Torres Andinas to SBA Communications, and the sale of Torres Unidas to Andean Tower Partners, part of Digital Bridge. TowerXchange increasingly see American Tower and SBA Communications competing for acquisition opportunities with Phoenix Tower International and Digital Bridge.
While a further half dozen or so privately owned tower portfolios are progressing toward a sale in the coming 18 months, there is no shortage of tower entrepreneurs and investors entering the CALA market. Smart capital is drawn toward investible towercos that have an exit strategy predicated on meeting American Tower and SBA Communications’ investment criteria: that means building good towers in good locations with good contracts. Previous market entrants who built sub-optimum structures on sub-optimum terms have struggled in CALA and will likewise struggle to make a good exit. However, not all carriers have recognised the medium term uncertainty of partnering with deep discount towercos that are at risk of being left ‘stranded’ when capital runs out and no exit can be secured.
Pureplay independent towercos own just 15,4% of Europe’s towers
The new tower market emerging in MENA notwithstanding, Europe is perhaps the tower industry’s least mature market. Operator-led towercos such as Telxius, INWIT and First Tower Company are present at some scale, while there is also a unique prevalence of joint venture infracos, both symptomatic that some European carriers are under less pressure to monetise their tower assets, and many remain anxious to retain control of their networks. This makes it incumbent upon Europe’s acquisitive towercos to build a business case to acquire both towers and operator-led towercos, a business case which might be significantly affected by the impending IFRS16 Lease accounting standards change, which will remove the distinction between finance leases and operating leases, requiring conventional tower leases to be brought on to MNO balance sheets.
While there are 18 towercos with more than 1,000 towers in Europe, and 28 smaller towercos, the phenomenon of the build-to-suit-centric towerco is rare as build volumes are low and most MNOs keep their search rings to themselves. As a relatively mature tower market, with considerable overlap in networks, Europe demonstrates how a tower market might evolve when organic growth is almost entirely cancelled out by decommissioning.
Ultimately, Europe is a tower market of lower year on year revenue growth potential, yet Europe’s towers remain pensionable assets – exemplified by the fact that American Tower’s European operation is a joint venture with 49% stakeholder PGGM, a Dutch pension fund.
Asia’s unique tower industry
India was the birthplace of Asia’s tower industry in 2008. While the Indian tower industry was inaugurated by a pureplay independent towerco that became Viom Networks (ultimately acquired by American Tower), India’s relatively uniform and MNO-friendly contractual norms and lease rates have been largely defined by operator-led towerco giants Indus Towers and Bharti Infratel. With relatively low lease rates, and other favorable terms including discounts for anchor tenants when additional tenants are added to a tower, the efficiencies unlocked by India’s towercos accelerated the country’s mobile rollout, and contributed to optimising costs.
The key theme in India’s tower industry today is the impact of MNO consolidation. Whereas Indian towers were once changing hands for over US$120,000 each, since 2015 valuations have been in the US$60-90,000 per tower range. The reason is simple: where once India teemed with over a hundred regional MNOs, and more recently nine MNOs with nationwide aspirations, now MNO consolidation seems likely to result in 4-5 national operators, headlined by the merger of #2 and #3 operators Vodafone and Idea Cellular. Tens of thousands of tenancies are set to not be renewed, while battles continue to recover lease revenue from ailing operators.
The stimulus for India’s market restructuring was innovative new entrant MNO Reliance Jio jacking the Indian mobile and tower industries into the 4G era, grabbing huge market share, and making voice free. With Jio heavily dependent on data, fiberisation was critical, yet many of India’s independent towers were not connected to fibre, hence Jio has more than half it’s network on small cells and single tenant proprietary lampposts. Jio is also trying to push through the acquisition of infrastructure assets from its elder sibling RCOM, whose wireless business is winding up. Jio is seeking to acquire spectrum as well as substantial fibre holdings and towerco Reliance Infratel (~43,000 towers, on which Jio is a tenant on approximately 30,000 sites, and which TowerXchange cautiously still counts as a towerco, pending reconfirming whether the assets will still be leased to third parties on a non-discriminate basis). This is the first but perhaps not the last time we’ll see the phenomenon of carriers acquiring independent towers, as Aircel are believed to be bidding to acquire Indian towerco GTL Infrastructure to release themselves from contractual obligations originating from their original sale and leaseback a decade ago.
The restructuring of the Indian tower market is proof positive that towercos are not immune to the pressure on carrier balance sheets. For all the turbulence it has created, that same market restructuring may also make hitherto untouchable operator-led towerco Indus Towers acquirable, demonstrating that operator-led towercos may be acquirable under the right circumstances.
Could this all precipitate the evolution of the Indian tower industry business model from its operator-led bias to a more pureplay independent towerco-led blueprint, with higher lease rates and real amendment revenue? Like most analysts, TowerXchange are sceptical – ARPUs remain low in India, and it would take many years to unwind current contractual norms.
Let’s look at China. In 2014, with the approval of the General Office of the State Council and led by State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and the Ministry of Industry and Information Technology (MIIT), China’s operator-led towerco giant China Tower Corporation (CTC) was formed to promote a culture of infrastructure sharing, also referred to as “co-build, co-share.” After an initial ~1.5mn existing China Mobile, China Telecom and China Unicom towers were injected in 2015, CTC has built a mind-boggling 400,000+ towers, saving tens of billions of Yuan in the process.
Alongside CTC, China is teaming with independent towercos – there are at least 200 privately owned tower companies in China, perhaps as many as 500, although they own less than 100,000 towers between them. In terms of pricing, the situation is reversed to the norm: instead of competition among independent pureplay towercos putting pressure on lease pricing, it is the market leader CTC which is undercutting – under pressure from their MNO owners.
China Tower Corporation will soon be listed on the Hong Kong stock exchange.
The mature Indonesian tower market stands apart from the rest of Asia as it features several pureplay independent towercos of considerable scale, and they have contributed to a relatively commercial, Americas-like tower industry. The Indonesian market is led by Protelindo, Tower Bersama and STP, who have achieved substantial growth through buy and leaseback deals with the country’s MNOs, by rolling up smaller private towercos, and through steady organic growth, which offsets lease up, keeping tenancy ratios constant at around 1.7. Telkom’s Mitratel is emerging as a strong operator-led towerco, while a long tail of 30+ privately owned local independent towercos remain acquisition targets.
Indonesia is a slightly more mature mobile market than many others in Southeast Asia; ARPUs and higher and 4G rollouts are further progressed, which means IBS, fibre and small cells are land grabs as much as are macro towers. This diversification of the towerco inventory beyond ground based towers and rooftops is exemplified by the acquisition of technical innovators iForte by Protelindo, and Bit by STP, as well as partnerships such as those of smaller towercos Balitower with Jakarta to operate their CCTV network in return for offering the poles as small cell sites, or Pekape’s partnership with retail giant Alfamart.
Beyond China, India and Indonesia, the rest of Southern and Southeast Asia is primarily populated by single country towercos, with the exceptions of edotco, in six countries, and OCK in three.
Towercos evolve into powercos in Africa: major liquidity events imminent
The ‘Big Four’ towercos (IHS Towers, American Tower, Helios Towers and Eaton Towers) own 36% of the towers in Sub-Saharan Africa, representing the majority of the sites in investible markets with investible anchor tenants.
The towerco business model evolved to solve African MNO’s number one challenge: energy. By transferring both tower and power assets to their towerco partners, Africa’s MNOs have been able to refocus on their core business, while the towercos have cultivated centres of power management excellence, improving uptime and efficiency.
Whether they merge with one another, sell to a strategic acquirer, or list on the London, New York (and Johannesburg) stock exchanges, the three privately owned members of the ‘Big Four’ seem poised for major liquidity events in 2018.
The future of the tower industry: a bifurcation between vertical real estate specialists and providers of diverse yet complementary connectivity infrastructure
Figure three represents the vertical real estate-centric world as most towercos, and their investors, know it today. To use a baseball analogy, this word cloud is full of good pitches to hit: we’re in our comfort zone, and the opportunities and issues illustrated on this slide are in our wheelhouse. The tower industry as we know it today is ultimately a simple business: we build towers, we buy towers, we lease them up, we add value.
Figure Three: Today’s vertical real estate centric towerco business model
But with towercos now owing over two out of three of the world’s towers, and many remaining towers stranded in uninvestible markets, we’re running out of inorganic growth opportunities. And with an increasing proportion of new sites being infill city poles and small cells, the ground based tower rollout is maturing and plateauing. How do we extend our industry’s growth narrative?
Firstly, we must continue to open up virgin territories; from Argentina to Zambia. When towers are ‘trapped’ in uninvestible markets, for example where Foreign Direct Investment is capped at 49% or less, can our investment criteria be relaxed? Alternatively, do we need a global body to lobby regulatory stakeholders to make more new tower markets investible?
Secondly, can we expand our horizons to provision a broader set of connectivity solutions, and to engage with a broader set of alternate site and asset typologies?
Figure four shows ‘The Future Network’ illustrated through a new word cloud which includes many concepts representing pitches outside our strike zone. But you can still hit a home run on a pitch outside the zone!
Figure Four: The Future Network
This word cloud is almost entirely drawn from a fascinating conversation I had with Mansoor Hanif, who until recently was Director of Converged Network Research at BT. Mansoor knows a thing or two about the infrastructure business having served on the Board of Directors of MBNL, one of the joint venture infracos formed to share the UK’s towers. And like senior strategists at many carriers, one of Mansoor’s preoccupations was to reduce BT’s reliance on towercos by leveraging network innovations like those shown on this illustration.
We’re moving into an era when a cell site is increasingly not a ground based tower. And we’re moving to an era when network topographies will be redefined by software, not by the exchange of equipment on a tower. Carriers demand that their towercos be genuine partners, not landlords.
From the threat of disruptive new market entrants leveraging MESH networks of small cells to create high quality coverage for high value customers – making minimal use of macro infrastructure; to the opportunity of converting towers at the network EDGE into micro data centres, our industry can no longer afford to just passively sell vertical real estate.
If we’re to transform ourselves from passive real estate agents into strategic partners of carriers, we need both a new mindset and a new toolset. Business intelligence tools like Crowd SiteIntel from M2 Catalyst, which uses analyses of crowd sourced data to transform every subscriber into a human driver tester, can enable towercos to view your sites through the lens of the network planner, enabling the proactive promotion of co-location and build to suit services as solutions to carriers’ problems. Such tools can also help focus your capital deployment into fibre, IBS and small cells, while also providing a reality check for lease-up forecasts in due diligence.
Conclusions – the shape of towercos and wireless networks to come
The future of the tower industry worldwide will be defined by innovation, consolidation and bifurcation.
In terms of bifurcation, towercos will increasingly be grouped into two categories: those who strictly adhere to the blueprint of a REIT towerco, who exhibit steady growth, who (eventually) pay good dividends, and who build and buy good ground based towers, with good paper, in good locations. And there’s nothing wrong with that model – it generates proven returns, and risks are controlled.
Then there will be towercos that will diversify beyond the tower industry 1.0 blueprint; leveraging street furniture for urban infill, pushing beyond DAS in landmark buildings to deploy small cells in ‘middle market’ premises, laying and acquiring fiber, and eventually converting selected cell sites into micro data centres. Early adopters like Digital Bridge and Crown Castle have already planted their flags in this second category.
TowerXchange are not advocating one path – adherence to the existing blueprint, or diversification as a ‘Future Network Provider’ – but we do feel towercos should either decide to diversify, or decide to focus primarily on their core business.
