Change gathering pace in European digital infrastructure

TowerXchange spoke with TMT heavyweights David Martin and Julian Cunningham-Day about the changing face of European tower investors, the pressures on MNOs over 5G rollout and where towercos might face competition for a share of urban neutral host infrastructure. Having taken part in some of the biggest deals in tower history, we were delighted to have a chance to pick their brains about how the market will change over the next few years.

TowerXchange: Please introduce Linklaters, your telecoms infrastructure practice and your global footprint.

We are seeing that traditional infrastructure investors have been pushed further along the spectrum as new investors, most notable Asian pension funds, are willing to invest in infrastructure at lower returns. This means investors are starting to look at core plus, and even core plus plus infrastructure and co-investment. Private Equity infrastructure players are also interested in digital infrastructure, and we find our BRIC sponsor clients are looking at this sector, with all of these groups converging in the middle. 

We’ve been involved in this convergence, working on the Altice deals in France and Portugal for both towers and fibre in terms of both the M&A and the financing work. I run the digital infrastructure M&A practice which is complemented by Julian Cunningham-Day as a telecoms expert running commercial aspects (eg master service agreements and regulatory advice). 

Globally, we have a growing client base in the US, our team in New York doing increasing amounts of digital infrastructure work in the Americas, we typically cover Europe and Africa from the London office and our teams in Singapore and UAE cover APAC. Whichever office we’re working from, our model remains the same, providing M&A lawyers, commercial lawyers and financing lawyers who can act for both sides of a deal. 

TowerXchange: What can you tell us about the scope of your work in telecoms infrastructure? Can you give us any examples of the projects you have worked on?

As I mentioned, we took on the bank financing role for Altice in France, across both towers and fibre. We acted for Morgan Stanley Infrastructure Partners on the Altice tower deal in Portugal. We also have a longstanding relationship with Zain in Africa and the Middle East, helping them package up 14 countries to sell to Bharti Airtel and moving over to their ongoing transactions with IHS in the Middle East. We often work for acquirers in African towers and have worked on preparing potential IPOs which didn’t hit the market last year. We also have relationships with Three and Vodafone as well as doing financing work for Cellnex, so we’re involved in a good mix of MNOs, towercos and investors looking to participate in that space. 

TowerXchange: Tell us about your thoughts on the European digital infrastructure market – what trends have you observed and what’s shaping it right now? 

There’s a universe of infrastructure players who have grown and carved out a niche in the space, who see digital infrastructure as a dedicated asset class. I’ve heard data referred to as ‘the new oil’ as it’s a commodity which you can create, transport, store and mine. This has driven an explosion in opportunity, as people see digital infrastructure as underpinning the future of infrastructure and they’re keen to invest in it. 

Another trend we’re seeing is MNOs choosing to hive out their passive infrastructure and becoming a customer rather than a tower owner with a third party infrastructure specialist owning the towers and leasing them back to them. This will create opportunities for new players in the market, if you look at what Altice did in Portugal and France, they retained a stake and sold a share to infrastructure funds. However, in some respects it’s more interesting for some market participants to take 100% of an asset as they’ll want to drive up colocation and bring other operators on board and if the anchor tenant retains a legacy stake it calls into question their willingness to colocate with other MNOs. Omtel, the new towers business in Portugal which has retained Altice as an investor, has recognised the importance of implementing its own systems in order to be attractive to other market participants.

TowerXchange: We saw dealflow between MNOs and towercos stall slightly in 2018, precipitated by the trend for MNOs to carve out their towers rather than selling them. What do you think the long term impact of this trend will be?

Carving out tower operations is often a first step towards a more comprehensive separation of this aspect of an MNO’s operations. The long term capital demands of continued network enhancements (such as 5G) are likely to drive more MNOs to explore collaboration with other operators or towercos, rather than simply carving out the towers and retaining control.  In terms of the Altice deal, reducing debt was a key driver rather than a strategic decision to outsource the infrastructure, so Altice only wanted to concede as much control as they had to. In the long term it will depend how the rest of the market develops. Where operators do engage with towercos or other operators, negotiations can sometimes falter due to both the MNOs and towercos going into the discussion with an over-optimistic idea about what they can each get from the deal the question is whether they can find a compromise which everyone can live with. The fact we’ve been involved in several renegotiations of these deals suggests that the arrangements need to be fl. 

There’s market speculation that CTIL, Vodafone and Telefonica’s joint venture in the UK, will come into play, and if it does I am sure a number of investors will be very interested in this. I agree with Julian that the Altice deal was more push than pull, driven by a need to repair the balance sheet: if you’re only auctioning a minority stake you know what you’re getting into. However, selling a majority stake attracts different buyers and opens the door to more opportunities. 

The idea of selling a minority stake is a trend which we’re seeing across infrastructure in general at the moment. Strategic infrastructure owners have a lot of infrastructure sitting on their balance sheets and want to sell a minority stake. This  is a different offering to someone who is prepared to cede control because they consider it a non-core asset. If strategics think they can get more value by selling to a towerco, they will do that. 

We’re seeing different trains of thought developing in terms of operators’ [appetite] to share active network element as well. Some think they’ll keep the active side of their operations as a differentiator, but I’m not convinced they have the luxury of the kind of capex needed for this – particularly as active differentiation isn’t something which the customer always perceives value in. Markets will push them towards sharing their active equipment as well, which will create opportunities for the OEMs, and  towercos who can look beyond tenancy ratios and drive changes in market behaviour. 

We also need to consider the impact of regulation. In terms of the base position, as digital infrastructure becomes a more established asset class, investors worry it will become regulated and about what that regulation will look like. This has long been a concern, even back in 2007 when we did the deal between National Grid Wireless and Arqiva as a duopoly became a monopoly. We’re involved in auctions around different types of critical infrastructure where we’re talking to governments and regulators about assets which aren’t regulated at the moment, and we are seeing regulators taking a more active role in processes, including changing legislation to give greater oversight and potentially approval rights. 

TowerXchange: Although 5G is the main topic of conversation in telecoms right now, progress is slow. What are the main roadblocks to rollout and what do you think is a realistic timescale to see meaningful 5G rollout?

One of the main aspects of 5G at the moment is that no one knows how it’s going to work. Anyone who has run a fixed line network will know how tough it can be to go through the permitting to acquire the sites and run power and backhaul to multiple points of presence, and I’m not sure all of the MNOs have anticipated the full cost implications of this. There are a lot of regulations to be ironed out, and a lot relies on the assumption that operators can get access to ducts for fibre and power.  France is a good example of a country which perceived the need to implement regulatory change to facilitate network roll-out. 

It feels like there needs to be some kind of government catalyst to make this sufficiently feasible. The US currently looks like it’s powering ahead of Europe, and we see that there needs to be some kind of intervention, like the UK’s Digital Economy Bill was for towers – in order to bring Europe up to speed. It will be hard for operators to go it alone, and the drive for a single set of infrastructure will be hard enough, let alone for multiple sets of parallel infrastructure. There are infrastructure players like CityFibre who have rolled out fibre, but there needs to be an effort to bring together lots of markets and technologies where someone steps back from each industry’s own priorities and looks at what we need as a society – that’s what will allow countries to compete in years to come. This is something which needs to be talked about on every level.

TowerXchange: It’s clear that the way infrastructure ownership is structured will need to change in order to support the proliferation of points of presence needed for 5G. How do you see the ownership of European towers and telecoms infrastructure changing in the next five years? Who will come to the fore and why?

We acted for Harbinger in 2008 in the US when they tried to buy Inmarsat, and their plan was to use satellite technology to connect Americans rather than using towers, as the cost of rollout in the US was felt to be too high. It’s telling that even ten years ago we were looking at alternative ways to provide mobile connectivity without towers, and now technology is developing at such a rate that the current setup might well not last forever. 

We’ve heard from towercos that they can expand into everything MNOs will need in their new ‘MVNO’ role, but there’s a long way to go from owning passive towers to running all the plumbing. 

It feels like the accepted wisdom in terms of how many MNOs each market needs will start to be tested as we get into 5G, as there will need to be such a level of operational integration -  regulators will have to review how much consolidation they can tolerate in this new environment. When the whole world operates on mobile internet connectivity, the expectation is on MNOs to provide a critical service and to offer choice at the same time, they are under a lot of pressure.