the delta perspective april 2009 tower sharing in the

8/14/2019 The Delta Perspective April 2009 Tower Sharing in The

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April 2009

The Delta Perspective

As markets liberalize and

competition heats up,

telecom operators realize

that their long term

competitive advantage lies in

their value proposition and

not in their networks

Tower sharing in the

Middle East and Africa:Coaborang ncompon

Auors Vcor Fon - managng parnr: [email protected] Daa - prncpa: [email protected] Rdd - snor assoca: [email protected] Gos - snor rsarcr: [email protected]

Infrastructure sharing is coming to MEA

Tower sharing has been one of the

telecom industrys global hot topics

for close to a decade. The first wave

was seen in the US and Europe,

while recently, India has taken center

stage with several multi-billion dollar

asset carve-outs. With some small

exceptions, the Middle East and Africa

(MEA) region have been relatively

quiet with respect to infrastructure

sharing deals, as operators believed

that coverage advantages outweigh

the benefits of sharing. However, Delta

Partners expects activity to heat up in

the next twelve to eighteen months

with multiple deal announcements.

The timing of these expected sharing

deals is linked to several strategic

dilemmas that regional mobile operators

are currently facing. The first and

foremost driver is compression of

margins due to increased competition

and decline in price-levels. Operators

Key hiGhliGhtS

Delta Partners estimates that there are

currently over 200,000 mobile telecom

towers operating in the Middle East

and Africa (MEA) region

Tower sharing can bring significant

capex and opex savings for regional

operators. Additionally, operators can

also make substantial capital gains

by monetizing their tower assets into

seperate entities

Towers in MEA are expected to

increase by 50% in the next five years.

However, US$8.0 billion in cumulative

tower related capex could be saved if

operators were to share towers

Delta Partners forecasts that several

tower sharing deals will be announced

in the coming twelve to eighteen

months. These could potentially

involve some of the large pan-regional

operators


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in the Middle East are battling market

liberalization amidst fully saturated

markets, while in Africa mobile

operators in many markets are facing

hyper competition due to the

issuance of fourth and fifth licenses.

The second related driver is decline

in customer profitability as operators

penetrate the bottom of the value

pyramid. Operators are being forced

to find new ways to enhance margins

but still be able to support lower value

customers. The third and final key

driver is the rationalization of capex

budget due to tightened financing

in the current economic climate.

Regional operators are starting to look

at ways they can reduce future capital

expenditure but also unlock cash from

their existing balance sheets to finance

future projects.

Sharing brings many benefits to

emerging markets

Not long ago in more developed

markets, telecom operators considered

network related infrastructure as their

core lever for sustainable competitive

advantage. However, as markets

liberalized and competition heated

up, their networks eventually became

more of a commodity. Thus, mobile

operators shifted focus to other

elements of their value proposition to

differentiate and create value for their

customers. This allowed operators

to take advantage of many of the

strategic and financial benefits linked

to tower sharing including reduced

future capex, lower operating costs,

and potential capital gains if towers are

sold to a third party.

While some of these lessons still apply

in emerging markets such as Africa,

other factors make the case even more

compelling. One of the key differences

in Africa is the wide dispersion of

average income levels between nations.

Since operators have cherry picked

the most lucrative regions to roll-out

networks, the profitability of newer

roll-outs is not as compelling. This is

combined with the fact that remaining

rollouts are often in difficult and

expensive to reach rural areas. These

factors are currently forcing regional

operators to seriously evaluate tower

sharing options.

The size of the MEA opportunity is

enormous

The size of sharing opportunity in MEA

region is enormous. Delta Partners

estimates that there are roughly

200,000 towers currently in operation

in MEA and the number is expected

to increase by 50% in the next five

years. This expected growth is linked to

significant remaining network expansion

and continued market liberalization.

This tower forecast could be reduced

significantly if we factor in potential

for wide spread tower sharing which is

currently not the case.

Delta Partners estimates that in MEA,

US$8 billion could be saved over the

next five years in cumulative tower

related capex if a site sharing index

of 2.0 can be achieved on the newly

rolled out towers. A further US$1

billion annual opex savings on new

towers can be achieved by 2013.

However, this number could even be

higher if existing tower portfolios are

rationalized and shared.

Many stakeholders are pushing for

tower sharing

While tower sharing has clear benefits

for operators, other stakeholders

are also helping create momentum

in the industry. International tower

companies have been hovering around

the MEA region looking to expand their

tower portfolios. In parallel, both debt

and equity investors have also been

shopping for deal opportunities with

many of them allocating considerable

funds to invest in infrastructure deals.

This investment appetite stems from the

massive deals executed in other regions


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and the perceived attractive risk/

return profile. Lastly, regulators across

the region have begun to realize

the positive impact of tower sharing

and assessed that it can help them

achieve their objectives of fostering

competition and improving customer

service. Increased environmental

pressure has also put tower sharing

into the spotlight and reinforced some

regulators across the region to take

proactive action.

The purpose of the paper is to examine

the different infrastructure sharing

models currently being employed

and their potential impact on the key

stakeholders in the MEA region: mobile

operators, investors and regulators.

The paper aims to identify the key

opportunities and challenges for each

of the players and discusses Delta

Partners expectations for the coming 12

to 24 months within the context of the

current economic and financial climate.

Sharing passive versus active

infrastructure

In order to categorize different types

of infrastructure sharing, the first

question to address is which network

elements are to be shared. The

traditional infrastructure sharing model

in the telecom world has been that

of sharing passive infrastructure. This

model typically includes network

elements such as tower masts, power

units, shelters, air conditioning, and

security. These network elements

are not telecom equipment related

and are considered less strategic and

easier to share. Operators and existing

tower management companies are

experimenting with sharing active

telecom equipment components as

well. While active infrastructure sharing

is not prevalent today, it is expected to

play a more significant role in the near

future especially in places like India

where spectrum availability is a serious

concern. There have been some positive

developments recently on the active

infrastructure sharing front with the

regulators encouraging the same. This

together with advances in technology

such as multi party antennae, we expect

that active infrastructure will slowly

gain momentum. We further expect

that operators will continue to share

transmission capacity but will likely do

so on a case-by-case basis. For the

purposes of this paper, we will only

focus on the sharing of passive tower

assets as it is expected to be the first

step operators will take in MEA region.

Tower swaps versus carve outs

Once an operator has decided which

network elements to share, the next

question to answer is who will own the

shared assets. There are three basic

models available to operators when

deciding to share towers:

1. Engaging in tower swaps

2. Setting up Joint Ventures (JVs) with

other mobile operators (Operator-

owned Towercos)

3. Outsourcing tower assets to

independent tower management

companies (Pure Plays)

Understanding the basicsof tower sharing models

There are two main questions that must be addressed:

which network elements should be shared and who

should own these assets?


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EXHIBIT 1: Main advantages and disadvantages of different tower sharing models

towr swaps1.

Tower swaps involve the simplest

form of tower sharing between

operators. This model involves a like

for like swap of access to towers

between two operators in the same

market. Put more simply, Operator

A gives access to Operator B on one

of its towers, and Operator B gives

access to Operator A to one of its

towers. In this model, each operator

maintains ownership and control of

their own towers.

Tower swaps are relatively simple to

implement and can offer pragmatic

solutions to operators looking to

rationalize their network capex and

opex. Unfortunately this model

typically only allows for savings on a

very small percentage of the overall

tower portfolio and full value is not

extracted. At the moment, tower

swaps are actually being executed

in MEA but on a selective basis in

certain countries.

Opraor-ownd towrcos2.

Another option available for

operators is to create an Operator-

owned Towerco as a separate entity

while maintaining a significant equity

stake. This new Towerco can be

formed with one or more operators

and would be responsible for the joint

future network rollout needs of the

shareholders. Typically, operators also

carve out their existing tower assets

into the Towerco by entering into a

sell and lease back arrangement.

Examples of Operator-owned

Towercos include Bharti Infratel, Indus

Tower, Quippo Tata Teleservices and

Reliance Infratel all in India.

Financing for the Operator-owned

Towerco can come from either the

operators themselves or from external

equity and debt financers. In order to

minimize cash outlays, operators tend

to bring in debt financing and private

equity investors to fund the expansion

of Towerco. This helps operators to

capture value from the start and take

the first steps for a future potential

equity exit.

The Operator-owned Towerco model

offers many benefits to operators.

In the case that multiple operators

come together, it allows them to

reduce operational risk by ensuring

high site sharing indexes with

guaranteed tenants from day one.

By being shareholders, operators

also get the comfort that they will

be able to control and influence the

JV especially in the earlier stages

of the outsourcing process. By

externalizing the tower assets,

operators also position the Towerco

for a future sale or exit when more

value can be realized.

Pur-pa towrcos3.

The third most prevalent model used

by operators is selling their tower

assets to Pure-play Towercos and

outsourcing the remaining future

network rollout as well. These Pure-

plays tend not to have operators

as shareholders and typically grow

through aggressive leverage driven

acquisition of towers. Examples of

Pure-play Towercos include American

Towers and Crown Castle in the US,

TDF in Europe, and Helios in Nigeria.

Apart from the obvious financial

benefits, a sale of assets to a Pure-

play Towerco can also bring certain

operational advantages to operators.

Depending on the region, Pure-plays

bring significant experience with

them which reduces operational risk.

By selling to Pure-plays, operators

also avoid messy negotiations with

respect to operations and governance

with other operators. On the flip

side, Pure-play Towercos will not buy

towers at their full potential market

value leaving operators with less cash

for their assets.

Source: Delta Partners analysis


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Tower sharing brings capex and opex

reductions

One of the clearest benefits to

operators of tower sharing is reduced

future network capex. Under a simple

tower swap arrangement, operators

can split capex costs with their partner

operators on shared towers. However,

if operators decide to outsource to

Towercos, future tower capex can

then be completely eliminated. The

Towercos themselves are willing to pay

for the capex because they create value

through co-locating multiple operators

on each tower and recover their

investment through leasing fees.

Delta Partners estimates that there are

approximately 200,000 towers currently

operating in MEA and the requirement

for towers (in a non-site sharing

scenario) will increase by 50% over the

next five years. Taking an industry-wide

view and assuming a tenancy ratio of

2.0 on newly built towers, operators in

the MEA region could save upwards of

US$8 billion in cumulative capex over

the next five years.

In addition to lower future capex, tower

outsourcing should offer operators

improved operating margins. Through

the improved economics of tower

sharing, Towercos will be able to

offer attractive leasing rates to tenant

operators which will improve their

overall EBIT margins (earnings before

interest and taxes). However, in order

to extract maximum value from lower

leasing rates, operators will need to

ensure that their host Towercos are able

to secure high tenancy ratios (number

of tenants per tower) so savings can

be passed along to operators. Delta

Partners estimates that in MEA,

assuming a site sharing index of 2.0,

an annual opex savings of over US$1.0

billion is expected (12-15% savings on

passive infrastructure related opex).

Operators can unlock cash from their

balance sheets

Outsourcing tower assets can also

unlock huge amounts of cash from an

operators balance sheet. By carving

out tower assets or selling them into

separate entities, operators are able to

generate cash through the partial or

complete sale of these assets. Towercos

will attract both debt and equity

financing and these new investors will

value the tower assets higher than their

book value. Therefore, operators are

able to secure cash up front for the sale

of the tower assets and secure financing

for the Towercos for future roll-outs

as well. Given the current credit

crunch, leveraged operators can see

passive infrastructure outsourcing as an

opportunity to strengthen their balance

sheets and improve cash flows.

Finally, if mobile operators maintain

an equity stake in the Towercos, they

can experience significant financial

gains through the value creation of the

Towerco itself. As Towercos increase

their tenancy ratios and efficiency, the

overall risk will decrease while implicit

valuations will go up. Operators can

Implications for operatorsof mobile tower sharing

Operators can benefit from improved cash flows,

better margins and shorter time to market through

tower sharing


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EXHIBIT 2: Tower transactions across the globe

participate in this upside as shareholders

and gain more upside from the

outsourcing of their towers.

Strategic benefits include reduced

time to market and lower

environmental burden

Outsourcing of towers can provide

mobile operators with significant

strategic and operational benefits,

particularly in developing low income

markets. In countries where significant

rural roll-outs are still required, tower

sharing can decrease the time to market

for operators since they can pool their

existing assets and share towers. Tower

sharing may also increase the financial

viability of rolling out to certain rural

locations and help support universal

access initiatives.

There is also an important argument

to be made in terms of specialization

and simplification of operations for

mobile operators. Tower roll-outs and

tower management require a specific

skill set which historically has been

better managed by Towercos. For

example, roll-outs are often delayed

due to permits and licenses approval

by the local municipalities. These

types of complex processes tend to

overwhelm monolithic operators

who are already struggling to

manage growth on all fronts in their

organizations. This specialization can

be further complemented by teams

which can move from the operators

to the Towerco, as their positions are

potentially made redundant due to

outsourcing.

Finally, a recent international trend

(including MEA) is to push for tower

sharing due to its environmental

benefits. With regulators now issuing

their fourth, fifth or sixth mobility

licenses, local municipalities are feeling

the visual burden of an explosion of

tower masts. Forced tower sharing

initiatives are already taking place in

markets such as KSA, UAE and Iran

and should continue to play a more

significant role in the coming months

and years.

Governance and organizational

resistance remain the challenge

There are two main challenges for

operators in implementing tower

outsourcing initiatives. The first is

establishing appropriate governance

mechanisms and service level

agreements with partner Towercos

and the second is managing internal

organizational resistance.

In order to reduce future operational

risk, operators will need to ensure

that they have the right agreements

in place which will secure their

future roll-out needs and ensure

the appropriate level of quality.

Historically, operators have guarded

their network deployment plans as it

was considered a trade secret. Now

operators will need to negotiate

their tower needs with Towercos

to guarantee they will have the

right locations, specifications, and

even positioning compared to other

operators. None of these issues

are impossible to govern with

well thought out agreements, but

nonetheless it remains a challenge.

Organizational resistance is also

proving to be a headache within

operators in MEA. Pan-regional

operators view their deep pockets



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EXHIBIT 3: Key negotiation parameters


EXHIBIT 4: NPV break-even analysis of accelerated market share loss

Source: Delta Partners analysis, African operator data

as a core strength and subscribe to

the idea of flexing their muscle

through aggressive network roll-outs.

Regional CEOs are reluctant to give up

their edge in networks and have been

historically more focused on market

share and revenues, and therefore

are usually the first to object to tower

sharing initiatives. This resistance is

declining somewhat in the currentfinancial climate as financing becomes

scarce. Furthermore, some operators

are now beginning to realize that the

NPV impact of faster market share loss

may not actually be large enough to

discourage tower sharing initiatives

between incumbents and challengers.

The myth of market share loss

One of the strongest arguments

against tower sharing in growing

markets such as MEA is the potential

for accelerated market share loss

resulting from giving challengers

access to an incumbents towers. Site

acquisition and rollout is indeed an

arduous and time consuming process

and in some emerging markets cantake challengers more than a couple of

years to catch up.

However, when analyzing the expected

impact of tower sharing, we see that

the theoretical impact may not be

that great, especially if an NPV-view

is taken. First of all, incumbents are

not giving away an indefinite network

advantage, it is only a head start.

Therefore, in any financial analysis,

the market share loss effect should

be diluted very rapidly after the first

two to three years. Second, even

when taking relatively aggressive

assumptions in the early years of tower

sharing (e.g. challenger doubles itsgross adds rate in the first two years),

the negative NPV impact is not as high

as one would expect. By combining

this with the potential capex savings

and capital gains on the sale of assets,

the result is a no-brainer.


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EXHIBIT 5: Potential capital structure evolution for regional Towercos

Investing in the Towerco space is

attractive even in the current

financial climate

There is no doubt that investing

during the current global financial

crisis can appear to be a risky

proposition. No sector or region

has been spared in the fallout and

although governments around the

world (led by the US) are taking

dramatic actions to right the course,

significant uncertainty remains in

the near term. Nonetheless, Delta

Partners remains extremely bullish

with respect to the opportunity in

Towercos space for the coming 18

months in MEA.

Towercos present a unique

opportunity

Towercos represent a unique

opportunity for private equity investors

to invest in start-ups or relatively

young companies, but with stable

and guaranteed cash flows from long

term leasing contracts. Furthermore,

with increased network roll-outs and

increased potential tenants through

new licenses, Towercos offer equity

investors a significant upside on their

investments. Given the relatively

large size of Towercos, private equity

investors are also offered a legitimate

exit opportunity through an initial public

offering (IPO) on a local or international

stock exchange. This access to future

liquidity significantly reduces the exit risk

for private equity investors and makes

Towercos quite attractive.

Within the context of the current

financial climate, Delta Partners

The opportunity forinvestors

High certainty of cash flows and high growth

potential of the region, makes investing in a regional

company attractive for equity and debt investors.



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believes that several factors make

investing in Towercos more attractive

than ever. First of all, the overall

operator sentiment towards tower

sharing in the region is evolving.

Given less availability of financing

and increased pressure on margins,

operators are looking for new ways

to improve cash flows and reduce

costs. This should bode very well for

tenancy ratio potential for Towercos.

Furthermore, as global equity markets

have been hit hard in the past year,

investors should be able to enter

tower deals at more reasonable

valuation multiples.

Less leverage means operators will

play a bigger role in the short term

One of the downsides of current

market conditions is the scarcity of debt

financing. This implies that Towercos

will not be able to leverage up as much

to improve equity returns. One of the

possible consequences of this is that

operators who decide to carve out their

towers into separate entities may need

to maintain larger equity stakes in the

short term. If this happens, interested

equity investors such as international

Towercos or PE funds will have access

to minority stakes only. However, Delta

Partners believes there will also be

opportunities for which both external

equity and debt will be available. In

these cases, incumbent operators

may be interested in taking a minority

position and allowing the independent

Towerco to grow the business by adding

new entrants as tenants to their towers.

Investors need to ensure they secure

high site sharing indexes from day one

Although the economics of tower

sharing are clearly positive, Delta

Partners estimates that Towerco must

achieve an average tenancy ratio of 1.5

in order to break-even. This assumes

that 68% of tower costs are fixed and

the remaining variable costs increase

as tenants increase. Furthermore,

Towercos must pay for the cost of

capital for carrying the tower assets

on their balance sheets. Overall, a 1.5

tenancy ratio is very achievable but the

best way to accomplish this is to set-up

a Towerco with two anchor tenants

from day one to reduce risk.

EXHIBIT 6: Tower economics

Source: Delta Partners analysis; Asian operator data

Note: Actual data has been indexed and expressed as percentages to protect client confidential information;1 Costs are based on weighted average of 70% Ground Based Tower and 30% Rooftop Tower; 2 Includes cost of capital therefore is not an accounting margin


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EXHIBIT 7: Stance of telecom regulators in the MENA region

Source: Telecom regulators website; press reports

As part of their overall mandate,

telecom regulators are charged with

the task of ensuring fair competition,availability of affordable services

for customers, and incentives for

innovation. Conceptually, tower

outsourcing helps to reinforce all of

these objectives and therefore should be

promoted by telecom regulators.

One of the clearest benefits of tower

sharing, from the point of view of

regulators, is to support universal

access initiatives. Tower sharing willhelp to improve the business case for

rural roll-outs and should encourage

more population coverage in low

income environments such as Africa.

A further benefit is the environmental

angle, which is not specifically part

of a telecom regulators mandate,

but has increasingly become a hot

topic due to the explosion of mobile

towers. Regulators can take a proactiveapproach as in markets such as Iran,

KSA, and UAE, and either encourage

or force operators to share towers in

certain areas.

The only area which should be a

concern for regulators is ensuring that

the establishment of Towercos do not

give an unfair competitive advantage

to specific operators. This is especially

important if operators happen to beshareholders in Towercos. Under

this scenario, regulators may need to

intervene to ensure that Towercos give

fair and equal access to its towers to all

operators and that leasing rates are not

set in any preferential manner.

The role of telecomregulators in the tower

management industry

International experience to date would suggest that

regulators in the MEA region will act favourably towards

the set-up of Towercos and tower sharing in general.


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Several tower deals will be

announced across MEA

Delta Partners expects several towerdeal announcements in the next

12 to 24 months. We expect deals

between regional operators that

will want to maintain a controlling

stake in the new Towerco in the

short term, as well as buy and lease

back transactions led by Pure-play

Towercos with limited participation

of the operator in the new entity.

The challenges of these cases are

also unique. In the first case, themain challenge will be to ensure rival

operators succeed in the execution of

the transaction. In the second case,

access to debt and equity financing

will be the major hurdle in closing

buy and lease back transactions.

An open question remains as to

whether international Towercos

will take a relevant role in these

opportunities. Regional operatorsappear to favour bringing in the

operational expertise of Towercos

but are less interested in the US and

European giants due to their lack of

emerging market experience. Smaller

emerging market focused Towercos

would be the most logical candidates.

These would include the Indian players,

but they may lack the focus and

resources to look towards aggressive

expansion to MEA as they consolidatetheir current footprints. Delta Partners

expects that the tower deals in 2009

will exclude international Towercos but

this trend could change from 2010 and

beyond as operators look to exit theirequity positions.

Key success factors for pioneer

Towercos in MEA

Delta Partners perspective is that

the following elements will play a

critical role in ensuring the success of

regional Towercos in MEA:

1. Incumbent operators should not

shy away from striking deals with

new license winners based on themarket share loss myth

2. Towercos must bring in outside

investors to ensure impartiality and

act as a broker between operators

3. Existing towers must be included

in any deal (not just future towers)

to allow for sufficient scale and

increase operational simplicity for

the operators

4. In order to reduce operational risk,

new Towercos need to secure aminimum site sharing index from

the start by signing at least two

anchor tenants

Delta Partners outlook fortower outsourcing in the

MEA region in 2009/10

Delta Partners expects multiple deals to be struck

between operators in the coming 12 to 24 months and

probably starting with the African continent.


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Delta Partnersis the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East and Africa from i ts offices

in Dubai and Johannesburg, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

25 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Groups unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

Copyright 2009 Delta Partners FZ-LLC. All rights reserved.

the delta perspective april 2009 tower sharing in the

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