This briefing provides a high-level checklist of the key considerations for investors contemplating investing in a telecoms tower infrastructure company (Towerco) or partnering with a mobile telecoms operator (Telco) to form a Towerco.
Towers transactions between Towercos and Telcos create long-term relationships and can be complicated. Experience has shown that careful planning will ensure a better chance of successful implementation and value creation.
Why do a towers deal?
Over recent years, transactions carving out a portfolio of towers from a Telco to create a Towerco holding a portfolio of towers have become mutually attractive to both infrastructure investors and Telcos. For infrastructure investors they have created a new investment opportunity based on long-term income streams and value creation. For Telcos they offer the opportunity to realise cash from existing assets and to focus on the core business of attracting and maintaining subscribers as well as potentially reducing overheads and depreciation charges.
A different approach to life
There is, however, a natural tension between the interests of each party. Typically Telcos will require flexibility, high levels of service and cost savings. Towercos, on the other hand, are focused on bankability, rental yield and driving efficiency savings. Both parties want to protect themselves from surprises. Incoming infrastructure investors and Towercos need to be alive to potential pitfalls.
Key considerations for infrastructure investors and Towercos
- Terms of leaseback contracts with Telcos
The value of a Towerco will depend to a large degree on the long-term lease contracts with Telcos. Key terms include:
- term and certainty of revenue;
- price escalators vs risk of underlying ground rent increases, inflation in fuel and other cost increases;
- priority rights for anchor Telco tenant vs Towerco’s growth opportunities;
- risk of regulatory change;
- operational flexibility and withdrawal rights for Telco;
- long-term service level commitments;
- change of control; and
- Does Towerco have legal title to the sites for an acceptable term?
Good legal title to the tower sites is crucial and may be of greater concern to Towerco than it has historically been for Telco. Establishing legal title is likely to be more complicated and involve a higher degree of legal risk in high growth markets.
Towerco will also need to understand the longevity of the leases and the likely timing as well as challenges and costs of lease renewals.
As Towerco will have a portfolio of multiple sites, a pragmatic sampling approach to due diligence on title and other key terms will be important. Contractual protection and transaction structuring also have a role to play.
- Understand the local regulatory and political environment
Towers typically require a range of regulatory consents, being relatively immaterial on a tower-by-tower basis but aggregating to potentially material matters on a portfolio basis. Issues of non-compliance with planning, business, environmental and civil aviation permit requirements need to be covered by due diligence and/or appropriate contractual protection.
Significant hurdles may also arise in the local telecoms regulatory framework and in broader infrastructure regulation. Regulators may use the carve-out of towers from a Telco as an opportunity to identify a further revenue stream, to reassess market influence of different players in the market and to test the efficacy of existing regulation.
High growth markets will typically involve a higher degree of regulatory and political uncertainty.
- Market risk and future proofing
Towercos should also consider the future of the telecoms landscape including the likelihood of consolidation and network sharing amongst Telcos in-market which could negatively impact Towerco’s revenues. Future large scale technological change may have cost and operational implications for Towerco and these should be tested under the long-term leaseback arrangements with Telco.
Banks will be concerned about how the factors above impact revenue profile, including in particular the terms of the leaseback arrangements, regulatory impact and future proofing against technological and market risk.
Banks may also require security over Towerco's assets, comfort that the security is enforceable (including understanding any regulatory hurdles to enforceability) and that the revenue streams of Towerco are preserved.
- Diligence and status of portfolio
To create a Towerco, the separation process, due diligence and deal closing (largely due to the need for numerous third party consents) can be time consuming. Typically, the carve- out of towers from a mobile operator is achieved through staggered closings. Towercos and investors need to be mindful of the status of the tower portfolio carve-out when assessing any likely transaction, such as whether there are outstanding operational risks associated with permitting and separation steps.