In a little over 20 years, a new breed of independent telecom tower companies (towercos) have created a new USD 300 billion infrastructure asset class — the tower industry — which according to TowerXchange, Towercos now own 68.7% of the world’s investible towers and rooftops.
Today, a tower on a mobile network operator’s (MNO’s) balance sheet is a depreciating asset built to serve the needs of a single owner — the same tower on a towerco’s balance sheet is a potential source of long-term, recurring revenue from multiple credit worthy tenants. Investors recognize towercos’ proven long-term cash flows, and the separation of infrastructure assets from retail and technology risk, hence a valuation arbitrage wherein MNOs typically trade at 4-7x, while towercos typically trade at 10-25x.
While there is great diversity in towerco business models, they can be categorized into two groups.
The first are pureplay independent towercos, exemplified by American Tower, Crown Castle, SBA Communications, Protelindo and Cellnex, which can all trace their origins back to the phenomenon where privately-owned tower builders started retaining and acquiring assets in the U.S. in the mid-1990s.
The second category are operator-led towercos, towercos in which 51% or more of the equity is retained by parent MNOs, exemplified by China Tower Corporation, Indus Towers, Bharti Infratel, edotco and INWIT.
A third variant on the business model, which overlaps with both the pureplay independent and operator-led categories, are the power-as-a-service towercos, which provide a full service inclusive both tower and power, exemplified by IHS Towers, Helios Towers and Eaton Towers.
While less than a third of the world’s towers remain on MNO balance sheets, shown in blue in the Figure below, only 15% of the world’s towers are owned by pureplay independent towercos.
51% of the world’s towers are owned by towercos that are themselves majority owned by MNOs, although that statistic is somewhat distorted by the sheer scale of China Tower Corporation and Indus Towers.
Just over 2 million of Asia’s 3 million towers are owned or operated by towercos.
The Chinese market has transitioned to a co-build, co-share model, led by China Tower Corporation (CTC), which remains 94% owned by China’s three MNOs, with an initial public offering (IPO) expected in the first half of 2018. In the two years since its creation in July 2015, the infrastructure sharing facilitated by CTC has reduced China’s new cell site requirement by a staggering 568 000 sites, saving 27 700 acres of land, and CNY ¥100.3 billion (USD 15.2 billion).
With an ecosystem of over 700 registered local suppliers to CTC, and with the Ministry of Industry and Information Technology (MIIT) and the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), both heavily involved in the transition to independent infrastructure ownership, the technical and regulatory environment is extremely supportive in China, particularly since document No. 92 legitimised the status of a fragmented ecosystem of over 200 privately owned, pureplay independent towercos that also serve the Chinese tower market.
The rest of North and Eastern Asia remains untapped by the tower industry — in countries like Japan, towers are still considered strategic assets and a source of competitive differentiation.
Oceania also remains relatively unpenetrated, with only Axicom (formerly Crown Castle Australia), and a handful of smaller private tower builders active.
The “disarmament of MNOs passive infrastructure” continues in India, where towercos own more than two thirds of the country’s 461 550 towers. Consolidation of the carrier landscape to four or five all-India players will lower the glass ceiling on towerco tenancy ratios, however, it will also concentrate spectrum in the hands of carriers less burdened by debt and better able to deploy capex, resulting in more sustainable long-term growth for India’s towercos, even if they have to absorb a slowdown in near-term growth.
Consolidation at the carrier level has accelerated consolidation among India’s towercos, such that TowerXchange forecast two or three giant Indian towercos emerging; American Tower, plus a combined, increasingly privately owned Indus Towers/Bharti Infratel combine, with perhaps room for one other.
Two big questions remain in Indian towers: what will become of India’s towers that remain on carrier balance sheets?
While the Reliance Communications towers will be acquired by Reliance Jio, the future of an estimated 75 000 BSNL and MTNL towers, remains uncertain. And with Vodafone and Idea making no secret of their desire to monetize both their captive towers, already lined up by American Tower, and their stake in Indus Towers, TowerXchange wonder whether the Indian tower market is on the brink of evolving from an operator-led bias to a more pureplay independent towerco model. And if that were the case, will the current contractual norms survive, where lease rates are relatively low, amendment revenue is almost non-existent, and discounts are offered when towers are shared?
While the tower industry remains covetous of aligning the Indian business model more closely with the pureplay independent towercos of the U.S., TowerXchange believes that downward pressure on ARPU and lease rates suggests any transition in contractual norms may take many years.
While there remain operational challenges particularly in rural India, towercos like Bharti Infratel and Indus Towers have leveraged battery and renewable hybridization and free cooling to enable over 80 000 towers to run zero-diesel. India is one of the most welcoming countries in the world for towercos in terms of ease of doing business, with light touch registration of towercos as IP-1s, IP-1s afforded infrastructure status since 2012, expedited rights of way since 2016, and regulators actively promoting electromagnetic field (EMF) awareness, resulting in a tower count compound annual growth rate (CAGR) of 3% forecast for the next three years, and average tenancy ratios approaching 2.5.
Regulatory environments are more varied across the rest of Southern and Southeast Asia, with mature regimes in Malaysia and Myanmar, and new licensing regimes emerging in countries like Bangladesh.
This region has seen towerco penetration rapidly rise to 34%, driven most recently by the acquisitiveness of Asia’s two multi-country towercos, edotco, which recently spent over USD 1 billion to acquire 13 700 towers in Pakistan, and OCK Group, which recently entered Myanmar and Vietnam. This region is also home to Asia’s most mature benchmark tower market; Indonesia, where over 50 towercos own two thirds of the country’s 93 549 towers.
Africa and the Middle East
Five years ago, towercos owned less than 5% of the towers in sub-Saharan Africa. Today, led by Africa’s ’Big Four’ towercos (IHS Towers, American Tower, Helios Towers and Eaton Towers), that figure has risen to over 36%. With many untouched African tower markets remaining uninvestible due to regulatory and taxation regimes, the majority of Africa’s most investible towers have now been acquired — MTN and Airtel have divested towers in the majority of their larger markets, while Orange, Etisalat and Vodafone/Vodacom have partnered more selectively with towercos.
The next milestone for the African tower industry is likely to be the IPOs of three of the big four towercos, with IHS Towers expected to list in New York, Helios Towers and Eaton Towers in London, seeking a collective valuation of around USD 14 billion.
Africa’s ’Big Four’ towercos have successfully evolved into full service powercos, assuming responsibility for and improving uptime at sites both on and off-grid, driving operational excellence, and reducing pilferage and opex.
While towercos currently own less than 1% of the towers in the Middle East and North Africa (MENA), this figure could rise to almost 10% in the next year.
Q417 saw the first sale and leaseback of scale take place in the region; IHS Towers and Towershare announced the acquisition of 1600 towers from Zain Kuwait.
Expect this to be the first of several MENA tower transactions, where joint venture infracos may also emerge, with MCI, RighTel and Fanasia pioneering this form of infrastructure sharing in Iran.
Until recent adoption in MENA, the business model of the joint venture infraco (infrastructure company) had hitherto been unique to Europe, exemplified by CTIL and MBNL in the UK, as well as 3GIS, SUNAB, Net4Mobility, Yhteis Verkko and TT Networks in Scandinavia. Joint venture infracos own or operate 10% of Europe’s towers, but since 2012 Europe has seen significant growth in both the pureplay independent towerco sector (driven by Cellnex and American Tower) and the operator led towerco sectors (with the carve outs of INWIT, Telxius); pureplay independent towercos now own 12% of Europe’s towers, operator-led towercos own 17%.
While balance sheet re-engineering remains a driver in Europe, so does network efficiency — in particular the decommissioning of parallel infrastructure.
USA and Canada remain the heartland of the global tower industry; the business models and contract structure utilized by American Tower, Crown Castle and SBA Communications continue to represent the ’gold standard’ in terms of investibility and capital value creation, while the operational environment is less challenging than emerging markets, and the regulatory environment is considered extremely favourable.
While historically value in the U.S. market has been driven by robust contractual terms with healthy lease rates and escalators, and significant ’amendment revenue’ (the overlay of nextgen technology equipment), healthy domestic lease up prospects have driven valuations to an unprecedented high.
With the majority of U.S. and Canadian towers now on towerco balance sheets, leading U.S. towercos have increasingly looked south of the border to extend their growth narratives.
When their latest acquisition closes in Paraguay, American Tower will have almost as many towers in Central America/Latin America CALA (36 486) as they do in the USA (40 426). SBA Communications has built a stronghold in Central America, utilizing U.S. style contract structures in largely USD economies. SBA recently supplemented their 7335 site Brazilian portfolio, acquiring Highline do Brazil and their 1200 sites.
This theme of towerco-on-towerco consolidation will be a constant in 2018, with Phoenix Tower International and Digital Bridge joining American Tower and SBA Communications in seeking to rollup the dozens of smaller private pureplay independent towercos in Latin America.
With the vast majority of towercos in Central and Latin America operated on a ’steel and grass’ basis only (power remains the responsibility of the carrier), the region benefits from relatively low operational complexity, and the regulatory environment is developing positively, with new accelerated permitting initiatives bearing fruit in countries like Guatemala, Mexico and Brazil.
With an estimated 73% of North American and 51% of Central and Latin American towers now on towerco balance sheets, the ’heartland’ of the tower industry is almost sold out, driving international growth of this proven innovation.
I’ll conclude by mentioning some of the positive impacts, and pitfalls to be avoided, as we continue into an era of professional infrastructure sharing in which towercos own the majority of the world’s towers.
Towercos’ laser-beam focus on passive infrastructure creates value in several ways:
Ultimately, the separation of infrastructure assets from retail telecommunication releases capital and creates capital value, enabling MNOs to focus on selling minutes and megabytes. It would be naïve to assume that this industry transformation comes at no cost and without risk: MNOs would be well advised to absorb the cautionary tales of peers who leveraged towerco partnerships to sell their passive infrastructure for many times its replacement cost, in the process saddling the MNO’s local operating companies with an increased total cost of network ownership that may become difficult to sustain in the long term. Partnering with towercos can relieve debt, but the old cliché holds true: don’t take out a mortgage you cannot afford!