On the surface, Russia appears to be an ideal market for mobile operators looking to separate their towers. A competitive four-player market coupled with an expansive geography give it similar characteristics to Brazil and the US, two countries in which…
On the surface, Russia appears to be an ideal market for mobile operators looking to separate their towers. A competitive four-player market coupled with an expansive geography give it similar characteristics to Brazil and the US, two countries in which independent tower companies have for years been snapping up sites, yet the tower model is yet to take off.
“All operators I understand are a bit cautious,” says Nikolai Lukashevich, senior director at Fitch Ratings.
“They want to have their own infrastructure and flexibility in how they manage it, and they believe this gives them a competitive advantage over their peers and is a bit of a differentiating factor.”
Peter Owen Edmund, chairman of Russian Towers, the country’s only significant independent towerco, has first-hand experience of operators’ reticence to sell their infrastructure.
“Russia has a very strong technical and scientific background, lots of people are very well qualified, they understand engineering and new technology, and there’s a lot of pride in that,” Owen Edmund says.
“There is to a certain extent a psychological piece that is perhaps more unique to Russia than other geographies where handing over infrastructure is not an easy thing to do.”
A financial discussion
Founded in 2009, Russian Towers has spent a lot of time making sure the engineers understand the benefits, and convincing them that his company can operate their infrastructure competently.
That said, Owen Edmunds is clear that technology is not the primary concern when operators consider outsourcing their towers.
“When it comes down to it, this is a financial argument and a financial discussion. The fact that we are in a position to free up capital, such that operators can use that increasingly scarce capital to more effect through their active network makes our proposition attractive.”
Russian Towers has built and operated towers for all four leading mobile operators (MegaFon, MTS, VimpelCom and T2 RTK Holding) with a portfolio of roughly 1,500 sites. It also has a strategic relationship with the railways allowing it to build towers on their infrastructure.
“We have probably managed to get to a watershed, both in terms of educating the market on the model and proving to the operators that we are a competent company to do it,” Owen Edmund says.
Up until now, Russian Towers has grown organically, but the towerco has a longstanding interest in acquiring some sites from the operators, which together own more than 40,000. That has yet to come to fruition, but could be set to change.
Weakening economy could drive transactions
Lukashevich said the economic downturn, following both the western sanctions in response to the war in Ukraine and the devaluation of the rouble [which has nearly halved against the dollar in the last two years, rising to the current Rbs57 to US$1 however after bottoming out at Rbs69.7 on 31 January 2015], has wrought new cost burdens.
“Market growth has run out of stream and operators should be bracing for more pressures ahead, so they are looking for ways to economise,” says Lukashevich.
“The key cost pressure is the weakening rouble. All the operators are investing a lot and the telecoms equipment is almost entirely imported, or assembled using imported components.”
Owen Edmunds says the environment could open up opportunities for Russian Towers.
“In many ways, this current crisis has helped our organic model and has the potential to unlock a wider transaction,” he explains.
“The operators are capital constrained and could benefit from bringing in some cash, and also removing the expense of building passive infrastructure [in order] to concentrate on live infrastructure.”
Russian Towers has been in dialogue with operators since it opened for business. Its founders all have backgrounds in Russian telecoms and the towerco’s investors help open doors, too. It is backed by UFG Asset Management, the Macquarie Russia Infrastructure Fund, the EBRD, the IFC, ADM Capital and Sumitomo Corporation.
“We’ve always been able to have these discussions and they blow hot and cold as cycles run,” Owen Edmunds says.
“We stand ready to transact when they feel that the moment would become live.”
Despite operators coming under increasing cost pressures, Owen Edmunds concedes there are downsides to disposals during a downturn.
“Operators may question whether their assets would attract the same valuations as they would have either in the past or in a future recovery market,” he said.
Edmunds says operators must weigh up the market situation and cost per tower, versus capital constraints.
First mover advantage
Owen Edmunds added that Russian Towers did not have a deal on the table at the moment, and refused to be drawn on which of MegaFon, MTS, VimpelCom and T2 RTK Holding were most likely to blink first.
Lukashevich took a step back and suggested that the four-player mobile market was likely to consolidate in the next two to five years, with smallest player T2 RTK the most likely consolidation target.
“On that basis, it makes strategic sense for T2R not to overly invest in its own infrastructure, but rather rely on infrastructure provided by someone else,” Lukashevich says.
VimpelCom appears to be the other prime candidate to sell towers in the near future. The company’s Italian subsidiary, Wind Telecomunicazioni, sold more than 7,000 of its towers to Spanish infrastructure group Abertis in March, raising €693m (US$774.29m). Meanwhile in Russia, the telco has looked at selling towers but, as yet, been unable to seal a deal.
Owen Edmunds says the first operator to take the plunge could get the best deal.
“I think it’s a truth to say that often the valuations work best for the first one or two operators that transact, and very much worse for the last ones,” he says.
“I suppose there’s also a simple rule that the first to market will probably get more bang for their buck than the people following.”
With the rouble exchange rate and implications for capex on operators’ minds, a deal may come sooner rather than later.
