Are TowerCo's really the low-risk infrastructure advertised?

RPS Deal Advisory specialists offer insights into the recent upsurge of telecommunication tower transactions happening across the Asia Pacific region. Billed as low risk infrastructure to potential buyers – is this really the case when it comes to balancing operational cost, financing and ESG?

* This article was first published on Project Finance International

Telecommunication towers are an infrastructure asset class that’s attracting a lot of attention from investors. Continued population and economic growth across the Asia Pacific (ASPAC) region and increased bandwidth requirements per capita have translated to governments and telcos racing to meet demand.

Across the region we have observed the highest number of transactions in Australia, Indonesia, and the Philippines, with more than 65,000 towers being subject to merger and acquisition (M&A) activity or refinancing since the beginning of 2020. Cumulatively, these deals represent more than USD8.5b in transaction value.

These transactions all relate to independent tower companies (TowerCo’s) that are dedicated to providing what some consider to be ‘low risk’ infrastructure to one or more Mobile Network Operators (MNOs).

TowerCo’s primarily manage this ‘passive’ mobile infrastructure, and the underlying assets that form the transaction perimeters typically include the utility connection, security and fencing, tower structure and foundation, and occasionally some sheds. For rooftop towers, access ways to deployed equipment are also included. Active equipment such as antennas, communications systems, cabling, and backhaul, are managed directly by the MNOs who can be expected to sign up to long-term contracts.

At the time of writing, TowerCo transactions currently in the due diligence phase include Vodafone (NZ), Spark Infrastructure (NZ) and BAI Communications (AUS). These potential transactions continue the pattern that’s emerged of telco firms divesting passive infrastructure and using the returns to invest in 5G, or focus on their core business of providing mobile services.

Independent TowerCo’s make commercial sense in an environment where MNOs are looking to utilise active equipment while managing capital outlay through co-location with other tenants. Revenue is generated through leasing capacity on the towers, providing space on the ground for sheds, associated infrastructure, and connection to the electricity grid.

Established TowerCo’s will have a network of towers and associated assets already in place. Long-term leases for land, reliable services and supply chain provide significant barriers to entry for new players looking to compete.

The most common types of tower structures include lattice towers, monopoles, guyed masts, and rooftop installations.

The TowerCo sector is one that investors are finding attractive in 2022 – but what are some of the below the line items that impact asset performance? What should investors be considering?

Testimonial

Operations and maintenance

The carve out of tower assets from a telco firm can be complex as the development, sales, operations, and maintenance of towers become primary functions of the incoming management team and infrastructure owner/s. Under prior arrangements, these assets would have provided a supporting role to the retail or active broadcasting arms of their parent organisations.

With the quality of towers and associated infrastructure now contributing the majority of tangible asset value, a new lens is required to ensure sustainable ownership and growth.

Typical relationship between TowerCo, customers and suppliers

Typical relationship between TowerCo, customers and suppliers

Beyond the expected management functions that need to be established, dedicated roles need to be provisioned for land and property management, engineering, asset management, project management offices (PMOs) for capital works programs, work health safety and environment (WHSE), community engagement, and more.

Opex and Capex budgets will contribute towards the shape of the organisation and in particular, the functions that are outsourced to third parties. There needs to be checks and balances so the setting of direction, execution, and assurance can be adequately balanced. As part of its asset management strategy, the TowerCo will need to decide which party owns and manages the asset information and associated intellectual property (maintenance plans, drawings, etc.) as these are valuable to incoming investors.

Unfortunately, natural disasters and the impacts of climate change are unavoidable in many regions across the globe. Earthquakes, landslides, fire, high wind, and rainfall can all impact the operability of towers, so it’s important that investors consider the potential impact that such events could have on older towers that were certified to legacy design codes that may be grandfathered.

Regarded as critical infrastructure by authorities and end users, design requirements for towers are consistently updated over the asset’s lifespan. Regulations introduced in New Zealand following 2010 Christchurch earthquakes, or the Australian Wind Code introduced in 2021 are good examples of this.

The obligations for satisfying such requirements remain with the TowerCo.

Cash flow

Additional tenants and technology for towers contribute to both revenue and coverage. However, this can come with an upfront cost as towers that are already at capacity will need to be modified to carry more hardware. The exception is when MNOs engage in network sharing through Multi Operator Core Network (MOCN) or Multi Operator Radio Access Network (MORAN) systems.

This is particularly challenging for towers that start life as dedicated assets for a single MNO. Understanding why towers were deployed in the first place can help investors better gauge the level of additional Capex investment required. Towers that were originally deployed to meet the needs of one MNO can be expected to require substantial augmentation.

Effective fiscal management is needed to ensure new tenants can be onboarded at established sites without them making a loss in the short term.

Strengthening upgrades are generally a one-off investment at the start of the tenancy, and capital co-contributions from tenants can offset this initial pain.

In addition to strengthening costs, TowerCo’s seeking to increase their geographic footprint will need to embark on the development of new sites under 'built to suit’ (BTS) programs. The procurement timelines for completion can be between 18 – 24 months, and a large chunk of time must be invested in obtaining permits, licenses, and development approvals.

A potentially large downside risk exists where sites are remote or located in difficult terrain – contractors willing to sign up to fixed price contracts in challenging geotechnical conditions are few and far between.

The effective management of procurement for BTS programs requires careful juggling of cost, time, and quality considerations. Shareholders and their operators will have to pick which two of these three align with their risk appetite.

Tower relocations, modifications to equipment layouts and decommissions are also an unavoidable reality of operating TowerCo’s. Relocations may be necessary when landlords decline to renew site leases or when the site no longer satisfies the original development approvals due to encroachment from neighbouring sites.

A concern would be whether the prospect of some of the “variations” listed above are being factored into financing structures. Are they to be funded by equity (diluting returns), or on a pro rata basis with senior debt? Are they predictive or a gradually emerging risk through the life of the financing?

Potential obsolescence

Most of the towers reviewed by our team in recent times have design lives in excess of 40 years.

Notwithstanding the technology required to support asset management functions and proactive maintenance regimes, adequate design criteria are still required to enable towers to operate to their originally designed lifespan (or beyond). With a considered approach, it is possible to extend the technical lifespan of tower assets, and in some cases this has been useful in achieving the requisite net present value (NPV) and internal rate of return (IRR).

Mobile phone and wireless applications became part of our lives when bandwidth and speeds enabled real time communications. A proportion of TowerCo’s in the market today carry assets that are less than halfway through their technical life - the result of the evolutionary growth from early networks through to 4G and 5G.

Even before these towers reach the end of the lifecycle for which they were originally designed, there are big questions about what 6G and beyond will look like, and what part these towers may play in that future. This is why many advisors are hesitant to provide revenue inputs to financial models beyond the mid-2030s.

As the demand for speed increases, so will the frequency spectrums that are being utilised for our telecommunications networks. Wavelength is inversely proportional to frequency, which means that blackspots around buildings and geographical features need mitigation through network densification.

With the increased focus on millimetre wave (mmWave) and distributed antenna system (DAS) networks, there is a risk that towers could be bypassed in favour of backhaul options when access to fibre becomes more readily available.

It remains to be seen whether the financing structures currently being put in place are flexible enough to hedge these potential risks for equity and debt in the medium term.  

ESG and financing

We have yet to see any clear investor guidance on the certifiability of tower assets when it comes to green financing.

However, arguments can be made about the applicability of existing data and information and communication technology (ICT) classifications for ESG certification. The role of towers in the ensuring vital service delivery could equally see them certified along with other network assets under the guise of renewable energy asset classifications. 

The Climate Bonds Initiative has so far remained silent on the inclusion of tower networks within its certification taxonomy, though it does include fibre and cable-based networks and ‘telecommuting and teleconference software and services’. The European Commission’s taxonomy also includes data processing, hosting and ‘related activities’. 

There is no clear inclusion of tower networks under the United Nations (UN) Sustainable Development Goals, though it can certainly be argued that tower infrastructure aids in the delivery of economic, social and education opportunities in places that are otherwise hard to service via wired network infrastructure. 

So, while the ‘greenness’ of a TowerCo itself may currently be debatable, the assets themselves have much to add in terms of economic development, transition, and decarbonisation.

A notable example of green lending in the TowerCo space is the inclusion of investments made by Verizon in the 5G network under its Green Financing Framework. While indirect in that the benefits come from the organisation’s support for smart energy, energy efficiency devices, and greater energy efficiency through the upgrade of older networks to more efficient 5G, it’s a signal of where tower network green financing could be going.

Moving forward, TowerCo’s may be able access sustainability linked finance more directly by agreeing to targets for their own energy and emissions performance.

This might include sourcing renewable energy for their network power needs, or investing in energy efficiency upgrades. Under sustainability linked structures, TowerCo’s may secure funding discounts, so long as these targets are met. These energy sourcing and efficiency criteria are also key elements of the abovementioned ESG taxonomies.

Pandemic era lockdowns demonstrated the benefit of virtual meetings, and with business travel being more carbon-intensive, the corporate sustainability programs of many organisation’s are preferencing virtual meetings over face-to-face. This is in turn increasing the demand for capacity on tower and other telco infrastructure.

With all of this in mind, the movement towards ESG prioritisation, goal setting, and certification will be a positive for the sector as a whole, and for TowerCo’s with favourable tower locations in particular.

Looking over the horizon

At present, TowerCo’s are viewed as an element of the supply chain for MNOs and other users to deploy their hardware. The needs of end customers will invariably drive the demand that TowerCo’s must respond to. The question becomes: what else should they be investing in to ensure that they remain relevant in a market that’s evolving quickly and growing rapidly?

Moving the lens way from towers, how will the hunger for reliable bandwidth and speed be considered in an ecosystem that comprises data centres, fibre networks, and applications like smart meters? Financial investors should be asking what steps are needed to diversify portfolios and exploit economies of scale through enhancing their internal subject matter expert (SME) talent.

Pushing the boundaries further, we are on the cusp of a confluence, where multiple technology breakthroughs will meet. Our future world will be one where electrically powered autonomous vehicles will roam our streets, energy networks will be required to support quick charging, and wireless networks will be needed to transfer data in real-time to manage vehicle fleets.

Now is the time for TowerCo investors to consider how they will evolve to remain competitive and relevant in this not-too-distant future.

 

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