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The Delta Perspective

April 2009

Tower sharing in the


Middle East and Africa:
Collaborating in
competition
Authors Victor Font - managing partner: vf@deltapartnersgroup.com
Chris Datta - principal: cd@deltapartnersgroup.com
Alphonse Reddy - senior associate: ar@deltapartnersgroup.com
Shohinee Ghosh - senior researcher: sg@deltapartnersgroup.com

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

Infrastructure sharing is coming to MEA


Tower sharing has been one of the Key highlights
telecom industry’s global hot topics • Delta Partners estimates that there are
for close to a decade. The first wave currently over 200,000 mobile telecom
was seen in the US and Europe, towers operating in the Middle East
while recently, India has taken center and Africa (MEA) region
stage with several multi-billion dollar
• Tower sharing can bring significant
asset carve-outs. With some small
capex and opex savings for regional
exceptions, the Middle East and Africa
operators. Additionally, operators can
(MEA) region have been relatively
also make substantial capital gains
quiet with respect to infrastructure
by monetizing their tower assets into
sharing deals, as operators believed
seperate entities
that coverage advantages outweigh
the benefits of sharing. However, Delta • Towers in MEA are expected to
Partners expects activity to heat up in increase by 50% in the next five years.
the next twelve to eighteen months However, US$8.0 billion in cumulative
with multiple deal announcements. tower related capex could be saved if
operators were to share towers
The timing of these expected sharing
• Delta Partners forecasts that several
deals is linked to several strategic
tower sharing deals will be announced
dilemmas that regional mobile operators
in the coming twelve to eighteen
are currently facing. The first and
months. These could potentially
foremost driver is compression of
involve some of the large pan-regional
margins due to increased competition
operators
and decline in price-levels. Operators
in the Middle East are battling market networks, the profitability of newer
liberalization amidst fully saturated roll-outs is not as compelling. This is
markets, while in Africa mobile combined with the fact that remaining
operators in many markets are facing rollouts are often in difficult and
“hyper competition” due to the expensive to reach rural areas. These
issuance of fourth and fifth licenses. factors are currently forcing regional
operators to seriously evaluate tower
The second related driver is decline sharing options.
in customer profitability as operators
penetrate the “bottom of the value The size of the MEA opportunity is
pyramid”. Operators are being forced enormous
to find new ways to enhance margins The size of sharing opportunity in MEA
but still be able to support lower value region is enormous. Delta Partners
customers. The third and final key estimates that there are roughly
driver is the rationalization of capex 200,000 towers currently in operation
budget due to tightened financing in MEA and the number is expected
in the current economic climate. to increase by 50% in the next five
Regional operators are starting to look years. This expected growth is linked to
at ways they can reduce future capital significant remaining network expansion
expenditure but also unlock cash from and continued market liberalization.
their existing balance sheets to finance This tower forecast could be reduced
future projects. significantly if we factor in potential
for wide spread tower sharing which is
Sharing brings many benefits to currently not the case.
emerging markets
Not long ago in more developed Delta Partners estimates that in MEA,
markets, telecom operators considered US$8 billion could be saved over the
network related infrastructure as their next five years in cumulative tower
core lever for sustainable competitive related capex if a site sharing index
advantage. However, as markets of 2.0 can be achieved on the newly
liberalized and competition heated rolled out towers. A further US$1
up, their networks eventually became billion annual opex savings on new
more of a commodity. Thus, mobile towers can be achieved by 2013.
operators shifted focus to other However, this number could even be
elements of their value proposition to higher if existing tower portfolios are
differentiate and create value for their rationalized and shared.
customers. This allowed operators
to take advantage of many of the Many stakeholders are pushing for
strategic and financial benefits linked tower sharing
to tower sharing including reduced While tower sharing has clear benefits
future capex, lower operating costs, for operators, other stakeholders
and potential capital gains if towers are are also helping create momentum
sold to a third party. in the industry. International tower
companies have been hovering around
While some of these lessons still apply the MEA region looking to expand their
in emerging markets such as Africa, tower portfolios. In parallel, both debt
other factors make the case even more and equity investors have also been
compelling. One of the key differences shopping for deal opportunities with
in Africa is the wide dispersion of many of them allocating considerable
average income levels between nations. funds to invest in infrastructure deals.
Since operators have “cherry picked” This investment appetite stems from the
the most lucrative regions to roll-out massive deals executed in other regions

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and the perceived attractive risk/ The purpose of the paper is to examine
return profile. Lastly, regulators across the different infrastructure sharing
the region have begun to realize models currently being employed
the positive impact of tower sharing and their potential impact on the key
and assessed that it can help them stakeholders in the MEA region: mobile
achieve their objectives of fostering operators, investors and regulators.
competition and improving customer The paper aims to identify the key
service. Increased environmental opportunities and challenges for each
pressure has also put tower sharing of the players and discusses Delta
into the spotlight and reinforced some Partners’ expectations for the coming 12
regulators across the region to take to 24 months within the context of the
proactive action. current economic and financial climate.

Understanding the basics


of tower sharing models
There are two main questions that must be addressed:
which network elements should be shared and who
should own these assets?
Sharing passive versus active regulators encouraging the same. This
infrastructure together with advances in technology
In order to categorize different types such as multi party antennae, we expect
of infrastructure sharing, the first that active infrastructure will slowly
question to address is which network gain momentum. We further expect
elements are to be shared. The that operators will continue to share
traditional infrastructure sharing model transmission capacity but will likely do
in the telecom world has been that so on a case-by-case basis. For the
of sharing passive infrastructure. This purposes of this paper, we will only
model typically includes network focus on the sharing of passive tower
elements such as tower masts, power assets as it is expected to be the first
units, shelters, air conditioning, and step operators will take in MEA region.
security. These network elements
are not telecom equipment related Tower swaps versus carve outs
and are considered less strategic and Once an operator has decided which
easier to share. Operators and existing network elements to share, the next
tower management companies are question to answer is who will own the
experimenting with sharing active shared assets. There are three basic
telecom equipment components as models available to operators when
well. While active infrastructure sharing deciding to share towers:
is not prevalent today, it is expected to 1. Engaging in tower swaps
play a more significant role in the near 2. Setting up Joint Ventures (JVs) with
future especially in places like India other mobile operators (“Operator-
where spectrum availability is a serious owned Towercos”)
concern. There have been some positive 3. Outsourcing tower assets to
developments recently on the active independent tower management
infrastructure sharing front with the companies (“Pure Plays”)
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1. Tower swaps future network rollout needs of the operators also position the Towerco
Tower swaps involve the simplest shareholders. Typically, operators also for a future sale or exit when more
form of tower sharing between carve out their existing tower assets value can be realized.
operators. This model involves a “like into the Towerco by entering into a
for like” swap of access to towers “sell and lease back” arrangement. 3. “Pure-play” Towercos
between two operators in the same Examples of “Operator-owned” The third most prevalent model used
market. Put more simply, Operator Towercos include Bharti Infratel, Indus by operators is selling their tower
A gives access to Operator B on one Tower, Quippo – Tata Teleservices and assets to Pure-play Towercos and
of its towers, and Operator B gives Reliance Infratel – all in India. outsourcing the remaining future
access to Operator A to one of its network rollout as well. These Pure-
towers. In this model, each operator Financing for the Operator-owned plays tend not to have operators
maintains ownership and control of Towerco can come from either the as shareholders and typically grow
their own towers. operators themselves or from external through aggressive leverage driven
equity and debt financers. In order to acquisition of towers. Examples of
Tower swaps are relatively simple to minimize cash outlays, operators tend Pure-play Towercos include American
implement and can offer pragmatic to bring in debt financing and private Towers and Crown Castle in the US,
solutions to operators looking to equity investors to fund the expansion TDF in Europe, and Helios in Nigeria.
rationalize their network capex and of Towerco. This helps operators to
opex. Unfortunately this model capture value from the start and take Apart from the obvious financial
typically only allows for savings on a the first steps for a future potential benefits, a sale of assets to a Pure-
very small percentage of the overall equity exit. play Towerco can also bring certain
tower portfolio and full value is not operational advantages to operators.
extracted. At the moment, tower The Operator-owned Towerco model Depending on the region, Pure-plays
swaps are actually being executed offers many benefits to operators. bring significant experience with
in MEA but on a selective basis in In the case that multiple operators them which reduces operational risk.
certain countries. come together, it allows them to By selling to Pure-plays, operators
reduce operational risk by ensuring also avoid messy negotiations with
2. “Operator-owned” Towercos high site sharing indexes with respect to operations and governance
Another option available for guaranteed tenants from day one. with other operators. On the flip
operators is to create an “Operator- By being shareholders, operators side, Pure-play Towercos will not buy
owned” Towerco as a separate entity also get the comfort that they will towers at their full potential market
while maintaining a significant equity be able to control and influence the value leaving operators with less cash
stake. This new Towerco can be JV especially in the earlier stages for their assets.
formed with one or more operators of the outsourcing process. By
and would be responsible for the joint externalizing the tower assets,

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

Source: Delta Partners analysis

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Implications for operators
of mobile tower sharing
Operators can benefit from improved cash flows,
better margins and shorter time to market through
tower sharing

Tower sharing brings capex and opex ensure that their host Towercos are able
reductions to secure high tenancy ratios (number
One of the clearest benefits to of tenants per tower) so savings can
operators of tower sharing is reduced be passed along to operators. Delta
future network capex. Under a simple Partners estimates that in MEA,
tower swap arrangement, operators assuming a site sharing index of 2.0,
can split capex costs with their partner an annual opex savings of over US$1.0
operators on shared towers. However, billion is expected (12-15% savings on
if operators decide to outsource to passive infrastructure related opex).
Towercos, future tower capex can
then be completely eliminated. The Operators can unlock cash from their
Towercos themselves are willing to pay balance sheets
for the capex because they create value Outsourcing tower assets can also
through co-locating multiple operators unlock huge amounts of cash from an
on each tower and recover their operator’s balance sheet. By carving
investment through leasing fees. out tower assets or selling them into
separate entities, operators are able to
Delta Partners estimates that there are generate cash through the partial or
approximately 200,000 towers currently complete sale of these assets. Towercos
operating in MEA and the requirement will attract both debt and equity
for towers (in a non-site sharing financing and these new investors will
scenario) will increase by 50% over the value the tower assets higher than their
next five years. Taking an industry-wide book value. Therefore, operators are
view and assuming a tenancy ratio of able to secure cash up front for the sale
2.0 on newly built towers, operators in of the tower assets and secure financing
the MEA region could save upwards of for the Towercos for future roll-outs
US$8 billion in cumulative capex over as well. Given the current credit
the next five years. crunch, leveraged operators can see
passive infrastructure outsourcing as an
In addition to lower future capex, tower opportunity to strengthen their balance
outsourcing should offer operators sheets and improve cash flows.
improved operating margins. Through
the improved economics of tower Finally, if mobile operators maintain
sharing, Towercos will be able to an equity stake in the Towercos, they
offer attractive leasing rates to tenant can experience significant financial
operators which will improve their gains through the value creation of the
overall EBIT margins (earnings before Towerco itself. As Towercos increase
interest and taxes). However, in order their tenancy ratios and efficiency, the
to extract maximum value from lower overall risk will decrease while implicit
leasing rates, operators will need to valuations will go up. Operators can
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participate in this upside as shareholders by the local municipalities. These outsourcing initiatives. The first is
and gain more upside from the types of complex processes tend to establishing appropriate governance
outsourcing of their towers. overwhelm monolithic operators mechanisms and service level
who are already struggling to agreements with partner Towercos
Strategic benefits include reduced manage growth on all fronts in their and the second is managing internal
time to market and lower organizations. This specialization can organizational resistance.
environmental burden be further complemented by teams
Outsourcing of towers can provide which can move from the operators In order to reduce future operational
mobile operators with significant to the Towerco, as their positions are risk, operators will need to ensure
strategic and operational benefits, potentially made redundant due to that they have the right agreements
particularly in developing low income outsourcing. in place which will secure their
markets. In countries where significant future roll-out needs and ensure
rural roll-outs are still required, tower Finally, a recent international trend the appropriate level of quality.
sharing can decrease the time to market (including MEA) is to push for tower Historically, operators have guarded
for operators since they can pool their sharing due to its environmental their network deployment plans as it
existing assets and share towers. Tower benefits. With regulators now issuing was considered a trade secret. Now
sharing may also increase the financial their fourth, fifth or sixth mobility operators will need to negotiate
viability of rolling out to certain rural licenses, local municipalities are feeling their tower needs with Towercos
locations and help support universal the visual burden of an explosion of to guarantee they will have the
access initiatives. tower masts. Forced tower sharing right locations, specifications, and
initiatives are already taking place in even positioning compared to other
There is also an important argument markets such as KSA, UAE and Iran operators. None of these issues
to be made in terms of specialization and should continue to play a more are impossible to govern with
and simplification of operations for significant role in the coming months well thought out agreements, but
mobile operators. Tower roll-outs and and years. nonetheless it remains a challenge.
tower management require a specific
skill set which historically has been Governance and organizational Organizational resistance is also
better managed by Towercos. For resistance remain the challenge proving to be a headache within
example, roll-outs are often delayed There are two main challenges for operators in MEA. Pan-regional
due to permits and licenses approval operators in implementing tower operators view their deep pockets

EXHIBIT 2: Tower transactions across the globe

Source: Delta Partners analysis

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EXHIBIT 3: Key negotiation parameters

Source: Delta Partners analysis

as a core strength and subscribe to The myth of market share loss is taken. First of all, incumbents are
the idea of “flexing their muscle” One of the strongest arguments not giving away an indefinite network
through aggressive network roll-outs. against tower sharing in growing advantage, it is only a head start.
Regional CEOs are reluctant to give up markets such as MEA is the potential Therefore, in any financial analysis,
their edge in networks and have been for accelerated market share loss the market share loss effect should
historically more focused on market resulting from giving challengers be diluted very rapidly after the first
share and revenues, and therefore access to an incumbent’s towers. Site two to three years. Second, even
are usually the first to object to tower acquisition and rollout is indeed an when taking relatively aggressive
sharing initiatives. This resistance is arduous and time consuming process assumptions in the early years of tower
declining somewhat in the current and in some emerging markets can sharing (e.g. challenger doubles its
financial climate as financing becomes take challengers more than a couple of gross adds rate in the first two years),
scarce. Furthermore, some operators years to catch up. the negative NPV impact is not as high
are now beginning to realize that the as one would expect. By combining
NPV impact of faster market share loss However, when analyzing the expected this with the potential capex savings
may not actually be large enough to impact of tower sharing, we see that and capital gains on the sale of assets,
discourage tower sharing initiatives the theoretical impact may not be the result is a “no-brainer”.
between incumbents and challengers. that great, especially if an NPV-view

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

Source: Delta Partners analysis, African operator data

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The opportunity for
investors
High certainty of cash flows and high growth
potential of the region, makes investing in a regional
company attractive for equity and debt investors.

Investing in the Towerco space is opportunity for private equity investors


attractive – even in the current to invest in “start-ups” or relatively
financial climate young companies, but with stable
There is no doubt that investing and guaranteed cash flows from long
during the current global financial term leasing contracts. Furthermore,
crisis can appear to be a risky with increased network roll-outs and
proposition. No sector or region increased potential tenants through
has been spared in the fallout and new licenses, Towercos offer equity
although governments around the investors a significant upside on their
world (led by the US) are taking investments. Given the relatively
dramatic actions to right the course, large size of Towercos, private equity
significant uncertainty remains in investors are also offered a legitimate
the near term. Nonetheless, Delta exit opportunity through an initial public
Partners remains extremely bullish offering (IPO) on a local or international
with respect to the opportunity in stock exchange. This access to future
Towercos space for the coming 18 liquidity significantly reduces the exit risk
months in MEA. for private equity investors and makes
Towercos quite attractive.
Towercos present a unique
opportunity Within the context of the current
Towercos represent a unique financial climate, Delta Partners

EXHIBIT 5: Potential capital structure evolution for regional Towercos

Source: Delta Partners analysis

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believes that several factors make equity investors such as international
investing in Towercos more attractive Towercos or PE funds will have access
than ever. First of all, the overall to minority stakes only. However, Delta
operator sentiment towards tower Partners believes there will also be
sharing in the region is evolving. opportunities for which both external
Given less availability of financing equity and debt will be available. In
and increased pressure on margins, these cases, incumbent operators
operators are looking for new ways may be interested in taking a minority
to improve cash flows and reduce position and allowing the independent
costs. This should bode very well for Towerco to grow the business by adding
tenancy ratio potential for Towercos. new entrants as tenants to their towers.
Furthermore, as global equity markets
have been hit hard in the past year, Investors need to ensure they secure
investors should be able to enter high site sharing indexes from day one
tower deals at more reasonable Although the economics of tower
valuation multiples. sharing are clearly positive, Delta
Partners estimates that Towerco must
Less leverage means operators will achieve an average tenancy ratio of 1.5
play a bigger role in the short term in order to break-even. This assumes
One of the downsides of current that 68% of tower costs are fixed and
market conditions is the scarcity of debt the remaining variable costs increase
financing. This implies that Towercos as tenants increase. Furthermore,
will not be able to leverage up as much Towercos must pay for the cost of
to improve equity returns. One of the capital for carrying the tower assets
possible consequences of this is that on their balance sheets. Overall, a 1.5
operators who decide to carve out their tenancy ratio is very achievable but the
towers into separate entities may need best way to accomplish this is to set-up
to maintain larger equity stakes in the a Towerco with two anchor tenants
short term. If this happens, interested 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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The role of telecom
regulators 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.

As part of their overall mandate, but has increasingly become a hot


telecom regulators are charged with topic due to the explosion of mobile
the task of ensuring fair competition, towers. Regulators can take a proactive
availability of affordable services approach as in markets such as Iran,
for customers, and incentives for KSA, and UAE, and either encourage
innovation. Conceptually, tower or force operators to share towers in
outsourcing helps to reinforce all of certain areas.
these objectives and therefore should be
promoted by telecom regulators. The only area which should be a
concern for regulators is ensuring that
One of the clearest benefits of tower the establishment of Towercos do not
sharing, from the point of view of give an unfair competitive advantage
regulators, is to support universal to specific operators. This is especially
access initiatives. Tower sharing will important if operators happen to be
help to improve the business case for shareholders in Towercos. Under
rural roll-outs and should encourage this scenario, regulators may need to
more population coverage in low intervene to ensure that Towercos give
income environments such as Africa. fair and equal access to its towers to all
A further benefit is the environmental operators and that leasing rates are not
angle, which is not specifically part set in any preferential manner.
of a telecom regulator’s mandate,

EXHIBIT 7: Stance of telecom regulators in the MENA region

Source: Telecom regulator’s website; press reports

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Delta Partners’ outlook for
tower 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.

Several tower deals will be will exclude international Towercos but


announced across MEA this trend could change from 2010 and
Delta Partners expects several tower beyond as operators look to exit their
deal announcements in the next equity positions.
12 to 24 months. We expect deals
between regional operators that Key success factors for pioneer
will want to maintain a controlling Towercos in MEA
stake in the new Towerco in the Delta Partners’ perspective is that
short term, as well as “buy and lease the following elements will play a
back” transactions led by Pure-play critical role in ensuring the success of
Towercos with limited participation regional Towercos in MEA:
of the operator in the new entity. 1. Incumbent operators should not
The challenges of these cases are shy away from striking deals with
also unique. In the first case, the new license winners based on the
main challenge will be to ensure rival “market share loss myth”
operators succeed in the execution of 2. Towercos must bring in outside
the transaction. In the second case, investors to ensure impartiality and
access to debt and equity financing act as a broker between operators
will be the major hurdle in closing 3. Existing towers must be included
“buy and lease back” transactions. in any deal (not just future towers)
to allow for sufficient scale and
An open question remains as to increase operational simplicity for
whether international Towercos the operators
will take a relevant role in these 4. In order to reduce operational risk,
opportunities. Regional operators new Towercos need to secure a
appear to favour bringing in the minimum site sharing index from
operational expertise of Towercos the start by signing at least two
but are less interested in the US and anchor tenants
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 consolidate
their current footprints. Delta Partners
expects that the tower deals in 2009

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Delta Partners is 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 its 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 Group’s 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.


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