Towers for sale: how foreigners have established a business that is growing amid the crisis
Now Russian Towers no longer has to solicit for orders from operators, but in 2009, it was not easy to persuade them to entrust the construction of infrastructure to a third-party company
Foreigners Garth Self and Peter Owen Edmunds, founders of the Russian Towers company, decided to start construction of cellular network towers in Russia in the midst of the previous crisis, in 2009. Today the company owns the largest fleet of towers in the country, and yet another crisis gives it an opportunity – a very expensive one, though – to become the absolute leader in the market.
Now Russian Towers no longer has to solicit for orders from operators, but in 2009, it was not easy to persuade them to entrust the construction of infrastructure to a third-party company: back then the only reason that worked was that in that way one could save money. “From this point of view, the downturn in the economy has played into our hands,” says Owen Edmunds.
The idea of creating a company had been borrowed by the founders from abroad: such independent tower companies like American Tower, which is currently one of the largest in the world, were already operating, and Russia seemed to be an attractive market for such a business. Meanwhile, Owen Edmunds and Self are literally veterans of the Russian telecommunications industry. Both came to Russia in the early 1990s: Owen Edmunds started in the PeterStar holding company, and Self as Financial Manager and minority shareholder of San Francisco/Moscow Teleport (SFMT), a legendary company with the participation of which the Internet began to evolve in Russia. Later some of the SFMT assets became part of Golden Telecom, which was later merged into VympelCom. Self also acted as President of the group of regional mobile operators Indigo and the a minority shareholder of its owner – an American holding company MCT Corp. Self is also the controlling shareholder in the iKS Media holding.
Owen Edmunds and Self conceived Russian Towers in late 2007; the whole next year they were busy with preparing a business plan and negotiating with operators and investors. “After almost 20 years in Russia, the partners had made many acquaintances who could help them with the development of this business,” admits Owen Edmunds. But Owen Edmunds and Self believe that the year of foundation of Russian Towers was 2009, when they received investments from the first shareholders - UFG Private Equity and EBRD and signed the first contract for construction and lease of 55 towers.
“We went the length of this deal thanks to a great extent to Peter’s personality. This is a person you can trust,” says Dominic Reed, managing partner of UFG Private Equity, who took the decision to invest in 2009. According to him, up to that point, UFG Private Equity had never invested in start-ups, so prior to signing of the agreement it asked the company to obtain confirmation from the prime customer Tele2.
“Those were very difficult negotiations. We were confident in our own abilities but without the support of investors the operator could have doubted that we would be able to build towers for it,” recalls Owen Edmunds. He expected that Tele2 as an international operator would be more willing to cooperate than the Russian players. In addition, Tele2 was actively developing at that time and could be interested in cost saving.
“We saw a real opportunity to save and decided to go for it,” says Ritvars Krievs, Technical Director of Tele2 Russia. “Tele2 has always tried to lease the infrastructure rather than build its own one, and the company was investing available money in the development of new services and quality improvement,” he adds.
Krievs said that the founders were “quite famous people in the Russian telecom market”, so the absence of an executed contract with investors did not stop Tele2. “If the result would not have satisfied us, we would not have continued the cooperation,” said Krievs. The contract with Tele2 and the agreement with investors were signed by Russian Towers at the very end of 2009. Tele2 still secures the major portion of revenues for the company: based on the results of the first three quarters of 2015, its share amounted to 37.6%.
Russian Towers is engaged in the construction of antenna mast structures, which are then leased out to operators: they place base stations thereon. Each tower is leased out by the company to at least two operators. “In a 10-15 year perspective the company’s clients will spend ca. 30-35% less for operation and maintenance of the towers than if they owned them,” asserts Alexander Chub, President of Russian Towers.
Today Russian Towers owns over 1.7 thousand antenna mast structures: in 2015, the company built approximately 800 towers, and in 2016, it plans to put into operation at least a thousand more, said Chub. According to him, the demand is there: operators develop a 4G infrastructure, especially in cities with a million-plus population and along highways. In the next five years, there will be 10-15 thousand new base stations for the 4G standard in Russia, he predicts. The business of Russian Towers is growing rapidly: the company’s revenue in 2015 almost doubled as compared to the previous year - up to RUB 1 billion, and in 2016 the company plans to maintain the pace of growth, says Chub.
The closest competitor, Vertikal, started operation in 2013 having chosen another right time: operators began to build LTE networks actively, and Tele2 started approaching new regions, as it was reported to RBC by Vertikal founder Georgiy Chumburidze through his representative. Vertikal is inferior to Russian Towers in terms of the quantity of structures: by the end of 2015, it had about 1.6 thousand towers, as it follows from the report of the TowerXchange analytical company published in January 2016. According to Chumburidze, construction of facilities continues every day, therefore, his company has now more than 1.7 thousand towers. But an RBC source close to one of the tower companies says that Vertikal hardly has a thousand towers, and its revenue in 2015 made around RUB 300 million. The estimate of 1 thousand towers owned by Vertikal is also confirmed by analysts of J’son & Partners Consulting. Vertikal does not disclose its financial data; according to SPARK-Interfax, in 2014, the revenue of Vertikal LLC exceeded RUB 82 million, with the net loss equalling to RUB 88 million.
Another player is Link Development, a company from St. Petersburg, which started operation in parallel with Russian Towers in 2008. It has 300 towers in the North-Western region. In 2016, it plans to build 50-60 new facilities, including in Moscow, a new market for them: the company is now getting land for construction registered, told RBC Denis Skazov, co-founder of Link Development. According to him, the company’s revenue amounted in 2015 to RUB 400 million.
“The almost simultaneous entry of two tower companies in the Russian market was a coincidence,” assures Skazov. “In some measure we helped each other at the initial stage. Our product was new to operators. Therefore, it was easier for two together to explain its benefits.” According to him, doing the same work, Russian Towers and Link Development made operators familiar with the new phenomenon in the market and formed the level of tariffs.
“Building a tower from scratch costs around RUB 5 million; about 5% thereof is spent annually for its maintenance,” says Skazov. A payback period per tower tends to be seven years: for an operator the lease costs about RUB 25-50 thousand per month, depending on the height of the structure, the quantity of equipment there and the region.
In November 2015, VympelCom announced its intention to sell its infrastructure: its buyer would become the undisputed market leader. The operator planned to sell 10-12 thousand towers for $500 million, reported the Vedomosti newspaper with reference to its own sources. In November 2015, Alexander Popovsky, Executive Vice President for Corporate Strategy and Business Development of VympelCom said that the operator had sent out an investment memorandum to potential buyers.
It is reported by the TowerXchange analytical company that in response the company received eight proposals, but the main candidates for purchasing were Russian Towers, Vertikal and the Russian Direct Investment Fund (RDIF). Representatives of Russian Towers, Vertikal, RDIF and VympelCom refused to comment on the course of the transaction. It follows from the TowerXchange’s report that the proposals of the potential buyers were in the range of $0.5 to 0.8 million ($48-77 thousand per tower). According to the study, 19.5 thousand structures located on building roofs could also be part of the deal, which is to take place in the first or second quarter of 2016.
By the end of 2015, the Russian market of tower infrastructure amounts to 80-95 thousand towers and roof structures. As regards this indicator, our country ranks first in Europe, where there are only about 600 thousand towers. 29% of them are owned by independent tower companies.
In the future, VympelCom may offer for sale 50 thousand towers for $5 billion in Armenia, Kyrgyzstan, Uzbekistan, Tajikistan, Georgia and Ukraine, informed Bloomberg with reference to its sources.
At the end of October 2015, Ivan Tavrin, General Director of MegaFon, announced their intention to sell towers. But a while later, the operator established a 100% subsidiary, the First Tower Company (FTC), which will deal with structures: MegaFon has about 14 thousand masts and antenna mast structures of different height. “Selling FTC is possible in the future, but now the top priority is to create our own operating company,” said to RBC Yulia Dorokhina, representative of MegaFon.
A source of RBC in the telecommunications market qualifies the simultaneous interest on the part of operators in selling its infrastructure as a domino effect. ”The operators watch each other carefully. Apart from MTS, the entire Big Four is in the process of negotiating the possible sale of towers,” he said.
“Currently MTS has no plans to sell its infrastructure,” confirmed Dmitry Solodovnikov, the operator’s representative. “Not only the cost of sale of the towers, but also the terms of their subsequent lease are important for Tele2,” says Krievs. “There will be no point in selling the infrastructure if the operator is unable to save money in the long run,” he noted.
“Russian Towers will seek to purchase towers from all operators. Nevertheless, if there are three poles right next to one another, it will be worthwhile for the company to buy one of them at a market price and install equipment of the other two operators thereon,” explains Chub. “The company is apt to buy the other two structures at a large discount in order to demolish them,” he added. “The operators were constructing networks in the conditions of severe competition ignoring the principles of commercial efficiency,” says Chub.
Arthur Akopyan, managing partner of UFG Private Equity, believes that no emergence of large western tower companies, such as Cellnex Telecom, SBA Communications Corporation, Crown Castle or American Towers, should be expected in Russia in the coming years for a number of reasons, including sanctions, the unfavourable business climate in Russia, the decreasing oil prices and the devaluation of the rouble. “Nevertheless, the emergence of large foreign players would help to develop Russian Towers faster,” he said. “Small competitors would disappear, and the market would be structured according to more clear regulations”.
“The market is open for new players provided that they have certain administrative resources and contacts,” says Vitaly Solonin, Head of the Wireless Technology Department of J’son & Partners Consulting. “They will be able to compete with large companies like Russian Towers or FTC only in limited areas, therefore it is unlikely that they will ever occupy a significant market share,” believes the expert.
Since 2009, Russian Towers has received more than $200 million of investments.
In turn, Russian Towers decided to go beyond the borders of Russia and in February 2016, the company announced its interest in the countries of the former USSR and Mongolia. “The company has already held talks with all major operators and regulators in all countries,” said Chub.
“Currently five companies are the major customers of Russian Towers: the Big Four and Evgeniy Roytman’s Antares. Roytman participated in the company’s incorporation and remains its minority shareholder. Therefore if, for instance, MTS operates in the CIS countries, it would be logical for Russian Towers to help the operator in all covered markets,“ reasons Akopyan. (MTS refused to comment on the potential partnership with Russian Towers in foreign countries). In his opinion, the approaching of the former USSR countries will make it possible for Russian Towers to expand the scale of business, as well as maintain the level of satisfaction of the key customers. “But the model of operation in the CIS will differ from what was implemented in Russia. “There is no point in opening an office in a country with a population of 5 million, staff it and use the built-to-suit model to start operations,” continues Akopyan. “It is more practical to buy a ready-for-service infrastructure and start leasing it out to operators.”
“It is probably Ukraine or Kazakhstan where it would make sense to invest tens of millions of dollars to approach a new geographic market,” says the managing partner of UFG Private Equity. “It takes a year to sell a tower to an operator, and nine months more to construct the same. It is a difficult and hard business, anything but a glamorous one,” says Akopyan.
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