Russian Towers: first sale of operators towers will lift the barrier for other transactions

Alexander Chub told about the formation of the operator infrastructure market and the new strategy of the company

Alexander Chub, President of Russian Towers GC

09 February, Moscow. INTERFAX.RU – The aggravated competition in the Russian mobile telecommunications market forces the leading service operators to concentrate to the maximum extent on the core business – the quality of networks and services. On the other hand, the new surge of the crisis induces them to save costs. Last year, VympelCom and MegaFon began to talk under the slogan of optimization about separation and potential sale of the towers on which their equipment is located. Russian Towers Group of Companies, one of the three independent Russian tower players, was mentioned more than once among the candidates for the VympelCom towers.

During an interview given to Interfax, Alexander Chub, President of Russian Towers, spoke about the establishment of the operator infrastructure market and the new strategy of the company.

- Last year the initial processes were launched in the operator market related to separation and sale of the tower infrastructure. In this connection, such infrastructure companies as Russian Towers stepped forward. How do you see the tower infrastructure market and what role does the company headed by you play on it?

- 2015 was the year of significant qualitative changes; without prejudice the situation began to change. The present-day stage of development of the tower industry is characterized by formation of the infrastructure market itself as an individual component rather than a mobile operator’s market segment, as well as by appearance of independent players in this market and emergence of opportunities for new services.

In my opinion, today mobile operators should be concerned about and seriously interested in the frequency coverage management and relations with customers. Operators face the fact that their scope of functions actually changed long ago. While earlier they in fact struggled for the first place in voice coverage, the today’s market challenge is how to satisfy the growing demand for traffic, how to respond to the competition occurring on the part of such companies as Google, for instance? How to respond to such more particular and nevertheless significant challenges as messengers and other applications that also withdraw potential business from operators. In my view, this is where operators should concentrate their efforts. All the rest like provision of the so-called standard passive and active infrastructure, is gradually going into offline.

In addition, significant financial resources are required to maintain the pace of development. In the present-day circumstances in our country, there appeared some problems with equity and debt financing which operators enjoying open-ended opportunities could not notice five years ago. Long ago, a considerable part of infrastructure ceased to be the first priority subject-matter or it will cease soon. It was 20 years ago when the one who was the first to install a tower and to provide mobile communications obtained the whole market in an area of coverage of that tower. Now the situation is different. Such companies as ours appeared which came with their own model and said, "We are independent, therefore, we are able to openly cooperate with each of the operators simultaneously. We can offer commercial services to them which will firstly suit operators from the quality perspective, and secondly be lower prices, because we offer services to several operators using the same facilities fleet. Furthermore, we want to buy their towers, buy them for fair money which is required by an operator for development".

- How did the said circumstances faced by operators impact the strategy of Russian Towers?

- The number one objective for us is to increase our scale steeply so that we could provide comprehensive services throughout the country, and probably beyond its boundaries, too. But these are our future plans. We finished last year with 1.7 thousand structures, and we grew over a year almost two-fold. The major increase fell on Moscow and the Moscow region. Now it is important to extend the rate of growth to the remaining regions of the country. I think that we have to settle this issue within 2016-2017.

- Which approach will be used for new construction? In fact, many areas are already covered by own infrastructures of operators.

- It would be illogical to create one more infrastructure, an alternative to the existing ones that were built by operators themselves. Repeating the operators’ presence map would mean flushing money down the drain.

We know where we should build. An army of mobile device users need data transmission and uninterrupted traffic. Where is this traffic generated? It’s where these millions of people live, where they work and where they move about. It’s the urban environment and transportation routes, like railways and motor ways. We have learnt to negotiate with organizations to obtain permits and construct in cities. We have invented, tested in practice and launched the infrastructure building technologies that nobody has never used before. For example, there are street lamps in Moscow with built-up additional segments on which operator equipment is located. These are the so-called double-purpose structures.

We have reached an agreement with electric power distribution companies, for example, with the Moscow United Power Grid Company (on the lease of power transmission line towers in Moscow and the region for a flat rate - IF) and acquired access to millions of facilities of their infrastructure. That is, we can actually build-up any street lamp where people reside and where they move about, and install a tower on any transformer house and place operator equipment there. And what's most important, either way we have access to the land on which this tower is to be installed, as well as access to electricity to ensure operation of the equipment.

- Which regions are your top priority, apart from Moscow and the Moscow region?

- Just recently we have signed an agreement on infrastructure development in Kazan, Tatarstan. This is a significant step forward. Active construction is planned in the Krasnodar Territory, which includes not only Krasnodar, but the whole Black Sea coast.

In addition, we have signed an agreement with the Kaluga region. We have a small construction site in Novosibirsk. Surely, we have Ekaterinburg and Saint Petersburg in sights, and we are working actively in this connection. There are other cities important to us in the Volga region. That is, by the end of the year a dozen of cities ought to be under our belt. Our shareholders are waiting the next ten from us in 2017.

We are talking about these cities in the context of a large-scale construction project for 4G purposes. On the whole, our facilities are available in 50 regions. This amounts to 85% of the population of the country. We have created a “skeleton” and are now going to simply build up mass on that skeleton taking into account the tried-and-tested competences.

- What growth in the number of structures is projected by Russian Towers following the results of 2016?

- I think that in 2016, we will add one more thousand new facilities to those 1.7 thousand available today. I mean our regular construction. But we also try to keep track of any opportunities which are related to the acquisition of tower assets, and we will implement them if these opportunities exist.

I am referring not only to major transactions, but also to the volume of two or three hundred facilities. We always have five or six options, which we carefully consider for potential acquisition.

Our ambitions are to become the leading company in Europe in terms of the number of towers in some foreseeable years. Nowadays we are among the top ten.

- In Russia, it were VympelCom and MegaFon who began talking about separation and sale of tower infrastructure. Are you planning to take part in these transactions?

- We do not comment on this matter. All I can say is that any transactions regarding tower assets in the country are within the scope of our priority interests. If such transactions are possible to be completed, we will complete them all.

- Meanwhile, not all players agree with the idea that it is profitable for an operator to sell its towers. In particular, MTS argued that it did not see any prospects from sale of its infrastructure and even hinted casually that it itself would be able to cash on the towers.

- It is difficult for me to comment on this position; it is likely that there is certain logic behind it. But we believe that firstly, market trends are nevertheless obvious, and sooner or later – sooner rather than later – these trends will win. Secondly, we are convinced that any and all operators are studying this matter one way or another. Only some speak on this topic and some do not, but are studying it.

- How do you estimate operator savings on tower maintenance as a result of transfer of their infrastructure to specialist companies?

- We estimate this delta at 30-35%. This is a very rough estimate, and it depends on a wide range of circumstances but it is noticeable and should not be ignored. Naturally, I’m talking about estimates for a 15-year perspective. Such infrastructure lease contracts are usually concluded for this term. Far less, in case of sale of towers to us operators get good money in the course of the transaction itself.

- When you say that market trends will win soon, which horizon do you mean? When will operators transfer the tower infrastructure to specialist companies?

- As you know, some processes have already been launched today, some solutions have been announced. Everyone who is potentially involved, is at least closely watching now. As soon as the first transaction takes place, the barrier will be lifted and a flow of offers will rush into the market. Nobody will be able to resist new realities. Everyone understands that if a market appears and you fail to enter it in time, you will become an outsider.

- Are you waiting for the first transaction to take place as early as this year?

- We all would love to have it taken place as soon as possible, and we are making efforts for this to happen.

- You need to attract financing in order to grow. How much money have you already raised and from whom?

- For an organic growth, we have both the money invested by the shareholders, and borrowed money. The shareholders (the funds of UFG Asset Management, Macquarie Russia/CIS Infrastructure Fund, ADM Capital, Japanese corporation Sumitomo, as well as IFC and EBRD - IF) have invested $160 million in Russian Towers. As for borrowings, we raise credit resources from the Eurasian Development Bank where we have a limit open for up to RUB 4 billion.

Currently we have all we need for development. We have financial resources in the required volume, as well as our staff, technologies and contracts with operators. While 2015 was a fracture year, 2016 should be a year of rapid and dynamic development. Probably, it will be a year of acquisitions; we are busy with this, too.

- Apart from the increase of the number of structures, due to what is the growth of the Russian Towers business planned?

- The second important direction of our strategy is the depth and quality of the services we offer. All tower companies in the world begin with an elementary service, i.e. leasing out a space for equipment placement. Some of them stop here. Probably, if we addressed the 20 years ago situation, that would definitely be the right approach. However, when the market changes under the pressure of the all-too-commonly mentioned data, which surround us and are transferred at a mad speed, we cannot sit idle. We have to move in the direction of an infrastructure service company.

For example, using our structures we add an apparent set of services, which are in demand among operators. In addition to equipment placement, it is power connections and arrangement for uninterrupted power supply. Monitoring is yet another service. We install 4 video cameras on our facilities, as well as weather sensors, remote access control sensors. We also offer the “last mile” service, i.e. a fibre optical communication line. We actually connect our tower to operators’ networks using a fibre optical channel.

We have defined this set of technological services as part of our strategy. This isn’t a revelation; these are easy-to-understand functions, but you need to put two and two together, learn to offer them and convince people to buy them from you.

- Are you going to offer any revolutionary services to operators?

- There is an additional group of services which is being formed now. These are services related to large arrays of data that we possess now. We receive dynamic data from our facilities, for example weather data. These data are accumulated; so analytics should appear. A group of services related to data management is also an important strategic direction of our development. Generally, tower companies even do not speak aloud about it. But without doubt, everything is heading in this direction. In the near term, the main competition will be in this field rather than anywhere else, after the quantitative coverage is completed.

- Probably, you will need a partner like Yandex for this?

- Yes, there are many interesting ideas in this connection, which we are working on now. But there no particular decision taken yet.

- Everything that has been just discussed means services for operators. Are you planning to provide services not only to them?

- The essence of our business is that we have facilities on which we can place something. Further, we have to think what we can place there in addition to operator equipment, and who needs it. It is in fact necessary for everyone who requires wireless data transmission. These are perhaps government institution as the Ministry of Internal Affairs, the Ministry of Civil Defence, Emergency Management and Natural Disasters Response, forest protection who in particular need a monitoring system. Remote oil companies: people reside in their territories and they need a communication link with the Big Land.

- Tell us about the company’s financial performance based on the results of 2015.

- We have at a minimum doubled the most significant financial indicators. The forecast for 2016 is that monetary indicators will again increase significantly. We are not ready to disclose absolute figures but the company has exceeded the projections in 2015. In the beginning of the last year there were some doubts caused by the overall situation in the country whether this business has actually prospects for development. Nevertheless, the result of 2015 dispelled every doubt.

- Is the company profitable?

- Yes, it is. We do not however wish to disclose specific figures.

- How do you estimate the share of Russian Towers in the Russian market without account for structures of mobile operators?

- If we are talking only independent infrastructure operators, I think that we have half of the market.

- Do you sense any competition on the part of the other two independent players – Vertikal and Link Development?

- At this stage of development, our so-called competitors are rather our supporters because they help us to accomplish a whole number of common tasks in market development and formation. When one company deals with the formation of a whole market segment, it may be very difficult, and such responsibility can squash you. Therefore, probably it is good when there are more participants.

We also look at what our competitors do and how they do it, what we can learn from them. We can think about our own superiority as much as we like, but it is important not to overdo. This is why we are constantly monitoring, looking at what these companies are engaged in and how they grow.

- At the beginning of our conversation you mentioned entering the international market. Some sources reported about the sale of towers in the CIS in the context of the VympelCom’s tender process. Is your entry to abroad connected with the tender process or was it planned irrespective of any potential transactions with operators?

- Our strategy of development of international presence includes, in particular, certain plans for the CIS countries. The forms of entry are different. I would not guess at the future right now. For instance, our employees are currently meeting in Kiev with all operators which are of interest to us, as well as with infrastructure companies in Ukraine. Over the last few months, we have visited all markets that are interesting to us. Apart from Ukraine, there are Belarus, Kazakhstan, Kyrgyzstan, Azerbaijan, Armenia, Georgia, and Mongolia. So we have finished the stage of research and formation of an opinion on this point.

- Did you build facilities for the Krymtelecom operator, which started operating on the peninsula on 1 February?

- We have not interacted with Krymtelecom or any other owners of towers in Crimea. Is this a subject of our future interest? Probably it is, as is any market with an interesting potential.


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