Whitepaper_Investing in telecoms towers-DR-080216

White Paper
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Investing in telecoms towers
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Authors: Dominique Reverdy, Pierre Blanc and Vladimira Pavcova
March 2015

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Table of Contents
Table of Contents ....................................................................................................................................................................2
EXECUTIVE SUMMARY............................................................................................................. 3
THE CASE FOR TOWER SHARING............................................................................................. 5
Alternative structures .............................................................................................................................................................5
Regulated facilities sharing ...................................................................................................................................................6
Tower swaps.............................................................................................................................................................................6
Spinoff .......................................................................................................................................................................................6
Joint Ventures (JV)...................................................................................................................................................................7
Independent TowerCo ............................................................................................................................................................8
Tailored transactions ..............................................................................................................................................................9
THE TOWERCO BUSINESS PLAN............................................................................................. 11
Key assumptions and drivers ...............................................................................................................................................11
THE TRANSACTION................................................................................................................. 19
Due diligence..........................................................................................................................................................................19
Pricing parameters................................................................................................................................................................22
Key contract terms ................................................................................................................................................................23
Valuation considerations .....................................................................................................................................................23
CONCLUSION .......................................................................................................................... 24
AUTHORS................................................................................................................................ 25

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Executive summary
In the early phases of mobile network development, technology was considered as a key
differentiationfactor.Emphasiswasputoncontrollingthenetworkinfrastructure,andanoperator
was often valued based on the coverage and the quality of service provided by its network.
Infrastructure ownership ensured long term viability to the business.
In recentyears,the focus graduallyshiftedtomore service- andcustomer-centricstructures,with
certainnetworkelementsbecomingnon-core.Ascompetitionwaserodingmargins,operatorsalso
became more cost-efficient and tended to favour leaner structures and outsourcing network
maintenance activities.
In a tighter financial environment, the carve-out of such assets could also help de-leveraging
operators’ balance sheet and create shareholders’ value.
As operatorsbecame more familiarwiththese processes,differentoutsourcingalternativeswere
considered,withvaryingdegreesof success.MTN for instance,over5years ago,decidedtoadopt
a strongapproachbycarvingoutitsInternationalCarrierServicesbranch,MTNICS,andoutsourcing
its operations to Belgacom ICS, through a sophisticated M&A transaction in return of a 20%
participation in BICS.
With the simultaneousdeploymentof several layersof mobile technologies(2G, 3G, and now LTE
or 4G) over a wide range of spectrumholdings,civil andengineeringworkshave becomeaburden
for the operators.Regulatorsalsostartedtoview favourablyarationalisationof the infrastructure
which ensures a better economic sustainability for the industry whilst addressing key
environmental concerns. This has led to the conclusion that some level of sharing passive
infrastructure is beneficial to the industry.
There are manyways in whichan operatorcan seekto optimise the returnon investmentsmade
fromitstowerasset.We propose adistinctionbetween 6mainbusinessmodels,dependingonthe
operator’srelationshipwithitspartner(s) andthe required levelof ownershipof the assetsinfine:
 Regulated facilities sharing
 Tower swaps
 Spinoffs
 Joint Ventures (JV)
 Independent TowerCo
 Tailored transactions
Independentlyof the chosenbusinessmodel,careful thoughtwillhave tobe appliedtothe drivers
that will make the business case positive, whether inherent to the operation, or coming from
synergies between stakeholders.
Despite the verydifferentnature of each businessmodel,all of themshare the same main driver
for success, the so called tenancy ratio. This ratio is defined as the average number of expected
tenants per tower. From looking at tower sharing ventures across the world,below 1.5, it is very
unlikely that the business case turns positive. In general, potential partners start looking into a
tower sharing opportunity when a sustainable tenancy ratio above this threshold can reasonably
be expected.
For this reason, the strategist will mainly concentrate on accurately forecasting this ratio, and

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developingtacticstoimprove thisalongthe years.Thiscouldrange fromopeningthe accessof the
towers to alternative wireless players, such as WiMax, TV broadcast, etc…, to working alongside
operatorsinorder to define intotal partnershipeachtowerparkexpansion,withearlyacceptable
commitment levels from the operators.
Then, setting up the appropriate price structure for the rental of tower space will be key to
generating sufficient return on investment, as well as insuring enough cash flow for growth.
Typical pricing structure will attempt to cover for investment costs, such as infrastructure costs,
witha set non-recurringupfrontpayment,while recurringfeeswill be adaptedto operatingcosts,
such as,typically,powerusage. Itwilltherefore be inthe interestof the toweroperatortoreacha
leancostingstructure where operatingcostsprove as variable aspossible soas to keepcontrol of
the generated margins.
Recurring fees will generallybe given per tower space utilised,and include power and utilities,
security,colocationif any,as well asoperationandmaintenance.However, more customercentric
approaches are increasingly created, based not on cost recovery, but on customer benefits. For
instance,some playershavechosenapricingapproachbasedonthe frequencybandwidthutilised
by the tenant,or the coverage reachedfromthe tower.These are still marginal instances,though
clearly reflect a higher consideration for a more sophisticated business model.
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The case for tower sharing
Operators are increasingly aware that keeping large assets on their books might not generate
sufficientlyattractive returnsand could be optimised. A carve-out of assets is one of the options to
address a number of benefits for the operators:
 Early monetisation of non-core assets
 Reduction in asset management burden
 Opex and capex savings
The optimal transaction, however, will depend on a number of factors
 Regulatory factors – limiting or qualifying the transfer of assets
 Market factors – which are key to assess the potential returns of a shared infrastructure
deployment
 Operator’s own risk assessment – in particular trading of cost savings and deployment
flexibility and operational quality
 The operator’s ability to access attractive financing conditions and its imperatives to de-
leverage its balance-sheet or monetise quickly its assets
In practice, the industry has developed several models which are briefly described below.
Alternative structures
The prioritiesof the differentmarketplayersandthe marketconditionswill balancethe different
optionsopentothe industry.The optionsare summarisedin Figure 1alongtwomainaxes:
 The operator’s relationship with its partner: commercial agreements versus cooperation
 Level of ownership of the assets
Figure 1: Asset optimisation alternatives
Maintain
Ownership
Separate
Accounts
Transfer
Ownership
Regulated
Facilities Sharing
Spin Off
Independent
TowerCo
Tower Swap
Join Venture
Tailored
Transaction
CooperativeCommercial

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Regulated facilities sharing
Whereas,historically,operatorswerereluctanttoshare core networkassets,regulatorsoftenopened
the wayto sharingasa keyremedytodominance.Smallerplayers,inhighlyunbalancedmarkets,find
itdifficulttoreplicate the requirednetworkinvestmentswhenmarketdistortionspreventthem from
competing for a larger portion of the addressable revenue. In such cases, regulators have acted to
ensure amore cost-efficientaccesstoexistinginfrastructure.One suchmeasureistoforce dominant
operators to open access to their towers, via bilateral commercial agreements.
Thiswasthe case whenEuropeanmarketsopenedtonew playersfor3Gservices.The entryof anew
player was motivated by the regulator’s desire to increase consumers’ benefits through increased
competition.However,the networkrolloutcostsfora greenfieldoperatorwere makingthe financial
case difficult, if not unviable. In addition, the awareness of environmental risks increased, often
makingthe searchfornewsitesdifficultandcostly.Byopeningexistingtowerstonewentrants,initial
set-up costs could be reduced.
Thistype of assetoptimisationisstill largelyusedtoregulatefixedtelecoms:dominantoperatorsare
typically required to open their ducts to alternative players in order to create a fair competition on
the fibre accessmarket.Inmobilemarkets,operatorswere initiallyreluctanttoshare assets,atatime
when differences in coverage had a material impact on market share due to the strong differences
among consumers of the quality of the coverage. As mobile marketshave matured,operators have
embraced sharing solutions, making the need for regulation less acute.
Tower swaps
As markets evolve, operators continuously need to optimise their networks, swapping sites for
optimisedcoverage aswellasdeployingnew sitestocovernew geographicareas.Differentnetworks
wouldoftenoverlapbut,due tothe particulartrajectoryof eachoperator,theycould have different
densities of sitesindifferentareas.Analternativeexperimentedbymanyoperatorswastointroduce
bilateral agreementsbywhichthe operatorsharesitsinfrastructure withotheroperator(s),notfora
defined access fee but against reciprocal access to the other’s facilities based on a fair swapping
principle.
The fairnessof the swapagreementcan take manyforms.The mostcommonremainsone-to-onesite
swaps,according to whichsitesare not differentiatedintheirquality,whichcouldprove unrealistic.
In some cases,operatorshave chosento swap sitesbasedoncoverage area, butmore sophisticated
swapping principle are more common, especially making difference between various clutters, as a
towerlocatedin a dense urbanarea cannot be swappedwitha rural site.A systemof rankingbased
on points allocated according to a series of predefined criteria, clutter, height, geography, social
environment,etc.isnowtypicallyusedinswapagreementsinordertoavoidfuture disagreements.
Spinoff
Swap arrangements miss out the opportunity of efficiency gains by adding new tenants to a site
portfolio. To realise this market opportunity, some operators have favoured the set-up of a
standalone entitywhosecore businessisthe managementandthe wholesalingof theirtowerassets.
This requires setting-up a separate entity, with majority ownership and control remaining with the
operator, to ensure clear accounting separation. The ownership of the assets is transferred to the
spinoff,usuallytogetherwithpartof the operator’sstaff.The spinoff thenleasesbackthe towersto
the original operatoras well asto otheroperators.The spinoff ismanagedat arms’ lengthtoensure
fair treatment of all clients.

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Technically, both swap and asset sharing can be proposed by the spinoff, though in practice, the
purpose of the spinoff isthe creationof a wholesale business, and it favours sharing-type services.
This approach has been chosen recently by America Móvil,which announced that they would spin-
off their 28,000 towers in Mexico, in order to create a new independent business entity, partly to
protect againstdominance rulingsandthe riskto see the regulatorimposingonthem tightnetwork
sharingobligations.The operationisclaimedto be givingthe new TowerCo highergrowthpotential
as itwill enabletoopenthe accesstoAmericaMóvilcompetitors.AccordingtoChiefExecutive Officer
Daniel Hajj,a spinoff will betterreflectthe value of the towers,whichcan be rentedto competitors.
This represent a significant strategic choice as the sale value assets has been estimated to reach c.
USD 8bn (Source – Bloomberg). This was very well perceivedby the market, and America Móvil’s
shares increased by 2.1% as a result of the announcement.
The Mexican case shows how regulatory pressure to impose infrastructure sharing can incentivise
operators to create a new wholesale market. In many other countries, obligations on accounting
separation have led to the spinoff of tower assets.
A tower spinoff is also an opportunityto monetise the assets in the medium-term. Once the entity
has beenset-upandhasproveditsabilitytoincrease the valueof the underlyingassetsbeyondlong-
term contracts with its anchor tenant, it can be partially or totally sold, either through a private
transaction or an IPO.
The MalaysianoperatorAxiatamaytake thisroute.ItannouncedinOctober2014 itsplansto spinoff
up to 19,000 of itstowers.Reportedly,the operatorisconcentrating oncostmanagementinlightof
strict market conditions, and an infrastructure arm could help it centralize procurement and deliver
better economies of scale (Source – telecomasia.net). If concluded as planned, the potential IPO
would raise up to USD 500m. However, this remains a medium term potential transaction, and the
spinoff is only the first step.
Joint Ventures (JV)
For similarsizedoperators,aJV deliverssubstantialcapex andopex reductions,whilsttheycontinue
competing on services. The operators create a JV where they consolidate their respective tower
portfolio.Thisbringsonestepfurtherthe conceptof towerswap:the operatorscanbenefitfromeach
other’s asset on fair and equal terms.
Business Wire announced in June 2014 that the three state-run telecom operators in China had
established a JV to share telecom infrastructure and reduce their related capital expenditure.The
newly formed company has a registered capital shared 40% by China Mobile,30% by China Unicom
Hong Kong with China Telecom holding the remaining 30%. The scope of the company will be
construction, maintenance and operation of telecommunications towers, including base stations
control rooms, power supplies, air conditioning and interior distribution system and outsourcing
services for base station equipment maintenance.
As in a tower swap deal, the ownership of the JV is calculated basedon “quality” criteria, as well as
the numberof towersputinthedeal.Once the JVisputinplace,itcaneithershare theassetbetween
the initial owners, or decide to wholesale the access to external players.
The JV alsoopensup the possibilitytomonetisingthe assetin a laterstage,eitherthrougha sale or
an IPO.

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Independent TowerCo
A transaction involving an independent third-partyTowerCo has been a preferred route for many
operatorsrecently. Figure 2belowshowssome transactionsthatwere completedinthe last5 years:
TowerCo Operator Year Country
HIS MTN 2014 Zambia,Rwanda
HIS MTN 2014 Nigeria
HIS Etisalat 2014 Nigeria
Eaton Towers Airtel 2014 Ghana, Niger,BurkinaFaso,
Kenya,Uganda,Malawi
American Tower NII 2014 Mexico
HeliosTowers Airtel 2014 Africa
SBA Communications Oi 2014 Brasil
HeliosTowers Vodacom 2013 Tanzania
Crown Castle AT&T 2013 USA
SBA Communications Oi 2013 Brazil
American Tower Nextel 2013 Brazil
American Tower Nextel 2013 Mexico
BR Towers Oi 2013 Brazil
American Tower Axtel 2013 Mexico
HIS MTN 2012 Cote d'Ivoire,Cameroon
American Tower Vivo 2012 Brazil
GPInvestments Vivo 2012 Brazil
Protelindo Hutchinson 2012 Indonesia
Tower Bersama Indosat 2012 Indonesia
Protelindo KPN Telecom 2012 Indonesia
Torres Unidas Telefonica 2012 Chile
SBA Communications Telefonica 2012 Brazil
Grupo TorreSur Oi 2012 Brazil
BR Towers Telefonica 2012 Brazil
American Tower Telefonica 2012 Chile
HeliosTowers Millicom 2011 Tanzania
HeliosTowers Millicom 2010 Ghana
GTL Aircel 2010 India
American Tower Cell C 2010 SouthAfrica
American Tower Essar Group 2010 India
Protelindo Hutchinson 2009 Indonesia
American Tower Xcel Telecom 2009 India
Crown Castle Vodafone 2008 Australia
Figure 2: Recent tower transactions
These transactions are usually referred to as sale-and-lease-back, as they include a sale/buy
agreement,supplementedbyamediumtermleasecontractbythe operatorforthe useof the towers.

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The operator’s objective in this type of transactions combines operational and financial elements.
From a pure financial standpoint, the transaction removes the asset from the balance sheet for a
significant cash inflow. The cash inflow will generally be used to deleverage the operator, so as to
reduce financingcosts.The operatormightplan alternative investments,eitherinM&A or in service
related growth.
There is an additional benefit to the operator, once the initial cash inflow has been recognised.
Through higher tenancy rate, the TowerCo can more effectivelydivide the high fixed costs over a
larger customer base. It can also leverage the larger scale of its portfolio to create substantial
efficiencygains.These canbe partlypassedon to the original ownerthrougha loweroperatingcost
persite.InAfricaforinstance,six majortowercompaniesoperatetoday,buildingeconomiesof scale
and pooling expertise.
The transaction allows the operator to focus on core services, outsourcing day-to-day engineering
issues whilst maintaining operational flexibility and speed of deployment. The benefits of focusing
management on core skills are less tangible but have proven to be highly valuable across most
industries.
EatonTowershasrecentlyacquiredAirtel’stowersin 6Africancountries(Ghana,Niger,BurkinaFaso,
Kenya,Ugandaand Malawi).The transactionincludedalease backcontractforan initial periodof 10
years. According to Manoj Kohli, chairman of Bharti Airtel International, the agreement represents
the next phase of Airtel’s growth journey in Africa. We (Bharti Airtel) are the pioneers and strong
proponents of telecoms infrastructure sharing, which results in industry-wide cost efficiencies. The
agreementwithEaton Towersisan extension of this philosophyand willlead to farsuperiorutilisation
of passive infrastructure and help drive the proliferation of affordable mobile services across Africa.
According to analysts, the agreements will allow Airtel to focus on its core business and customers,
enable it to deleverage through debt reduction, and will reduce its on-going capital expenditure on
passive infrastructure.
Tailored transactions
The sale-and-lease-back of asset is based on a simple commercial relationshipbased on an existing
tower portfolio. More creative transactions can be required in more complex environments.Often,
the TowerCoagreesto expandthe portfolio,addingbuild-to-suit(BTS) sitesinlinewiththe operator
expansionstrategy.ForBTSsites,the site acquisitionprocesscanbe co-organisedbybothcompanies
so as to improve deploymentaccuracyand efficiency.The operatorkeepsthe advantage of a shared
asset, together with some level of technical competitive edge.
IHS has acquired 1,269 mobile network towers from MTN Rwanda and Zambia for a total of USD
620m. According to HIS statement on the transaction, IHS will acquire and operate the towers and
related passive infrastructure and will invest in a build-to-suit programme to support MTN’s future
requirements in both countries. MTN Rwanda and MTN Zambia will become the respective anchor
tenantson thetowerswhilecollocation serviceswillbeoffered to theotheroperatorsin thesemarkets.
Insome cases,the operatorandthe TowerCoentermore complexfinancialagreements.Forinstance,
theycanagree onanIRUtype structure:alumpsumispaidupfront,atadiscountedprice,andannual
O&M charges are applicable forthe durationof the contract. The lowerupfrontfee iscompensated
by lower recurring charges. This also decreases the funding requirements for the TowerCo. In a
country with high interest rates, this could prove highly valuable for the TowerCo.
It is worth noticing that some collaborative agreements between operators and TowerCo do not
involve the change of ownershipof the towers –which,insome cases,isprohibitedbythe law of the
operator’s concession. For instance, in 2010 Vodafone Ghana and Eaton towers have agreed on an

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outsourcing contract, whereby Eaton would manage Vodafone’s towers, and invest directly in new
radio sites to increase Vodafone’s coverage and capacity. Deployment plans remain to be agreed
betweenthe parties.Eatonwasallowedtolease spare capacityonVodafone’stowerstoVodafone’s
competitors.
Figure 3 compares the advantages and disadvantages of the different optimisation solutions
Alternative Pros Cons
Tower Sharing Generatesadditionalrevenues No operational benefit
Towermanagementcandivert
attentionfromcore business
Swap Increasessignificantlythe
deploymentcapacity
Fixedcostscan be shared
Difficulttoensure one-on-one fairness.
Operatorsmusthave equivalenttower
park to benefitequally
Towermanagementcandivert
attentionfromcore business
Spin off Enablesbothentitiestofocuson
theircore businesses
Give flexibilitytothe businessmodel
Potentiallyincreasesthe value of
the assetovertime
Increasesoverhead
No operational benefit
No financial benefitwithoutopening
access to the infrastructure
JV Enablesall entitiestofocusontheir
core businesses
Createsoperational synergies
Increasessignificantlythe
deploymentcapacity
Fixedcostscan be shared
Potentiallyincreasesthe value of
the assetovertime
Lengthynegotiationsdue tothe
difficultiesof agreeinginthe compared
value of the assets
No consolidatedinvestmentbenefits
Dependingonthe shareholding,the
operatorcan lose longtermasseton
the balance sheetwithout
compensation
Sale and lease
back
Generatessignificantcashinflow at
the transactionday
Enablestoconcentrate on core
business
Decreasespotentialcollateral for
operator'sfunding
Onlycreatesoperational andfinancial
benefitsif the TowerCoalreadyhas
agreementwithcompetitors
Tailored
transactions
Dependingonthe actual structure
of the transaction,the operatorscan
benefitfromanyof the above pros
Dependingonthe actual structure of
the transaction,the operatorscan
sufferfromanyof the above cons
Figure 3: Site optimisation alternatives

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The TowerCo business plan
A carve-outof towerassetsallowsanoperatorto monetise non-coreassetsthroughasale andlease
back arrangement. Ultimately, the seller and the buyer need to agree on:
 The appropriate trade-off between the upfront payment and the recurring fees as both are
linked –the sellerneedstoensure thatthe transactionreflectsalowercostof equitythanits
own
 How the upside (increased tenancyratios, operational efficiencies) are shared between the
parties
This is achieved in establishing a business plan that is agreed between the parties and reflects
accuratelythe total cost of ownershipof the assets,i.e.boththe recurringoperation costsaswell as
appropriate capital expenditure (capex) levels for maintaining the asset portfolio.
The businessplantakesintoaccountlocal marketconditions,commercial opportunities,operational
and financingconstraintsto define aprice grid to reach a predeterminedreturnoninvestment.The
price level must be at an affordable level for operators to justify the need of a TowerCo.
The business plan typically follows a three-step approach:
 A business as usual (BaU) plan for the existing tower assets under the current tenancy
 A business plan reflecting the network expansion requirements of the operator
 A business plan reflecting the upsides from additional tenancy and the resulting efficiency
savings
An illustrative example of a TowerCo P&L is described below.
Key assumptions and drivers
The BaU plan reflects the current asset portfolio and its future utilisation. To illustrate this, we
consider the following portfolio:
Number of towers # 5,000
Tenancy # 5,030
2G # 5,000
3G # 30
Monthly cost per tower USD 1,100
Rental USD 450
Maintenance USD 350
Electricity USD 200
Personnel USD 80
Insurance USD 10
G&A USD 10
Cost escalation % 2.0%
NBV USDm 250
Capex per new tower USDk 120
Upgrade cost per new tenant USDk 15
Maintenance capex per year USDm 5.0
Figure 4: Tower portfolio [Source: Aetha Consulting]

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The BaU considers the number of towers that can be carved-out in the asset and lease back
transaction. Key parameters in developing the BaU scenario include:
 The projections of tenancy – in particular the take-up of new technologies and related
equipment per site
 The operatingcostper tower– inpractice,the businessplanwilldistinguishseveral typesof
towers (e.g. rural or urban, rooftop, etc.). Some of these costs are variable (e.g. rental)
whereas other may be more fixed in nature (e.g. some G&A personnel costs).
 The escalation factor for costs – in this example a simple inflation-indexedescalation factor
can be used. In practice, different factors may be used for different cost types.
 The net bookvalue (NBV) of the assetsforsale –the depreciationprojectionsof these assets
will depend on the timing of the investments and the age of the towers. This will impact
taxable profit and cash flows.
The analysisof historiccosts – typicallyoverauditedresultsforthe lastfew yearsof operations –will
also allow identifying key capex components:
 The average cost for buildinganew site – again, thismay dependonthe site typologyused.
Capex can be further broken down into: civil works and permits, build out costs (tower,
shelters, etc.), energy (generators, batteries, etc.), manpower
 The upgrade cost for newtenancyi.e.the incremental costsforadditional equipmentonthe
tower. This can cover additional shelter space, incremental energy costs etc.
 The maintenance capex – the total cost of ownership needs to include the required
maintenance capex over the long-term.
Figure 5 below shows the evolution of key cash flow parameters over the period:
 Revenue increase as 3G tenancy increases before stabilising in the medium-term
 Improved utilisation of the site is reflected in the EBITDA margin
Figure 5: BaU [Source: Aetha Consulting]
0
5
10
15
20
25
30
35
40
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15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Revenue growth Capex to sales ratio EBIDTA margin

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Underthese conditions,andexcluding,forthe sakeof illustration,the additionalcomplexityof equity
and debt funding costs, the plan allows defining a base monthly rental per site:
EV USDm 220
Sale price USDm 250
Premium/ (discount) to NBV % -
Base monthly rental USDm 1,650
Escalation % 2%
Incremental tenants as % of base % 30%
IRR % 15%
WACC % 15%
Perpetuity % 2.0%
Figure 6: BaU – key transaction prices [Source: Aetha Consulting]
Assumingasale of the assetsat netbook value (i.e.USD 250m in thisexample),abase rental of USD
1,650 permonthgeneratesanIRRof 15%, equal tothe WACC.There isa trade-off betweenthe asset
sale price and the monthly rental. Operators need to assess the trade-off between higher upfront
cash and lower operating costs.
The BaU represented is useful as a base to understand the operations and profitability of TowerCo.
However, key assumptions relate to the upside potential:
 Tower portfolio expansion – typically based on the anchor tenants needs for additional
coverage and capacity
 Increased tenancy ratios with additional operator clients on the towers
 Efficiency gains realised by TowerCo on its portfolio.
Portfolio expansion – build-to-suit sites
TowerCowill seektoexpandthe portfoliobase toleverage efficiencygainsoverthe period.Typically,
both parties agree on a commitment level for site expansion. From an operator’s perspective, this
reflects its business expansion plans, which is a combination of:
 Geographic coverage expansion
 Requirements for additional capacity sites – in high traffic areas
 Network upgrade to new technologies, from 2G to 3G and 4G
Figure 7 presents the assumption for the illustrative case.
In practice, the parties need to agree on the level of commitment by site typology.

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Figure 7: Build-to-suit assumptions [Source: Aetha Consulting]
Tenancy ratios
A keyparameterinthe businessplanisthe tenancyratio,i.e.the potential toincreasethe numberof
tenants per site. The market potential may vary from country to country, local market conditions,
such as number of mobile players, coverage requirements or new technology deployment and
availabilityof alternative wirelesstechnologies.The TowerCowill quantifytenancyratioforecastper
type of tenant, including:
 Other mobile operators, for different technologies (2G, 3G, 4G)
 Other telecoms players (e.g. WiMAX players)
 TV players, notably for DTT networks
Figure 8 below presents the improved tenancy ratio based on an increase in 2G and 3G tenants.
Figure 8: Additional tenants and tenancy ratio assumptions [Source: Aetha Consulting]
-
5%
10%
15%
20%
25%
30%
35%
40%
45%
-
20
40
60
80
100
120
140
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
2G 3G
-
0.2 x
0.4 x
0.6 x
0.8 x
1.0 x
1.2 x
1.4 x
1.6 x
1.8 x
2.0 x
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
2G 3G Operator per site Tenant per site

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In mostcases,a tenancyratiohigherthan 1.5x has provensufficienttoensure aviable businesscase
with affordable prices to operators.
There is, however, a balancing exercise between anchor vs. new tenant economics:
 Mobile operators need to assess the competitive risk of opening towers. This has been
historically a major issue although its importance should possibly be down-played today as
networks are more mature and efficiency gains play a more important role in operators’
network economics.
 TowerCo needs to assess the optimal rental price point for new tenants – which may be
defined lower than for the anchor tenants – in order to attract new customers. The anchor
tenant, however, may in turn assess the competitive risk differently and resist lower price
points.
Efficiency gains
As the tower and client portfolios increase, TowerCo is able to leverage efficiency gains, notably
energy costs.Overall efficiencyimprovementsonopex persite inthe range of 8% to 10% are typical.
The mobile operator will want to capture in the transaction price a share of these gains.
Cash flow impact
The differentmodelsbuiltbasedonBTS,new tenancy and efficiencygainswill resultinanimproved
cash flow profile for the TowerCo.
Figure 9 shows the different revenue scenarios – assuming for illustrative purposes the same price
pointfor all tenants – this,as mentionedabove,isakeydiscussion pointbetweenthe anchortenant
and TowerCo.
Figure 9: Revenue scenarios (USDm) [Source: Aetha Consulting]
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50
100
150
200
250
300
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
No tenant + BTS + New tenants

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For TowerCo, additional sites and tenants have a significant impact on investment requirements, as
shown in Figure 10 below:
Figure 10: Capex scenarios (USDm) [Source: Aetha Consulting]
Additional tenants, however, improve the investment case, as shown in Figure 11 below:
Figure 11: Capex to sales scenarios [Source: Aetha Consulting]
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50
100
150
200
250
300
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
-
5%
10%
15%
20%
25%
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

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New tenants also improve the EBITDA margin profile of TowerCo as shown in Figure 12 below:
Figure 12: EBITDA scenarios, before savings (USDm) [Source: Aetha Consulting]
The result is a set of cash flow profiles with different risk profiles associated to them, as shown in
Figure 13 below.
Figure 13: FCF scenarios (USDm) [Source: Aetha Consulting]
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20
40
60
80
100
120
140
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
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10
20
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80
90
100
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
No tenant + BTS + New tenants + Savings

Page 18
Valuation and price negotiation
The simple case presented above illustrates the key negotiation points for the valuation.
Valuation EV (USDm) IRR (%)
No tenant 220 15%
+ BTS 152 10%
+ Newtenants 245 17%
+ Savings 269 18%
Figure 14: Valuation scenarios [Source: Aetha Consulting]
Based on the same base monthly rental, the valuation of TowerCo improvessignificantly withmore
tenantsandaddingthe expectedefficiencygains.The mobileoperatorwillwantashare of thisupside
– it needs to ensure that a portion of the upside and the savings are passed on to improve its own
cash-flow projections. This can be achieved through a combination:
 A higher upfront payment, i.e. increasing the premium on the NBV of the assets
 A lower monthly payment.
The mobile operator needs to assess the trade-off between these options. This needs to be
consideredunderdifferentscenarios for other tenants’ prices and its broader competitive impact.
Whereasbothpartiesneedtoagree onasetof commonassumptionstoagreeonvaluationandprice,
TowerCowill needtodevelopitsownfinancingplan,includingabilitytoleveragethe acquisitionand
its impact on cash-flows to assess its own IRR and valuation.

Page 19
The transaction
Tower transactions create long-term relationships (typically 12 to 15 years) betweenoperators and
towercompanies(TowerCo) andcanbe complicated.Careful planninginthe processforestablishing
a TowerCo will ensure a better chance of successful implementation.
An assetcarve-outis attractive for mobile operators:itisan opportunitytorealise cash,to focus on
itscore businessaswellaspotentiallytoreduce overheads.There is,however,atensionbetweenthe
parties.Operatorsrequire flexibility,highlevelsof service andcostsavingswhereastowercompanies
focus on rental yield and drive efficiency savings. Both parties want to protect themselves from
surprises.
In particular, the operator will consider its options for:
 Rights of first refusal and privileged access for a sub-setof the assets – where access to the
tower may reduce a key competitive advantage
 The quality of service levels required to the TowerCo to meet its internal objectives
(availability, repair time)
 Operational flexibility, notably in terms of numbers and timing of towers required in the
future
The TowerCo, in turn, will seek certainty for future cash-flows whilst maximising the market
opportunity. In particular, it will focus on:
 Usage and build-outcommitmentsfromthe mobile operatorto guarantee a minimumlevel
of revenue streams
 Pricing flexibility for new tenants
 Post completion protection against business risks such as risks related to asset ownership
The valuation, as explained in the previous section,needs to be set on a common understanding of
the businessopportunity,includingpotential upside bothintermsof revenue andcost savings.This
is achieved during the due diligence process ahead of setting key contract terms.
Due diligence
A towertransactionrequiresadetaileddue diligence of the portfolio and the transaction structure.
Tower portfolio due diligence
In case of a transferof the operator’sassetsto the TowerCo,a complete due diligence of the assets
need to be performed to ensure:
 The assets are properly documented in the asset register – documentationwill include site
plans, technical documentation, building permits.
 The titlesof ownership,lease andleaserenewal are documentedandvalid –establishinglegal
titles is likely to be more complex and involve a measure of the risks in some countries.
 All conditions are met for transferring the assets (e.g. change of ownership close, other
commitments). Amendments to existing leases may be required.
 The status and cost of maintenance are documented – e.g. existing vendor maintenance
contracts which will be transferred to TowerCo.

Page 20
The objective istoestablishacatalogue of towersbasedonsmall setof categorieswhichcanthenbe
used for pricing purposes. Typically, categories are defined based on criteria that include:
 Type of lease:freeholdorleasehold –these categoriesneedtobe furtherdefinedaccording
to aging (expiry date of the contract), renewal terms, key leaseholders etc.
 Current tenants: by technology (2G/3G), by capacity (available place for other tenants),by
operator (if some towers are already shared with other operators)
 Towers included or excludedfrom the carve-out: some towersmay be excluded due to the
relationshipwiththetenantorlimitationsinthe rights-of-use (e.g.the State) orbecause they
are deemed as strategic by the operator
 Type of towers: monopoles, towers (of different heights), rooftops etc.
 Age v life time of the asset
 Location: e.g. rural, urban, high-dense urban
 Maintenance contracts, by vendor
Legal/regulatory due diligence
The transfer of assets to TowerCo will raise a number of legal and regulatory issues that need to be
well understood ahead of the transaction. Legal systems vary across countries, but typically issues
relate to:
 Foreignownershiprestrictions.Somejurisdictionshave establishedrestrictionsonownership
of assets or land. These restrictions are sometimes overcome by incorporating a local
subsidiary.Specificrulesmayapplyfortelecomsassetsand/ormayrequire relevantlicences.
 Local ownership/partner. Some jurisdictions may limit the percentage of shares held by
foreign investors in the TowerCo.
 Investmentvehicle.Tax and accountingconsiderationsoftendrive the acquisitionstructure.
In some jurisdictions,establishinganSPV (specialpurpose vehicle)canbe a lengthyprocess.
 Legal compliance.Eachjurisdictionwillhave anumberof legal requirementsthatwill impact
TowerCooperations,e.g.anti-corruptionrules,environmental legislation,etc.Issuesof non-
compliance withplanningandenvironmentalregulationcanbe material issuesonaportfolio
basis.
 Telecoms regulation. In recent years, telecoms regulators have tended to favour
infrastructure sharing,establishingrulestoensure non-discriminatorypricing,andaccessto
towersforlate entrants.These regulationswillimpactTowerCo.A clearunderstandingof the
Licence orConcessionconditions–includingcoverageobligations,facility-sharingobligations
and rights-of-way legislation are all material.
 Government and regulatory approvals.The carve-outof assets is likely to require a number
of approvals from the government or governmental entities such as the Competition
Authority, the Telecoms Regulatory Authority or Civil Aviation Authority. The number of
approvals may delay the process.
 Third-partyconsents.Due tothe large numberof thirdparty consents,the due diligence can
be a time-consumingactivity.Infact, the transferof assetswill triggera range of third-party
consents,startingfromalarge numberof landlords,butalsogovernment(notablyif some of
the towersare builtongovernment-ownedland) andfinancial institutionswhohaveprovided
financing to the operator (possibly with a pledge of certain assets). Some transactions may

Page 21
have multiple closings,whenthe full portfoliocouldnotbe carvedout at once due to delays
in obtaining landlord consent.
 Post-completionformalities.The processtoensure how land interestscanbe protectedand
registered can be lengthy and time-consuming. Even in countries where land registration
exists, there is a risk that the buyer or its lenders may be reluctant to assume. These
considerations will need to be incorporated in the final transaction documents.
The legal due diligencehighlightskeyrisksof litigation(notablyonpermitsand deeds)andwillbe the
basis to define potential representations and warranties in the final contract.
Market due diligence
An understanding of the market dynamics is key to assess the viability of the carve-out and the
financial profiles for the TowerCo.
Typically, the due diligence process needs to review:
 The currentinfrastructure inplace,inparticularthe numberof towersforthedifferentmobile
operators, but possibly also existing broadcasters and other players (WiMAX etc.)
 The future of the mobile sector:e.g.potential new entrant, or risk of market consolidation
 The future of mobile technology:e.g.take-upof 3G, introductionof 4G. As marketsbecome
more mature, the incremental cost of an additional technical layer and/or additional
frequencies is becoming a key issue for operators – a more efficient management of multi-
frequency,multi-technologynetworksisbecomingakeydriverof the consolidationof tower
portfolios.
 The expectedcapacitydemandfromnew players,e.g.new WiMAXorWiFi players,future of
DTH for broadcasters, demand from public safety networks.
The objective of the marketdue diligence isto assessthe addressable marketforTowerCo.This will
be used as a key input to the business plan.
Cost structure due diligence
The pricingschedule isnegotiatedbetweenthe partiesbasedona review oncurrentcosts, typically
based on audited cost information for the previous two to three years.
Cost review includescapex and opex for the existing tower base. Costsare aggregated according to
the site typology agreed during the site survey.
Opex categories usually include:
 Rental – this can be based on a large number of individual contracts, with different aging
profiles, currencies, renewal conditions, pricing schedules and escalation factors
 Outsourced maintenance contracts which can vary by supplier, region and pricing terms.
Differentcontractsmayalsohave differentwarrantyschemesaffectingthe cashflowprofiles
of the TowerCo
 Electricity and air conditioning – electricity prices can be regulated and will depend on the
type of equipment and the number of tenants and technologies (an incremental 3G
equipment will typically increase the electricity bill by ~30%)
 Insurance
 Employee costs (for in-house maintenance)

Page 22
 SG&A (e.g. headquarter costs, IT systems, SG&A personnel)
Opex can be fixed or variable.
Costs that can be capitalised include:
 Site analysis and survey
 Site acquisition
 Permits and legal due diligence to ensure compliance
 Site development
 Site construction
 Equipment installation
Inaddition,andbasedonthe towerportfolio,one needstoconsidercapexupgradesrequired,aswell
as longer-term maintenance capex.
Insome transactions,the operatorhastransferredpersonnel inadditiontotangibleassetstothe new
TowerCo.
Tax and accounting legal due diligence
The operator also needs to consider carefully the accounting impact of the divestiture, notably tax
impacts.
Under a TowerCo transaction, the mobile operator sells passive network elements to the tower
company. The operator then leases allocated slots from the tower company. The accounting
treatmentcanbe eitheran operatinglease,afinance lease,orbe accountedforasaservice contracts
– with different cost recognition and tax implications.
Pricing parameters
Ashighlightedinthe BusinessPlansection,agreedpricingtermsallow bothpartiestoshare theupside
of the carve-out.
Key pricing parameters include:
 Upfront payment
 Site rental costs on existing and build-to-suit sites
 Maintenance costs – these are typically based on current costs plus a margin – e.g. 15%
 Site costs for future sites – including escalation and price revision points
Due to the long duration of the contract, price revision points need to be defined(every five years,
for example) at the start of the contract. The revision points will take into account changes in the
market environment, the overall demand, and new technological developments.
Price escalation for site rental can be based on, or linked to, inflation. Parties need to balance the
certaintyof price escalatorfactors versusthe riskof underlyingrental andothercostincreases,after
taking into account potential cost efficiency savings.
Pricing can vary based on the typology of sites (e.g. urban, rural). Incremental sites on 3G or 4G
technology can be priced at a portion of the 2G site (e.g. 30%) based on certain limitations on the
maximum additional equipment (e.g. cabinets, microwave, antennae).

Page 23
The pricing can also be set separately for the anchor tenant and other tenants – with the anchor
tenant being guaranteed the lowest price. Typically, for other tenants, some conditions may be
altered, e.g. shelter space included or an ‘as-available’ basis rather than being guaranteed.
Key contract terms
Asset transfer
The transfer of assets will depend on the selected structure of the transaction (e.g. finance or
operating lease, TowerCo or JV, etc.).
Duration and renewal
Towertransactionsare long-termtransactions,typically15yearsormore.The transactiontermsheet
needs to consider renewal conditions – which sometimes can be subject to the operator’s licence
renewal.
Commitments
Financial visibilityiscentral forthe TowerCotoreduceitsoperatingrisks.Typically,towertransactions
include certain commitments:
 Timing and number of sites to be rolled-out in the future (2G/3G/4G)
 Pricing catalogue
Service Level Agreements
For operators, the challenges of monitoring network performance and quality increases as their
control over the infrastructure decreases. These challenges are controllable through appropriate
governance procedures and service level agreements.
The final transaction documents need in particular to cover:
 Share of Responsibility matrix (SoR) : operational, new site rollout, site acquisition, site
permits, civil works, equipment
 SLA & KPI definitions for site acquisition, operation, inventory management, new site
implementation works and services
 Penalty structure to be used with the SLA & KPI
Representations and warranties
Both partieswill require some level of protectionagainstfuture risks,notablyonpermitsanddeeds.
Valuation considerations
A satisfactoryclosingof the transactionrequiresbothpartiestoagree onavaluationbase case which
includes similar cash flows to the standalone situation:
 Roll-out of current costs without further efficiency gains
 Site costs for existing sites
 Estimated needs for additional sites over the period
 No new tenancy over the period

Page 24
For the operator,the IRRof cashflowsdeliveredtothe towercompanyneedtobe lowerthanitsown
costof capital.The abilityforthe towercompanytoaccesscheaperfundingisthereforeakeyelement
to improve the equity IRR for the transaction.
The tower company return should be enhanced through incremental cash flows from third parties
and potential efficiencies.A goodunderstandingof the marketdynamicsare central forthe TowerCo
investors.
For the operator, other considerations often include:
 Access to short-term liquidities
 Tax impact
 Valuation
Conclusion
For a wireless operator owing a significant tower park, options are many to generate additional
profits, and in the revenue dropping age the telecom industry is going through, in particular mobile
telephony, these new profits would be welcome by shareholders.
However, many parameters prove to have major impact on the profitabilityof any tower sharing
option. The operator will then have to balance potential new profits with the risk appetite of its
shareholders.
But the separation betweeninfrastructure and service industriesseemsinevitable,andprobablystill
at itsearlystage.More profoundinfrastructure separationis increasinglyconsidered, climbingupthe
network topology, through passive as well as active elements, in the fixed telecommunications, as
well as mobile, and as a result, one can expect in the medium term an entire transformation of
traditional telecom landscape as we know it.

Page 25
Authors
Dominique Reverdy - Partner, Salience Consulting
Dominique is a senior consultant with over 15 year successful
delivery in financial, strategic, managerial and technical roles for
operators and consultancies. Expertise in finance management,
business and financial planning, business strategy and valuation,
cost recovery.
Dominique worked for MTN in Dubai inthe Group Wholesale and
Finance division and as Senior Manager for M&A activities at
Etisalat. Before that he was Head of Treasuryfor Watanya Algeria
and has alsospendnumber of years as a management consultant
advising on economic issues.
He is has and Advance Diploma of Management Accounting from
CiMA, an MBA in InternationalBusinessfromInstitutodeEmpressa
and a MSc inCommunicationSystems from university of Wales.
Vladimira Pavcova - Analyst, Salience Consulting
Vladimira is a Telecommunication Analyst with master’s degree in
International Business. Her main strengths lay in devising
methodologies for process reviews of the techniques used in the
end-to-end analysis of various models.
Vladimira has a background in HR and banking and has recently
moved into the telecoms sector. Here, she has experience with
analysing corporate structures, resource and deployment
management andalsotelecomindustrytrends withrecent work in
investing intelecom towers. She managedthe compilationof work
for the analysisof tower sharing businesswithimplications onthe
operators business and revenues.
Pierre Blanc - Partner, Aetha Consulting
Pierre is a founding Partner of Aetha Consulting, withmore than17
years’ experience focusingonmobile strategy, business planning &
transactions.
Pierre directed over 30 due diligence projects, delivering
transaction and post transaction support, and worked for
operators in Europe, the Middle East, Africa and Latin America.
Pierre holds a Master’s degree in physics from ETHZ (Zürich).

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