This is the third post in a three-part series focussing on key legal issues in data centre, fibre and towers acquisitions and investments. See our post on data centre investments here and fibre investments here.
The ever increasing demand for connectivity is set to lead to a transformation of the digital infrastructure on which the telecoms sector is built. The huge amount of capital required to upgrade telecoms networks is creating opportunities for investors in the fibre, towers and data centre asset classes, and as the importance of the transformation of these networks grows (as underlined by the current pandemic situation), so does the value of this critical infrastructure.
For a number of years now there has been strong M&A activity in European mobile towers. All signs point to a continuation of that trend as mobile operators – faced with the challenge of financing large scale mobile coverage and capacity projects (including for 5G) with traditional models – look to de-layer their businesses including by carving out their mobile towers and monetising them through private sales to towercos, selling stakes in them to infrastructure funds or private equity or listing them on public markets. One only has to look at the valuation arbitrage opportunity between operators and towercos (a valuation trading difference of some 3-4x EBITDA) to see that operators will continue to pursue these opportunities. These transactions generate significant proceeds for operators and underscore deleveraging targets and balance sheet management, and in turn enable them to focus on industrial projects.
These opportunities have also seen independent European towercos such as Cellnex, and more recently American Tower Company, benefit. Although they pay very high valuation multiples – driven by the demand for high-speed ubiquitous connectivity and the digitalisation of many sectors acting as a stimulus for mobile towers – these deals increase free cash flow for them as they are able to finance the debt at very low rates, have capex/sales at rates higher than interest rates and pay almost no cash taxes.
This post highlights selected key legal areas for an acquisition of, or investment in, mobile towers.
|Structuring||The decision whether to structure a sale of mobile towers is usually tax driven.
If it’s an asset sale, this will require the seller to procure the sale of towers on behalf of other selling entities. On the other hand, a share sale will require the towers to be carved out and transferred into a separate company, and the buyer agreeing to acquire shares in that company through an SPV acquisition vehicle.
Also of importance is to clarify what is to be transferred as passive infrastructure. This typically includes the tower structure, the land parcel (owned or operated under lease or licence by the operator) and in some cases generators at sites to help facilitate back-up power for the site’s tenants, but excludes antenna equipment, including microwave equipment, tenant shelters containing base station equipment and HVAC and coaxial cable.
|Due diligence||Investors and towercos will of course need to undertake due diligence on the towers portfolio. Not an easy task where there are often many thousands of individual towers and alternative structures such as rooftops and street furniture installations.
Key issues include establishing ownership of or rights to operate the infrastructure on the land under site lease or licence agreements (or in some cases concessions with local authorities to use public sector land, buildings and other assets). Such ownership or rights must transfer to towercos so they have continuing rights to operate the infrastructure post-completion. It’s also important to understand how long the term of the lease and licence agreements are as well as renewal rights and the potential costs and timing of any known site relocations.
There are many other issues to conduct due diligence on, including e.g.:
As there will likely be many thousands of sites, a pragmatic sampling approach (typically 5-10% of those sites which will provide the best view of the greater portfolio) to due diligence on title and other key terms will be important. This should provide enough detail on the overall site portfolio to potential buyers and any issues which may go to valuation etc., albeit on a small percentage of sites. Whilst issues identified on a per site basis may not be material, systemic issues of non-compliance will be of greater cause for concern.
|Local regulatory regime||An analysis of the local telecoms regulatory framework is important for investors and towercos. They should be aware of what the local regulatory controls around passive (and active) infrastructure sharing are – a regulator may, for example, decide to provide approval for sharing, actively encourage sharing or mandate access. The likelihood of future network sharing (or future consolidation) amongst operators can have a significant impact on the investment case.
Other issues include whether a towerco would need to obtain a licence or authorisation to conduct its business and whether there may be merger control and / or foreign direct investment risks (and whether any filings would need to be made).
|Closing||In order to avoid delaying closing due to e.g. the need for many third party consents, phased closings are often used whereby closings for certain groups of sites occur when pre-agreed site transfer criteria for that group of sites have been satisfied.
There will of course be other conditions precedent to closing such as regulatory conditions and approvals; appropriate shareholder approvals; entry into the MSA/MLA and any build-to-suit agreement with the operator; entry into a transitional services agreements between the seller and buyer; requirement for the seller to amend site leases if necessary; towerco obtaining a telecoms licence or authorisation if necessary; and bank consents.
|Pricing – acquisition agreement||Pricing under the acquisition agreement is typically on a per site basis.
The price of each site is set by reference to a number of factors including e.g. the annual licence fee to be paid by operators under the MSA/MLA; term of MSA/MLA; the number of sites; the quality of sites/structures; infrastructure on the compound (availability of free space in both the compound and the shelter to support additional tenants on the site); security of the sites; type of sites; competing towers in the area etc.
|MSA/MLA terms||The values of the towers will depend in part on the long-term MSA or MLA with the operator as the anchor tenant. Important issues therefore, for towercos and investors, to consider include:
|BTS sites||Build-to-suit site agreements are also commonly negotiated at the same time as the tower sale agreement and MSA/MLA.
Important issues to be considered by towercos and investors include e.g. the level of commitment made by the operator (i.e. how many sites is it committing to the towerco); forecasting regime; site selection regime; timelines, specifications and construction standards and acceptance testing regimes for new site builds; liquidated damages regimes; costs and cost overruns; and the ability for the operator to build its own sites and transfer them to towerco under and agreed form BTS transfer agreement.