“In the sprint to closing, it’s important to remember that the contracts need to be flexible enough to work well in the long term.”
In a highly competitive and fast-moving industry, can rivals learn to share to meet demand? In the telecoms industry, the answer is yes.
With ongoing upgrades for 5G technology that are expected to provide the fastest internet service yet, infrastructure-sharing arrangements will become more important than ever as operators seek to accommodate an unprecedented demand for data.
A growing number of operators are considering carving out their infrastructure portfolios from their core businesses, whether to free up some capital or to focus on customer services.
As a result, competing operators are moving towards sharing arrangements in increasing numbers…with the help of their attorneys.
“There’s often real pressure to get these deals done quickly so the MNOs can meet consumer demand for coverage and capacity. The arrangements are typically put in place for multiple years. So it’s key to move swiftly to closing in a way which optimises long-term success,” said Rob Dixon, a V&E partner in London with a focus on telecom infrastructure transactions.
“The opportunity pipeline in Europe is particularly strong as European operators are following in the footsteps of the US”, said Federico Fruhbeck, another London V&E partner who regularly advises European private equity and infrastructure funds on such investment opportunities. “Recent figures produced by a leading operator1 in Europe suggest that 70% of European towers are still owned by operators, compared with just 10% in the US”.
V&E attorneys have represented various equity and debt investors, infrastructure companies and mobile network operators in telecom infra deals. Below, Dixon, Fruhbeck and Natalie Lamb, a London-based V&E senior attorney who concentrates in telecom infra transactions, share the team’s top tips for accelerating telecom infrastructure deals while optimising long-term success.
1. Consider whether to pursue an auction.
When operators decide to outsource infrastructure services to independent service providers, they may choose to hold auctions. Such auctions force service providers to compete with one another for an operator’s business and could yield the operator a better deal. The drawback for operators, however, is that auctions may result in the disclosure of information such as which assets or sites they value most. “You are putting information out there as an operator that you may prefer to keep confidential,” Lamb said. She noted that appropriate confidentiality agreements should be put in place and that phased disclosure of information is prudent.
Service providers participating in auctions, meanwhile, must also approach them with care. “If we were acting for the infrastructure company who was facing an auction process, we would be advising on strategy, because you have to balance how much you want to win the deal with how much you’re willing to sacrifice,” Dixon said. “You have to strike a balance between doing what it takes to win the deal but not committing to something that ultimately can’t be financed or which will cause significant value erosion over the years.”
2. Start your due diligence early and consider sampling.
Due diligence is important for any deal, but due diligence for telecom infrastructure transactions can be a particularly intensive process given the large number of individual assets (towers, fibre or data centres) under review.
To compensate for gaps in information, or to simply save time and money, the parties may choose to focus on sampling certain sites instead. “If you can’t economically and practicably do due diligence on thousands of sites, early on you would want to come up with an effective sampling system,” Lamb said. “You could review a small percentage of sites that would be representative of the whole portfolio.”
3. Work with regulators in a timely fashion.
In every telecom infrastructure project, beginning an ongoing dialogue with regulators is important.
In some countries, regulation on telecom development and infrastructure is very clear and well developed. In other jurisdictions, however, regulation may be nascent or may not exist at all. In such cases, it’s key to make contact with government regulators early on. There have been projects where V&E attorneys and their telecom clients have helped to shape the relevant regulations. “Well-run infrastructure companies will welcome clear and fair regulation. It’s a useful barrier to entry,” Dixon said.
4. Ensure the independence of the infrastructure company.
It is key that the need for independence is recognised as an overarching principle of the deal from day one. An operator that sells or outsources the management of its infrastructure (which it built or owned long term) is likely to expect preferential treatment from the service provider. “But the service provider needs to make sure that it is acting independently, and is seen to be acting independently, for other operators to bring their equipment onto the infrastructure,” explained Lamb. So how does a service provider balance the expectations of its anchor customer with the concerns of its other customers? By setting limits on preferential treatment and ensuring that the rights of different customers do not conflict.
Where sharing creates technical issues (e.g., radio interference), there should be a clear, consistent and fair resolution method. Mobile network operators sometimes form captive infrastructure subsidiaries or form infrastructure joint ventures with competitors. In cases where MNOs have an equity stake in the infrastructure company, care must be taken to ensure that any equity protection rights do not impinge on the independence (and perceived independence) of the infrastructure company. For instance, the MNO should have restricted information rights and should not be entitled to consider or vote on operationally sensitive matters that impact the MNO’s competitors.
5. Future-proof your contracts.
In the sprint to closing, it’s important to remember that the contracts need to be flexible enough to work well in the long term. “While it’s not possible to ‘crystal ball gaze’ with 20/20 vision, it’s important to address how key commercial and technological changes will impact the arrangements. What if customers merge, for instance? Who bears the burden, and reaps the rewards, of implementing new power solutions?” Dixon noted. “Good governance processes and procedures are key, especially for types of change which the parties agree to discuss down the line, in the interests of getting the deal done.”
It’s clear that the complexity of telecom deals means that it’s critical for clients to amass teams of skilled, experienced professionals to advise on the transactions. Lamb said that, while attorneys — both international counsel and local counsel — play key roles on such teams, accountants, tax specialists and other financial advisors also make significant contributions in executing complex deals. “Make sure the professionals on your team have experience advising all different types of clients so they have a well-rounded view of the deal,” Lamb said. “Select the people who know the sector and know how it works so they can advise you effectively.”