FOCUS: Russia’s MTS opts to lease towers out to diversify, not sell like others

By Yekaterina Yezhova

MOSCOW, May 23 (PRIME) -- MTS has moved the last out of the Russian big three mobile operators to turn their tower infrastructure into an additional income. However, unlike MegaFon and VimpelCom, the red-labeled operator will not sell base stations, but lease them out to thirsty operators. Analysts favored the initiative as a source of diversification and money, but said that growth would be limited by market specifics.

“The purpose of our project is to diversify business and optimize spending on maintenance of our antenna facilities. We prefer a lease to a sale, because infrastructure is a basic asset of any connection operator; it’s the core of business. That’s why it’s crucial for us to keep control over the infrastructure allowing us to do business,” the operator’s press secretary Dmitry Solodovnikov told PRIME.

“As our expenses on construction of the bulk of towers paid back long ago and as we see demand for them from state entities and organizations, we’ve decided to lease our facilities out. The move will not only cover our minor expenses on maintenance of the existing infrastructure, but will also bring us extra money in the long-term.”

Promsvyazbank’s senior analyst Ilya Frolov said MTS, unlike its closest competitors MegaFon and VimpelCom, made a strategic decision to become a full-fledged player on the market instead of receiving a one-time profit from the sale of its infrastructure to third parties, which would have also resulted in one-time dividend payments.

MegaFon and VimpelCom decided earlier to spin off their towers into separate units. MegaFon can sell the tower unit either partially or fully, while VimpelCom will sell its infrastructure unit by the end of 2016.

“We think the main issue here is that cellular operators are facing a shortage of sources of further growth, and the effort to enter the lease market can contribute to formation of another promising business direction for MTS,” Frolov said.

Andrei Ushatsky, the company’s vice president for technology and IT, said that the country’s rental market of antenna towers has been actively evolving. “In the first phase, we are prepared to rent more than 5,500 towers in operation and our further development in this field will depend upon the mix of the demand from potential partners and our technical capabilities,” he said when announcing the move in late April.

MTS currently uses some 15,000 towers. “At some spots we take out a lease on facilities or exchange places with other operators,” Solodovnikov said, adding that the operator has already received applications.

“Final rates of a lease are set individually in every case, depending on specifics of required infrastructure, like a location and a region, the height of a tower, land rights and others,” he said.

Frolov estimated the country’s total capacity of the tower market at 80,000–90,000 units, which propels Russia to the first place by this indicator in Europe, which in total has only 600,000 towers, and 29% of them are controlled by independent tower companies.

“Construction of a tower from scratch costs about 5 million rubles, and its maintenance consumes about 5% of this amount per year. With lease rates at 25,000–50,000 rubles per month, the payback period stretches from eight to 10 years,” Frolov told PRIME.

The domestic market of towers and antenna masts leasing is led by company Russian Towers, which runs 1,700 facilities. Its main client is Tele2, he said. Tele2 is a brand used by T2 RTK Holding, in which state-controlled telecom giant Rostelecom owns 45%.

MTS’s towers could be of interest to Tele2 as well; the latter has been aggressively expanding its network after the entrance to the lucrative Moscow market in October 2015. Tele2 strives to improve connection quality and have a strong support of its investors, Frolov said.

“Demand for a tower lease is rather unique, as telecommunications companies are the core clients. MTS has a potential to develop the business, but the segment won’t show quick evolution rates,” he said.

(66.3775 rubles – U.S. $1)

End