The risks of not selling.
The risks associated with collecting rent from a mobile tower lease are actually greater than many owners are aware of. Telium knows these risks and accepts them as they are diluted within a diversified portfolio of assets.
Termination of a contract
The merger of 2 of the 4 major Polish operators (Polkomtel, Orange, T-Mobile, P4) is the largest theoretical risk for owners. Such a merger could lead to streamlining mobile towers, which would trigger a cancellation of around 25% of all tower leases, according to our estimates, rendering them redundant. Mergers in the mobile sector are common. Orange merged with Hutchinson in Austria in 2012, bringing the market from 4 to 3 operators. In Ireland, Telefonica and Hutchinson merged in 2014, also leading to a reduction in the number of operators from 4 to 3. In the United States, AT&T and Cingular, and Sprint, Nextel, Verizon and Alltel merged, triggering the termination of a number of leases, which had become redundant.
The 4 operators on the Polish market are engaged in an intense competition, which is driving down customer contract prices. The average monthly contract decreased from zł36 in 2011 to zł27 in 2017, a reduction of around 25% over 7 years. This had a negative impact on the profits of telecom operators which are now seeking to lower their operating expenses.
More specifically, operators have their eye on mobile tower leases whose rents are too high or on mobile towers located near new and less-expensive equipments. For example, Cellnex, Europe’s largest tower company, said its renegotiations lead to, on average, a 20% reduction in rental payments.
Mobile signal technology is changing rapidly. The market has gone from 2G, to 3G and now to 4G. 5G is the next step. These technological changes are prompting operators to regularly review their mobile towers leading to the creation of new locations but also to the removal of some existing towers.
In Poland, there are almost 22,000 mobile towers. With a population coverage rate of around 99% for 4G, operators could now decide that it is time to streamline mobile towers and therefore cancel some of their leases.
Co-location is when two or more operators use the same mobile tower. A common occurence in urban areas given the restrictions imposed on the installation of new mobile equipments, the phenomenon of co-location is poised to develop more and more in rural areas. This will inevitably trigger lease cancellations for some single-tenant towers and may trigger the grouping of operators on a smaller number of towers. With a national average of less than 2 tenants per tower, the Polish market is ready for this kind of move.
Sale and leaseback
Increasingly, telecom operators are selling their mobile towers to tower companies whose job is to optimise the management of this equipment. Ground site leases account for up to 80% of these companies’ operating costs, which can lead to tougher negotiations with ground site owners. The risks associated with these sale and leaseback transactions will soon be felt in Poland with the likely arrival of specialist players such as Cellnex (the European leader with 35,000 towers) or American Tower (the world leader with more than 170,000 towers).