Some towercos have made their name managing power. But could the challenges of managing power now be dragging down their valuations? That’s what Alessandro Ravagnolo and Alex Pericleous suggest in a provocative new paper by Analysys Mason.
Published late last year, the piece argues that investor wariness over energy uncertainties is dragging down towerco’s valuation. Much like how carriers outsourced their tower troubles, the report suggests towercos should outsource their power troubles to internal Energy Service Companies (ESCOs).
We have the power
Mobile operators continue to sell or carve-out their towers. More than 75% of the world’s towers are managed independently according to TowerXchange’s latest figures.
What might be less obvious is that power is now becoming a towerco responsibility as default. Even in Europe Vodafone opted to pass on management of power and delegated to its spin-off, Vantage Towers.
There is a natural synergy in managing all aspects of passive infrastructure so it seems odd to suggest that towercos in emerging markets might benefit from separating tower management from power management.
But in recent years, specialised ESCOs have been established and expanded in emerging markets, particularly in Africa, India and some greenfield markets like The Philippines.
These ESCOs raise capital themselves, invest in new power equipment and provide the associated operations and maintenance duties.
Notable ESCOs include Aktivco, CREI, Crossboundary, Energy Vision, IPT Powertech and REON. Thus, the principal of separating the active network from towers from power is well established.
In emerging markets, towercos have made their names by delivering reliable power and high uptime to tenants in the toughest markets going. Ravagnolo and Pericleous don’t deny that towercos should include power-as-a-service (PaaS) in their operational scope, but they do suggest it should be provided by a separated internal ESCO.
Separating the assets would make legible to investors how capital is deployed internally to earn returns.
Towercos must continue to provide power because they have created refuelling networks, network operations centres, security teams and end-of-life equipment replacement schemes.
MNOs trust towercos because they have amassed significant expertise in this space. Power is also seen as an important route to organic growth for towercos because power can account for up to 15% of the cost-base of a mobile operator.
For all these reasons, towercos in emerging markets need their own PaaS offerings. In fact, we can see these offerings being developed in South Africa where declining grid quality has created an opportunity for towercos to provide power.
Valuation troubles
Despite obvious incentives for towercos to provide power, we have seen valuations on emerging market towercos plumet as the global energy crisis deepens.
Financial markets may incentivise the segregation of PaaS from tower colocation services.
Towercos in emerging markets have consistently been undervalued by public markets relative to their counterparts in developed regions. Some of the most highly valued towercos in the world have lost 40% of their peak valuations; some emerging markets towercos have lost closer to 60% of their 2021 highs.
In discussions with investors Ravagnolo and Pericleous have identified several factors beyond a country risk premium that contributes to the lower trading multiples of emerging market towercos.
Exposure to power is a key factor. Supplying power to mobile operators is not universally perceived as an infrastructure-grade investment due to the susceptibility to energy cost fluctuations, shorter contract durations, heightened operational risks, abbreviated equipment lifespan, and elevated refresh capital expenditure and operating.
In essence, infrastructure investors associate greater risk with PaaS when contrasted with tower colocation and that part of the business is valued at a lower multiple.
The solution
To combat this reverse valuation arbitrage towercos should contemplate segregating their power offering into distinct entities while retaining operational and financial control, effectively creating a captive ESCO.
By creating a separate balance sheet but staying in control of operations the towerco can clearly explain the relative revenue and margin contributions of co-location and energy, aiming for an enhanced valuation.
Additionally, this approach may attract minority investors experienced in energy-related ventures, or create the potential to run competitive processes in the future to find new power partners.
Transparency regarding pricing could also yield long-term benefits, including better risk management, enhanced operational accountability and improved relationship with MNOs.
Towercos are caught between a rock and a hard place when it comes to power. Managing power is an essential contributor to the operational and commercial success of an emerging market towercos. However, depressed valuations may be driven by those same energy assets.
