Telecoms Infrastructure Sharing: The Asset Purchase Agreement This article follows on from Telecoms infrastructure sharing: structures and [Telecoms infrastructure sharing: The Tower Use Agreement], and provides some commentary on the drafting and negotiation of Asset Purchase Agreements as part of the managed model for mobile passive infrastructure sharing by telecoms operators. Christian Taylor, Partner, and Sophie Coignat, Managing Associate, Simmons & Simmons LLP Introduction In a managed model for passive infrastructure sharing, the operator transfers the ownership of its passive infrastructure assets to a telecom tower operator (the TowerCo ) which then operates the passive infrastructure and leases it back to the operator. This article focuses on the agreement pursuant to which the passive infrastructure is sold to the TowerCo by the operator. Passive infrastructure assets obviously include the tower facilities (transmission towers, rooftop structures, etc.), machinery and equipment (such as generators), i.e. the tangible assets comprising a tower. The transfer of these tangible assets usually does not raise any legal issues. The operation of passive infrastructure however also involves having title and access to, as well as the right to operate on, the sites on which the towers are located. This is where the main issues arise on the sale component of a sale and leaseback transaction. Before going into discussions with any TowerCo, a thorough due diligence needs to be undertaken by the operator regarding its rights over each of the sites. Does the operator have valid title to the sites? Does it hold all necessary permits relating to the sites? Can the operator show evidence of the same? These are some of the main legal questions that the TowerCo will check in its own due diligence. Vimpelcom has for instance reportedly chosen to delay the transfer of its telecom infrastructure assets in Russia due to issues relating to title to the sites. In addition to the above, the TowerCo will also need to check applicable statutory rights to access the sites where the towers are located, as well as environmental, health and safety requirements. In any tower transaction, engagement of local legal advice (in addition to legal advice from international counsel regarding transaction management and the contractual documentation) is key. Each party also needs to carry out a thorough analysis of the regulatory regime in place in the country where a tower transaction is contemplated. How is infrastructure sharing dealt with locally? Will the TowerCo need to obtain a licence to operate? Should intensive discussions with the local regulators be factored into the deal? All of the above questions are key to the drafting and negotiation of the Asset Purchase Agreement.
Structuring When such a sale and leaseback transaction begins, the passive infrastructure assets are rarely held by a dedicated company within the operator s group. They are usually directly owned by the operator or scattered amongst several entities within the group. One of the first structuring questions, from a legal point of view, will be whether the transaction will take the form of a direct asset sale to the TowerCo or rather a contribution of the assets to a newly-incorporated company the shares in which are then transferred to a telecom tower operator. The answer will mostly depend on the tax regime applicable to the transaction in a given country. To date, it would appear that the majority of tower deals are structured as asset sales rather than share deals. However, legal issues remain the same in either structure and the key features detailed below can be found regardless of whether the assets are sold directly or through a newly-incorporated company. We have therefore used Asset Purchase Agreement in this article to cover all transfer agreements. As mentioned above, a major part of the transfer of passive infrastructure relates to the transfer to the TowerCo of the right to operate the infrastructure on the land on which the towers are located. In most cases, the operator initially erects its tower on a plot pursuant to a lease agreement with the owner of the relevant land or building. In such a case, the underlying lease agreement will have to be transferred to the TowerCo as part of the transaction. In some instances, depending on the country in which the transaction takes place, the operator may also directly own the land on which the towers are located. In this case, one of the structuring questions will be to determine whether the operator transfers the land as part of the passive infrastructure or puts in place lease agreements with the TowerCo so as to allow the latter to use space on the relevant land. An important analysis must also be carried out by the operator to determine what is to be transferred as passive infrastructure, in particular in terms of equipment. Definitions in the Asset Purchase Agreement will need to be carefully drafted and reviewed in this respect. Key features of Asset Purchase Agreements In many instances, the Asset Purchase Agreement will include provisions that are typical of any other asset deal. Tower transactions do however also involve specific features which flow through into the Asset Purchase Agreement and are detailed below. Who are the parties? As in any asset deal, some work has to be done by the operator internally to determine where the passive infrastructure assets and contracts are located within its group. If located within several entities, the Asset Purchase Agreement will be impacted, either because several entities will need to be included as sellers or because one entity within the operator s group will need to procure on behalf of all of the relevant operator entities that the assets will be transferred to the TowerCo on completion. On the buyer s side, the question will rather be a local regulatory one. Independently from any practical or strategic considerations, local regulations may impose that a local entity be set up and prohibit any direct acquisition by a foreign buyer. Local law may also require that telecoms companies be wholly or partially owned by a national, such as in Indonesia or Kenya. Other countries may limit the ability for a foreign entity to own land on which towers are operated. The setting-up of the local subsidiary of the telecom tower operator should therefore occur before signing the Asset Purchase Agreement, and in any case prior to completion. In the event that the buyer is a newly incorporated entity, a guarantee from another viable entity within the TowerCo s group may need to be negotiated between the parties. 2
Conditions precedent Conditions precedent affecting the transfer of each site One of the most important issues for the TowerCo when taking over the real estate rights of the operator is to ensure that the lease agreements in place allow the TowerCo to carry on the business of operating the passive infrastructure and to offer space on the towers to a number of operators. It is therefore essential for the TowerCo that the lease agreements allows the TowerCo not only to lease space to the operators but also allows the co-location between multiple operators on any given site. In many instances, the lease agreements in place lack such provisions, in particular in certain African countries where provisions are limited to the bare minimum. The TowerCo will therefore request that amendments to the leases be a condition precedent to the transfer of the site in question. The TowerCo will also have checked as part of its due diligence that the landlords do not have the right to terminate or renegotiate the lease at any stage of the operation of the towers by the TowerCo. If this is the case, the TowerCo will likely insist on another amendment in this respect. On a related note, the term of the leases is also very important for the TowerCo as it needs to know, for the valuation of the sites, the period during which it is certain to have the right to operate the sites. Consequently, the TowerCo will also frequently ask as a condition precedent that leases below a defined minimum remaining term be renewed. Once the necessary amendments and renewals have been obtained, another condition precedent applicable to each of the site will be to obtain the consent of the relevant landlord for the transfer of the lease to the TowerCo. This can be a cumbersome process, as typically many hundreds of consents will be required as the operator will be selling multiple towers with many difficult landlords. Where the owner of the land is the State or where a tower is located on public land, a specific statutory procedure may need to be followed depending on applicable law. Issues may also arise in countries where land is owned by communities or groups of people (such as tribal land in parts of Africa), in particular in terms of existing documentation and proof of title. Both parties usually work together to contact the relevant landlords and obtain from them the necessary amendments, renewals and consents. Applicable law may require a building permit to be obtained prior to the erection of a tower. In such a case, the consent of the relevant administrative authority may also need to be obtained prior to transferring the sites to the TowerCo. Depending on the location of the sites, other permits, such as permits from the civil aviation authority or environmental permits, may also be necessary for the operation of the site and therefore have to be transferred to TowerCo. The transfer of these permits may be included as conditions precedent to the transfer of these sites, although the operator would typically resist this. These permits may also be missing for some of the sites to be transferred. The TowerCo will most likely ask that these permits be put in place either as a condition precedent or, if the negotiation does not provide the TowerCo with this option, as a covenant backed by indemnity or unwind provisions in the event the missing permits cannot be obtained. Conditions precedent affecting the whole transaction Apart from the conditions precedent applicable to each site which are encountered whatever the country, local laws may also require additional approvals that impact the whole transaction. Some countries indeed require that the TowerCo obtains an investment licence, as is the case in Uganda for example. Others impose that a telecoms licence be obtained by any telecom tower operator, such as in Rwanda or Tanzania. 3
Depending on the size of the transaction, the amount at stake and the market position of the parties involved, prior approval may also need to be obtained from local competition authorities. State bank approval may also be necessary, as would be the case in Pakistan. Each of these approvals and licences must be obtained prior to closing and would typically be provided as conditions precedent which may impact the timing of the transaction and delay the closing date initially contemplated by the parties, in particular where the applicable legislation is unclear and requires lengthy discussions with the local regulators. It has, for instance, been reported that obtaining a telecoms licence in Tanzania took Helios Towers eight months rather than the statutory four months which had been initially envisaged. Multiple closings Depending on the transaction, there may be several hundred sites to be transferred from the operator to the TowerCo. Each of the sites will have a separate lease agreement and administrative permits to be transferred to the TowerCo, which means that consents and approvals will be necessary for each of the sites to be transferred, as described above in section 3.2.1. In order to avoid delaying the whole transaction until the condition precedents are all fulfilled for each and every site, it is common practice to transfer sites in batches through several closings, either pursuant to a specific timetable or when the conditions precedents have been fulfilled for a minimum number of sites, or a mixture of both. In view of the numerous closings that may occur to transfer all of the sites comprising the passive infrastructure, the parties usually agree on a main closing, usually the first closing, where the TowerCo is certain that the main part of the deal will be completed, i.e. the transfer of the main contracts and the employees and sometimes payment of the full price. The parties usually condition the occurrence of this main closing upon a minimum number of sites being deemed transferable, with the relevant consents for those sites having been obtained. This minimum number of sites depends on the assessment made by the TowerCo of the minimum number of sites which needs to be transferred for the operations of the infrastructure to be sustainable in the relevant country. It is obviously also a matter of negotiation between the parties. Having a main closing followed by several purely legal closings also means that the tower use agreement will come into force and the related use fee paid as from the date of the main closing, since the operator will have transferred most of the capacity necessary to operate its own remaining sites. Price The price mechanism does not differ much from any other asset transaction, apart from the fact that the price is often set on a per site basis and is thus adjusted depending on the number of sites which are effectively transferred to the TowerCo. Although each site has a rather small intrinsic value, the price of the sites will also set by reference to the use fee to be paid by the operator pursuant to the tower use agreement. A different treatment is usually provided for the purchase price of the work-in-progress sites (see section 3.5 below) which will reflect the construction costs of each such site. Where the parties have chosen to transfer the sites in batches, a question arises as to the timing of the payment of the purchase price. Options include a one-time payment at the first and main closing based on the contemplated total number of sites to be transferred. This option has two main consequences: it means that the use fee to be paid by the operator to the TowerCo for the leasing and operation of the towers pursuant to the tower use agreement will be paid from the date of this main closing for all sites. It also means that in the event that a site cannot be transferred at a closing following the main closing, the parties will have to unwind such site and the operator will repay the corresponding price to the TowerCo. Another option is for the TowerCo to pay for a site when that site is transferred. This involves a more complex treatment of the payment of the use fee following the main closing. 4
Some countries, like Zambia, may require that all transactions be concluded in local currency which may raise issues when the price per site and use fee have been negotiated and the exchange rate is not stable. The Asset Purchase Agreement may then include provisions relating to the coverage of foreign exchange risks. The Asset Purchase Agreement may provide for a mere payment in cash at the main closing date or on each closing. It may also provide for a payment in cash and in shares of the TowerCo, as was the case for the PT Indosat Tbk / PT Tower Bersama Infrastructure Tbk transaction in Indonesia in 2012, or in a number of Helios transactions over the past few years (e.g. with Millicom and Vodacom). Work-in-progress sites The towers owned by the operators may include towers that are under construction (known as work-in-progress sites), or there may also be towers that are not yet built but that are planned for a construction in the following months. The Asset Purchase Agreement will include provisions regarding these sites as well. Work-in-progress sites may be transferred to the TowerCo on an as is basis on closing, from which the TowerCo will take over the construction. The operator may, on the other hand, choose to complete the construction and transfer the finished site to the TowerCo. In both cases, the construction agreements will need to be assigned to the TowerCo. Shared sites Some of the sites owned by the operator may well already be shared at closing with other operators, broadcasters or otherwise. In many cases, this sharing is part of a wider arrangement where the operator may also use space at some of the other party s sites. The Asset Purchase Agreement will then provide for the splitting of these arrangements in two agreements, one between the third party and the TowerCo for the transferred sites and the other between the operator and the third party for the third party s sites. The first agreement may also give room for renegotiation between the TowerCo and the third party where the TowerCo may try to obtain more preferential terms and conditions than those previously applicable to the operator. In some instances, such existing sharing arrangements between the operator and the third party are made free of charge due to the reciprocal use of space (so called barter sites ). In such a case, it is important for the TowerCo to request that best efforts be made by the parties to renegotiate these arrangements so as to convert them into cash-pay agreements. These renegotiations are of course fully dependent on the goodwill of the third party. If the operator is able to convert such arrangements, the sites gain additional value which can be reflected in the purchase price. Employee transfer Another important issue to be addressed in the Asset Purchase Agreement relates to the transfer of employees. The operator will likely have dedicated some of its employees to the operation of the towers and related passive infrastructure (such as electrical generators). Once the towers are transferred to the TowerCo, these employees are no longer needed within the operator s organisation. From the TowerCo s perspective, these employees are an asset as they are the ones holding the knowledge about the infrastructure that they are buying. Consequently, the Asset Purchase Agreement will likely address their transfer from the operator to the TowerCo and deal with the allocation of employee related liabilities before and after closing. It is worth noting that different legal systems provide for different employee transfer options. Indeed, some countries may consider that the employees are linked to the assets and must therefore automatically transfer with the assets. Other countries provide high protection for employees in the context of a transfer and approvals or notification of a labour inspector may be required. Employee representatives may also need to be consulted prior to the transfer. It is therefore important closely to analyse the applicable labour law regime in the country where a tower deal is anticipated. 5
Conclusion Although many provisions of Asset Purchase Agreements are no different in a tower deal from any other asset deal, specificities do exist when dealing with the transfer of towers and even more when the tower deal is a sale and leaseback transaction as the sale aspect of the transaction is closely linked to the leaseback part. It is therefore essential for operators or tower companies to engage in a tower deal to be advised by experienced legal advisors who can spot the issues which are specific to tower deals and address them accordingly. simmons-simmons.com elexica.com @SimmonsLLP elexica.com is the award winning online legal resource of Simmons & Simmons Simmons & Simmons LLP 2014. All rights reserved, and all moral rights are asserted and reserved. This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmons-simmons.com/legalresp Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. tmt_076_telecoms_infrastructure_sharing_the_asset_purchase_agreement