The rent to own towerco

B140 are a towerco with a difference. Rent to own is common in other industries, but rare in the towerco world, but this is the model B140 are deploying in South Africa. The towerco remains small, but has 17 completed sites with a current pipeline of 23 more, and agreements in place with South Africa’s two largest mobile network operators. TowerXchange spoke with their Managing Director Geoff Chennells about B140’s desire to disrupt the towerco industry and prove that their model can work.

TowerXchange: First please introduce yourself – what is your background and how did you get into the tower business?

I was born and bred in KZN South Africa. I received a Bachelors degree in Economics from the University of South Africa and ventured straight into business as a youngster, however I always chose the path of the more entrepreneurial opportunities.

My background was more in the property development sector and through default came across the very interesting space of the towerco industry. We quickly realised that the towerco space has very similar attributes to the property game but that it was a very “small” space as far as the stakeholders involved are concerned. It is dominated by a handful of MNOs, a couple of big towerco players (mostly from abroad) and a few “smaller” local towercos trying to make an impact in the industry.

TowerXchange: Please introduce B140 and what led you to develop your “rent to own” business model?

We realised that if we were going to play in this space we would have to come up with something unique that was missing in the industry and that would be embraced by our potential clients, the MNOs. One of my partners had a successful background in off balance sheet finance and thought that something similar could work in the towerco space.

We approached Vodacom very early on to gauge interest in a “rent to own” type model and there was an immediate interest. The feeling we got was that the MNOs were looking for alternate ways of funding and rolling out their networks.

Traditionally, network rollouts were done either through developing their own network, which is very capital intensive, in a time where the capex could be directed towards other realms of their business, or by jumping onto third party towers, where over time they found their rental rates were escalating out of control, and that they were, in fact, losing an element of control over their network infrastructure.

And so the seed was sown, but we had a long way to go to get to where we are today.

We listened to our potential clients and tailored something that would fit directly in-between themselves rolling out their network and using third party infrastructure. We eventually concluded the first “rent to own” Master Framework Agreement (MFA) with Vodacom in October 2018.

The uniqueness of the towerco model sparked interest with MTN and it seemed that the timing was right and we were offered our fist build-to-suit sites on a “rent to own” model in May/June 2019. The concept that was initiated in 2015 was now being put into practice.

This model also allowed us speed to market as we didn’t have to perform our own site acquisition and permitting as the MNOs give us their fully permitted sites to start construction. We completed construction on our first site for MTN in August 2019 and by December 2019 had 17 completed sites with a pipeline of a further 23 sites and counting. After signing an MFA with us, Vodacom spent a couple years of carrying out a modernisation programme, but now they are starting to ramp up new tower rollouts where we hope to play a major role in that space.

TowerXchange: What is the pedigree of your management team how lean is your business model – what capabilities sit ‘on your payroll’ and what is outsourced?  What is your procurement model and process – is it in-house? Who are the key stakeholders?

Due to the fact that we are a start-up it was “all hands on deck” from our management team (who are all shareholders). Luckily we have been able to utilise the strengths of our management team to keep B140 as lean and mean as possible.

We have very good strengths in finance, legal, operations/logistics/construction and sales/marketing. The rest is outsourced and we’ll make decisions as we go whether we bring certain functions in house or keep as is – this will be dictated to us as we build scale.

But, I am of the opinion that outsourcing to sector specialists in the short to medium term is a far better route to take. We understand that this industry runs in cycles (like most) and there will be good years and slower years and we have to be prepared for the slower times of this cycle, hence B140 taking the outsourcing approach where it makes financial and business sense.

At the moment our procurement model is in-house, however as we enter the second phase of our business plan which entails identifying, acquiring and permitting future sites of our own we have identified a consultancy firm who will be running this function for us – it goes without saying that we have to secure our own pipeline and can’t rely on the MNOs to keep giving us their fully permitted sites. This is of high priority and without a massive war chest, we have to be very selective and innovative in our strategy going forward.

We have a few ideas that we are implementing in order for us to keep feeding our pipeline with organically grown sites. Our key stakeholders in house are the four executives that run the business and out of house, include the MNOs, site acquisition and permitting firms, our financiers, our civils contractors, our main suppliers and our landlords.

TowerXchange: Are you focusing solely on building and leasing macro sites, or are you targeting small cells too?

We have seen the trend internationally and locally to some extent and we are definitely looking at small cells as something in the medium term where we are going to focus fairly aggressively. Whilst we will always “stick to our knitting” we have to be able to adapt quickly to growing demands in the market. One of the benefits of being lean and mean is our ability to shift course in a speedy manner should the need arise.

TowerXchange: Instead of owning towers, your key assets are your contracts – how does that affect your investability and what does this mean about your capacity to build more towers?

Yes, our assets are our contracts with our blue chip MNO clients. But our “rent to own” model and our MFA/MLAs took a very long time to sign off with our MNO partners because our agreements are very unique and very bankable.

Yes, they have a finite life but we intend building towers on this model for at the very least five to ten years, or for as long as the MNOs see value in our product. This gives us a life span of no less than 15 years but hopefully many more years than that.

Saying that, at the end of the nine years and eleven months, the MNO has the option to buy back the tower for one Rand. They also have the option to sell the tower back to us and lease it on a rent to own basis again, or enter into another arrangement to be negotiated at the time. The point is, the MNO has options at the 9 year 11 month point which is why they like it. So, this model suits financial institutions as it’s very bankable because of its predictability and the type of agreement we have managed to negotiate with the MNOs.

For this reason, we are able to fund an “unlimited” amount of towers using this model in its current form. But as mentioned briefly before, we have to adapt and stay relevant in the market, so we have therefore embarked on acquiring and permitting our own pipeline of sites which will run as more of a hybrid of our “rent to own” and a standard towerco model.

TowerXchange: What are the timelines you are working to internally? How many contracted sites and tenanted towers would represent success?

Covid 19 has thrown our modelling out a bit as I think 2020 is going to be a very unpredictable year to even try and be accurate as there are currently too many unknown factors to take into account.

But taking that out of the equation, we were always going to use 2019 as the year to “cut our teeth” and get B140s name out there. We had to build our clients’ trust in our ability and deliver quality sites, on time. I believe we achieved that with MTN in 2019 with the 17 sites currently up and a further 23 (so far) to be constructed in 2020/21, with hopefully more sites being added to that pipeline.

We anticipate a similar scenario with Vodacom in 2020. I would be happy with 25 MTN sites built and 25 Vodacom sites built on our “rent to own” model by the end of 2020. I would also like to have 50 identified sites in the permitting phase to be ready for construction in 2021. I would like our “rent to own” sites to increase to 100 per year from 2021 and have at least 50 new sites that we have permitted per year from then on. Therefore giving us a 150 sites per annum from 2021 onwards. This would be a mixture of organically grown sites generated from within B140’s stable and sites allocated, be it permitted, semi permitted or just nominals, by our clients.

However, as I mentioned earlier, we are in a very fast moving sector and things change overnight, so as long as we stay relevant and adapt to new trends or challenges as best we can, I believe we can achieve those numbers. The “rent to own” model is also a very good model for MNOs to sell their existing sites in their portfolio whereby they capitalise their assets but still remain in control of their assets in the medium to long term. They can either repeat the exercise again in ten years or agree on new terms thereafter – this can’t be modelled but is definitely part of our strategy.

TowerXchange: How does typical time to market for a greenfield tower build (including site acquisition, permitting and construction) compare to time to market for other towercos or a co-location?

Currently we are being given fully permitted sites by the MNOs. Depending how long it takes to get permanent power supply to the site or whether the MNO will look at other power solutions (be it temporary or permanent) we are able to begin construction immediately and have that site ready for handover within around 30 days. We are also fortunate in that we always have at least one tier 1 MNO signed up as a tenant from the start, therefore alleviating the risk of permitting a site which can take between 6 to 18 months, or even building a site before a tenant jumps on that tower.

TowerXchange: In nine years and eleven months your rent to buy towers might be bought out, so what is the long-term vision for B140?

As mentioned previously, we realise that the “rent to own” model has a finite lifespan, which is why we want to keep feeding that pipeline for as long as our clients find value in it, thereby giving B140 at least a 15 to 20 year lifespan. However, we are also feeding our own organically grown pipeline that will be similar to, but not exactly like, a normal towerco site, which means B140 will be in business in the long term.

A lot also depends on what the MNOs decide to do at the 9 year 11 month point as they have the option to buy it back for one Rand.  We are currently only focussed on the South African market but our vision is to take this into Africa or even globally in the future. One would hope that if we perform for our clients in SA then they would possibly consider using B140 in the other African counties that they operate in.

TowerXchange: What are your priorities and goals for the next twelve months?

Our main priority is to keep chipping away and causing disruption in the towerco space and getting the attention of the MNOs.

I get the feeling that the bigger towercos are keeping an eye on us and waiting for us to fail and the MNOs are giving B140 the opportunity to prove our model. As long as we prove ourselves to our clients, which I believe we have thus far, and keep our feet on the ground and get better and better at what we do we will start attracting lots more business.

2020 and into 2021 will be a phase of proving our model. If we can deliver quality sites on time and keep our very open lines of communication open, we can only grow as a business. I think the MNOs have been waiting for something new to add to their wheelhouse and I believe B140 is one such example – like any big machine, they take time to change their views and gain trust which we understand but as long as we keep in their faces and keep delivering we will be in a good position in the market.

All this whilst adding quality sites to our pipeline and constructing. I would rather take on less sites of quality than take everything that gets thrown at us and get stuck with sites that are marginal. It’s going to be a challenge navigating through the next 12 months with the COVID-19 pandemic around us, but due to our lean and mean management and our ability to adapt and shift strategy accordingly, we believe we will be in a very good position when this is all over.

I think many things will operate differently after the pandemic and we would be foolish to think the telco space will be any different – we want to be at the forefront of this and make ourselves relevant in any world that emerges out of this tragedy that is upon us right now.

Contact Geoff Chennells if you want to discuss his business model further Cell: 0726231343 | Tel: 0103006632 | Email: geoffc@b140.co.za | Web: www.b140.co.za