“The structure of any tower transaction depends on what the sell-side mobile operator is trying to achieve,” says Mohit Singh, Associate Director of M&A at Standard Chartered. “They might be trying to get stranded assets off the balance sheet, reduce opex and release capital for future rollout. Under such circumstances, if your objective is to minimise the burden on the OpCo by lowering lease costs and passing certain risks onto the towerco, you might need to retain a lesser share of future synergies, and up-front cash will be limited as it’s not as attractive a deal for the towerco.”
Singh continues: “Towercos will offer a range of deal structures, perhaps offering future lease discounts based on opex savings realized, or they might offer a lower lease rate right now and the towerco keeps the subsequent opex savings. It’s a matter of striking a balance between lease rates and up-front cash.”
“Towercos are smart at doing the math and working out what makes sense to them, while the OpCo needs to determine their priorities in terms of P&L, cash flow and shareholder valuation,” continues Standard Chartered’s Singh. “For example, MTN’s deal with American Tower realized a high value per tower. As a profitable business they could probably afford higher lease rentals that helped maximise value. However, if you have a cash-starved operation that isn’t yet breaking even, perhaps you can’t afford higher leases.”
The business case for sharing towers
Not every operator is convinced about the business case for sharing their towers. Some operators remain protective of network assets that had been a critical source of competitive differentiation.
One operator’s remarks summed up the perspective of those opposed to sale and leaseback, asking “Why sell? To create positive cash flow? Is that a good enough reason to waive the competitive advantage accrued from the network? Are the benefits equitably balanced across all parties? There is a risk that operators are giving up too much value to towercos. In some cases opex actually rises as operators use the towerco like a bank and sign up to higher lease costs to release more cash. OpCos had to invest the initial capex, and now the towercos are looking to benefit from someone else’s balance sheet. Operators need to realize benefits from these transactions too – there has to be a balance.”
But the pioneers of infrastructure sharing in Africa remain bullish. Fazal Hussain, Managing Partner at Deka Global and former CEO of Helios Towers Nigeria contends “infrastructure sharing will eventually happen everywhere – there’s just no case to keep having multiple towers serving the same location. And there’s the incentive of first mover advantage – anchor tenant privileges for operators, and being first to market to attract the finite number of tenants for the towercos.”
“Anchor tenant privileges can be pretty much whatever you want,” continues Hussain. “You define the covenants. Do you want the upside from opex savings? Do you want to retain a substantial equity stake in the towerco? Do you want a discount when additional tenants co-locate? If you’re a first mover, you can take your pick!”
“Where once there was resistance to sharing such strategic assets, operators are starting to realize that instead of retaining their towers to delay new competitors’ rollout, they’d be better off sharing their towers, creating a revenue stream from those new market entrants, using them to subsidise their own network, marketing and pricing,” concludes Hussain.
Many regulators in Africa are strongly in favour of infrastructure sharing, in some cases banning new site builds. As one senior network planning manager at a new market entrant operator explained: “we have no option but to pursue a co-location strategy as the authorities are reluctant to grant many additional site permits – African regulators are increasingly concerned about the environmental impact of towers.”
In markets such as Ghana, where infrastructure sharing has taken hold, very few new sites are being built. As Alan Harper, CEO of Eaton Towers explains, “the rationale for a new base station works something like this: first, can I add equipment to one of my own towers? If the operator can, they do. If not, can I co-locate on an existing tower, either by doing a bi-lateral swap or co-locating on a towerco’s tower? And only if neither of these options is possible do they build.”
Unpacking the range of tower deals open to operators
Keith Boyd’s experiences represent two of the main three forms of tower transaction, from operational leases as agreed between Eaton Towers and Vodafone Ghana (see the interview with Tony Dolton, former CTO of Vodafone Ghana here), to full sale and leaseback, as exemplified by Eaton Towers’ work with Warid and Orange in Uganda (see the interview with Alan Harper here).
The third variation on the model is where the operator carves-out their towers into a newco joint venture, and retains a substantial stake in the joint venture, as MTN have done in retaining a 49% stake in ATC Uganda and ATC Ghana. This model has to date been favoured by Millicom, who have retained a 40% stake in their deals to date with Helios in Ghana, Tanzania and the DRC.
Joint ventures offer an opportunity for operators’ shareholders to benefit from the favourable valuation multiples of infracos – successful towercos might trade at EBITDA multiples in the teens, while operators might trade at seven to eight times multiples. We haven’t yet seen an Indus-style operator-led joint venture in Africa, where several operators pool their assets, perhaps offering a management contract to a third party towercos. There have been rumours of such joint ventures in Kenya and Egypt.
Of course, one can also use tower transactions to liquidate cash for turnaround plays and aggressive rollouts. In such circumstances, an operator might accept increased leaseback costs in order to maximize the amount of capital released in the short term.
However, a high sale price doesn’t always mean a short-term priorities over-ride the long term. One African operator realized a sale price over 30% above the replacement value per tower, and increased leaseback costs by around 50%. But thanks to their retention of a substantial stake in the joint venture towerco, the aforementioned higher valuation of towercos means the deal makes sense for the CFO.
