Standard Bank is Africa’s largest financial institution with a presence in eighteen countries, offering corporate, investment and retail banking. Standard Bank has had a TMT focus since 1998 and has followed the major operators since then to maturity. Standard Bank was an early stage investor in Celtel. Standard Bank has been financing the tower industry in Africa since 2010 and has led a number of the more recent transactions including in Ghana, Tanzania and Uganda. Standard Bank is also an adviser in the tower business, and has an active current mandate in Africa. TowerXchange spoke to Nina Triantis, Managing Director and Global Head of Telecoms and Media at Standard Bank.
TowerXchange: Are Africa’s towercos paying a justifiable premium for first mover advantage? Indeed are first mover operators realising a good price?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
There are significant market differences in the performance of the tower industry. For example, in Indonesia, Tower Bersama has created phenomenal equity value with nearly 80% EBITDA margins, while there are less attractive markets such as India. It’s hard to judge where Africa will end up on that continuum.
Tower operators have been keen to establish a footprint in Africa. Helios have certainly benefitted from being first to market, as they’re the sole tower operator in Tanzania and DRC.
It’s always difficult to judge tower transactions as so much depends on the fine print that is not publicly available. For example, tower portfolios changed hands for a high price in Uganda last year, but much depends on the terms and Uganda is a good market. The Aga Khan is looking to build out in several countries in East Africa, and as long as the towerco has a good anchor tenant, even if not all lower ranked operators survive, the tower operator still gets a boost of revenue.
By all accounts MTN are very happy with their recent deals with IHS Africa in West Africa. Ivory Coast is a highly sought after market, with another one or two additional operators possibly entering the market. Cameroon has two active operators with a third license pending.
There’s a fine balance to be struck for tower operators gaining a foothold in Africa. While none have reached the scale of 10,000+ towers, 5,000 towers is an interesting scale in Africa. For example, Tower Bersama don’t have 10,000 towers, but they’re in a very good position in a single market in Indonesia, and would certainly be considered a mature tower operator.
American Tower’s appetite for African opportunities has a lot to do with country risk
TowerXchange: Are three towercos in Ghana too many? Would tower operators shy away from having three compete in a single market again?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
The competitive spirit may drive tower operators to bid for any assets even if they are the third operator or are late to market, but a lot depends on the attractiveness of the market, including the number of mobile operators. Ghana is a highly competitive market from an MNO perspective.
Whether three tower operators can prosper in a single country also depends on the extent to which existing networks overlap. Also, if it’s not an aggressive deal, the tower operator can still make a decent ROI on a lower tenancy ratio.
There is still considerable investment in 3G to come in Africa, and there are still capacity issues. The aggressive bids we’ve seen in the African tower industry aren’t going to stop, although some tower operators have the luxury of being a bit more measured than others.
TowerXchange: I guess you’re talking about American Tower…
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
American Tower has tremendous opportunity – they’re the only true global tower company. They have capital, but they’re disciplined and have the luxury of being able to pick and choose markets.
American Tower’s appetite for African opportunities has a lot to do with country risk. They’re cautious where they go, like a lot of other US companies, hence doing their first deals in South Africa and Ghana. American Tower has lots of opportunities in Latin America and they seem to be more comfortable there.
TowerXchange: Does American Towers’ cost of capital mean they are best placed to finance deal structures focusing on cash release, or are the other players in the sector well enough funded to compete for such opportunities?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
Whilst American Tower may have the deepest pockets and the lowest cost of capital, all tower operators appear to have access to capital, depending on the size of the transaction. IHS, Eaton and Helios are backed by private equity so have a disadvantage in their higher cost of capital as compared to American Tower.
However, sizable transactions all need additional capital, and many current investors are already maxed out. Helios Towers Africa has some substantial backers. IHS has a more diverse capital base and Eaton Towers has the backing of Capital International.
TowerXchange: Are investors looking for opportunities in the African tower market – or do tower operators have to work hard to find capital?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
There is interest in African towers. A couple of infrastructure funds that haven’t invested may be interested, but for most investors the tower industry is part of the telecoms sector. The majority of the capital accessible to this market isn’t going to come from pureplay infrastructure funds.
It’s a difficult task to raise funds. While a lot of investors buy into the tower industry business model, not everyone will take country risk, or accept the seemingly long lead time to earn a respectable return. This is often a chicken and egg situation as investors do not want to blindly provide capital, equally, tower companies do not want to enter into contracts without financing in place.
TowerXchange: Do the tower operators need to secure the investment first before they can make a credible bid, or do the investors need to see a winning bid before they’ll invest in the towerco?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
Tower operators raise capital in different ways. For example, Capital International invested in Eaton when they only had their deal in Ghana, for which Eaton already had an equity partner, so Capital International took a leap of faith in future deals. In other instances, letters of intent for build to suit orders may help secure investment.
When Helios raised money the first time around the potential of the industry was obvious, but it’s become progressively more difficult to access capital. Investors are concerned about aggressive bids and deal prices, and are concerned about the amount of time it will take to achieve decent return on investment in the mid-twenties or higher.
TowerXchange: From an investor’s perspective, what do you see as the differences between Africa’s ‘big 4’ towercos (IHS, ATC, Helios, Eaton)?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
All four are viewed as good tower operators, although it’s quite a simple business. They’re all focused on operational excellence. Some are better institutional buys than others – some are more “corporate”. It’s possible that some may be acquired in the future. And there are differences in how aggressive they may be when bidding for opportunities.
We’ve spoken about American Tower, who are in a category of their own. Investors will differentiate between them and players that are PE funded.
American Tower were initially the least experienced “African” operator whereas IHS Africa and Helios had a few more years of African experience from where the independent tower model originated in Nigeria, albeit with the CDMA operators as tenants.
Whilst Eaton Towers started later in Africa, its principals have extensive experience in the African cellular industry, and hence are very knowledgeable.
IHS Africa was initially focused on managed services and has over time been phasing that business out and building the co-location business. As a result IHS are strong on engineering skills.
I wouldn’t be surprised to see tower operators moving toward outsourcing because managed services is a lower margin business with a high cost base. The newer tower operators outsource more, for example Helios Towers Nigeria does more in-house than Helios Towers Africa.
As in any business, PE won’t invest if the valuation is regarded as high, or if they don’t think they can achieve targeted returns within a given timeline. Positioning and pipeline are key; whether that tower operator has the opportunity to invest in sensible deals.
TowerXchange: Are the business plans targeting tenancy ratios between 2.3 and 2.6 achievable? Can tower operators offset any shortfall by investing in energy opex reduction to improve site-level profitability?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
We’ve seen a lot of reasonable business plans. Tenancy ratios are more or less on target but haven’t exceeded expectations in some instances, in other instances tenancy ratios are reaching or slightly exceeding two. 2.6 might be a bit aggressive, but tenancy ratios aren’t the only measure of success. Tower Bersama is valued at nearly 17-18 times EBITDA, on a tenancy ratio of 1.6, but with a much higher prospective tenancy ratio.
I think tower operators are focused on site-level profitability, particularly on reducing energy opex. While lots of management time has had to be devoted to getting deals and securing funding, tower companies also have to focus on cost and other operational issues.
Tower operators will continue to do a lot of M&A, but I suspect many are minded to do a certain number of deals then focus on operational excellence. There are a mind-boggling array of potential energy saving solutions, choosing the right investment remains a challenge, and when tested they don’t always deliver what they promised.
It may be difficult for new tower operators to get into Africa at this stage. Mobile Network Operators are very protective of their towers, and are disinclined to entrust them to a company without experience
TowerXchange: If Africa eventually goes the way of India, in the sense that 80%+ of towers are transferred from operator-captive to independent towercos, do Africa’s ‘Big Four’ towercos have the ‘digestive capacity’ to acquire all the towers coming to market, or is there a gap in the market for additional players?
Nina Triantis, Managing Director, Global Head of Telecoms and Media, Standard Bank:
I’m conservative as to the scale of opportunity in Africa. There are only going to be so many towers from a logistical and permitting perspective, and some of the numbers suggested are pie in the sky. Africa is a collection of a large number of countries – I don’t think tower operators will go absolutely everywhere, at least not in the short term. There will be focus on the part of sellers and buyers on the countries that make the most sense.
If certain transactions involving thousands of towers came to market today, none of the tower operators except American Tower would be able to win the deal without raising substantial additional equity. To clarify that point, American Tower maintains an edge as their capital is immediately available, but the other three major African towercos now all have the backing of large and significant institutional shareholders, so raising the capital required for a big deal will be easier than it would have been at the outset.
There is more capital to be raised to do all the deals, but yes I think the existing tower operators are able to do those deals. It seems that the market is accelerating, though is still moving more slowly than originally anticipated.
It may be difficult for new tower operators to get into Africa at this stage. Mobile Network Operators are very protective of their towers, and are disinclined to entrust them to a company without experience. New regional tower operators may emerge from strong local relationships, but will find attracting funding difficult. The African tower market is already quite competitive. Rational competition, with tower operators achieving larger scale, is good for investors.
We could see operators doing transactions to manage their towers jointly, although this has yet to happen in scale. Some local operators have hived off assets in anticipation of this, but even Airtel has become one of the best tenants on everybody else’s towers!
