American Tower, Eaton Towers, Helios Towers Africa and IHS Africa, the ‘Big Four’ market leading towercos in Africa, are all well financed. All four have the credibility of having completed multiple tower transactions in Africa. But with tens of thousands of towers expected to come to market in Africa, it is clear that US$billions of investment is needed.
If the African telecoms infrastructure market is restructured to anything like the extent of the Indian market, where 85% of towers are owned by independent towercos, then Africa’s towercos are going to need capital to finance plenty more acquisitions – only 5-10% of Africa’s towers have transferred from operator-captive to towercos to date.
Meanwhile, Mott MacDonald predict that twice as many Points of Service are needed in most African markets. Tens of thousands of towers are needed to complete the rollout of mobile networks in Africa. Towercos often secure preferred bidder status on build-to-suit agreements, supplementing the value of sale and leaseback deals. Many installation contractors report that towercos already represent the lion’s share of greenfield site builds in certain markets in Africa.
Towercos can access only so much debt finance to back tower, transmission and build-to-suit investments. It takes some serious capital to acquire infrastructure assets, and the risks are high enough that Private Equity is often required. The biggest risk remains that key players become over leveraged, but ultimately these are real assets that investors are lending against. There is some valuation risk in paying premium prices to enter a market, but it’s justified by the need to build a brand as a credible player with towers under your belt – with their aggressive bids to date in Africa, the ‘Big Four’ towercos are buying market share.
How investors evaluate opportunities in African telecom towers
Investment opportunities in African towers look good on paper. “The maths and the market dynamics are right. While we haven’t made any investments in African towers yet, it’s a case of finding the right investment in terms of size and returns,” said a senior director at one Infrastructure Fund. “It’s clear that African Mobile Network Operators are committed to infrastructure sharing, but what we’re looking for is a bankable opportunity with a package of assets that lend themselves to co-location, and a clear path to a profitable business.”
As former CEO of Zain Africa (now Airtel) and current Chairman of Clean Power Systems, Chris Gabriel has extensive experience in African towers from the operator, vendor and investor perspective. Another of Chris’ current roles is as Senior Adviser to Macquarie Bank, with a remit to advise on global telco infrastructure deals and establish an EMEA portfolio of independently owned shared mobile tower and site infrastructure businesses.
We asked Gabriel for his views on the African tower market. “Infrastructure sharing is evolving, predominantly driven by price competition, shrinking margins and shorter technology life-cycles. It is already underway in several African countries including Ghana, Tanzania and Uganda, and has just spread into Cameroon and Cote d’Ivoire. While there’s a good volume of potential deals at discussion stage, this remains a formative market. Not every market in Africa is ready for tower sharing. Critical factors underpinning the success of tower companies include the number of existing and potential new operator licences, market growth (particularly data), tower lease-up potential (also known as the tenancy ratio), and political and economic stability.”
TowerXchange spoke to Andres Millan-Drews, Principal Investment Officer at the IFC. “IFC has supported several players to fund both bids and organic growth,” says Millan-Drews, who continues: “Investors are interested in operational risk, as downtime can incur substantial fines, so it’s not just about tenancy ratios. The margins may be smaller in Africa, but overall EBITDA is higher than Latin America, for example, as rent is more expensive.”
Chris Gabriel takes up the discussion: “With the proliferation of new operator licences, new entrants seek to compete predominantly on price - this, coupled with shorter technology life cycles means that the stand-alone network build and capex models of the past are unsustainable. Sale and lease back of towers makes sense from a financial point of view – freeing up capital to focus on creating customer value and spreading the network cost as an operating expense. In the Unites States we have seen that extracting towers from the telco into a separate tower company has seen resultant valuations three to three and half times greater than that within the telco. The attractiveness of tower companies to potential investors lies in the predictable cashflows, long terms leases and solid tenants – tower portfolios are a very saleable asset.”
“A lease up rate approaching 1.8-2.0 sees solid returns for the tower company. A lease up rate above 2 is where you start to see exponential value creation. Succeeding in African towers is also about operating efficiencies – reducing cost of service through streamlined methods and processes; reducing opex and capex through scale logistics; and optimising energy costs (power and diesel) through a combination of alternative energy solutions, including hybrid power, solar and wind energy. Opex savings well above 50% have already been realised by numerous operators through deployment of such alternative energy solutions,” concludes Gabriel.
When evaluating these opportunities, a credit assessment of the anchor tenant is critical, as is an evaluation of the market for new towers, for new technology upgrades, and for data growth
Overcoming investor concerns
So, what is putting off some investors? “Our interest in telecoms towers has reduced because expectations are tough to realize. Towers are a risky and expensive business in Africa with political and currency risk, tribal issues and at times governments seem to treat telecoms as a cash cow, with new taxes and fees,” said one investor.
Another investor expressed concerns about the credit worthiness of second tier operator anchor tenants, and about the lack of transparency in the market, saying: “we are somewhat risk averse in telecoms. Competition in Africa often means only the number one and number two operators in a market are financially viable, and often it’s only the third, fourth or fifth ranked operators who want to sell their towers. When evaluating these opportunities, a credit assessment of the anchor tenant is critical, as is an evaluation of the market for new towers, for new technology upgrades, and for data growth.”
“Can the towerco management generate additional sales?” He continued, “Co-location ratios are critical. One of our biggest challenges is the lack of data about how pioneering deals have progressed – have tenancy ratios been achieved? We don’t know. Given the huge capital involved in these transactions, and the lack of information, we’re cautious about investing.”
TowerXchange spoke to another company with a track record of substantial investments in telecoms in Africa and the Middle East. A couple of years ago they evaluated African tower investments. They felt that valuations were overhyped. They were underwhelmed by the tenancy ratios being achieved at the time. And they felt the 20-25% equity returns they were seeking weren’t possible. They were concerned that profitable African operators were disinclined to entertain the short-term cash-in of their towers, and preferred the long term future proofing and competitive advantage of retaining control of the network.
This sounded like a reasonable analysis of some markets where coverage remains a key differentiator. But where coverage is becoming commoditised and QoS becomes the critical differentiator, operators’ are recognising the opportunity to release stranded assets on their balance sheet and share infrastructure. For example, MTN are happy to say that their tower sale and leasebacks in Ghana and Uganda have been a success, and they have subsequently agreed deals in Cameroon and Côte d’Ivoire. As joint venture partners, the deal structures in Ghana and Uganda look as favourable to MTN in the long term as in the short term.
Perhaps if the unsatisfied investor repeated their analysis today, they might find a more attractive tower market in Africa.
Bankable opportunities
TowerXchange spoke to Ahjeeth JaiJai at Investec, who have co-funded a towerco deal in Tanzania. We asked JaiJai how passive infrastructure sharing deals rate on the risk / return scale, particularly in the current economic climate, when investment funds aren’t as forthcoming as they once were.
“Equity and debt funding have different appetites. Towerco multiples are very attractive for the equity investor, given that towerco multiples are generally higher than those of Mobile Network Operators. The debt finance option represents access to quality credit at attractive margins.”
How do investors determine how bankable an infrastructure sharing project is?
“Lendors are looking for a package of assets that lend themselves to co-location. Lenders also have to be sure SLAs are met. Performance and track record are key, as are tenancy ratios. Local knowledge is critical – this is the gap for new market entrants. Ultimately, we’re looking for a clear path to a profitable business,” concluded JaiJai.
The investment community has the full range of attitudes toward African towers. Investors familiar with the unique machinations of the tower industry are bullish. For more cautious investors, the lack of transparency in African towers remains a problem – a problem TowerXchange will do our part to ease, whilst respecting the confidentiality of Africa’s tower industry pioneers!
