Are there opportunities for new market entrant towercos in Africa?

Are there gaps in the African tower market for new entrants? Is the aggressive bidding of the ‘Big Four’ towercos pricing would-be competitors out of the market? Would new market entrants satisfy MNO’s criteria for towerco partners with “competence, experience and funding”? TowerXchange addresses these questions and talks to towercos who exemplify three categories of potential new market entrants – turnkey infrastructure providers moving up the value chain, niche market towercos, and international towercos diversifying their portfolio.

TowerXchange are tracking several potential new market entrant tower companies who maintain a watching brief, or who are actively bidding, on Africa’s telecom infrastructure assets.

Prospective new market entrants come from three categories:

• Turnkey infrastructure and managed service providers moving up the value chain, often fronting consortia that include investors

• Niche market towercos building upon localised portfolios

• International tower companies diversifying their asset portfolio

A fourth alternative category of potential new market entrant is operator-led tower companies such as Airtel’s Africa Towers and TELMA’s TowerCo of Madagascar. TowerXchange will be taking a closer look at operator-led towercos in a future special feature.

The leading tower decision maker at one of Africa’s leading operators is skeptical that there is much room in the market for new entrant tower companies. “It’s a tough market for new entrants,” he said. “These assets are sensitive. The competence, experience and funding of any prospective partner are critical. Why would we trust the crown jewels of our network to anyone but the most proven partners?” With four established towercos already commanding portfolios of thousands of African towers, at least one major operator doesn’t anticipate any more flourishing.

Let’s take a look at the characteristics of each of those categories of potential new entrant towercos, consider how they fare against the “competence, experience and funding” criteria, and look an example from each category.

To get a stronger sense of the perspective of players in the “Turnkey infrastructure moving up the value chain” category, TowerXchange spoke to Rajat Malhotra, CEO for the Middle East and Africa at Hayat Communications

TowerXchange: Thanks for talking to us today Rajat. Please tell us a bit about Hayat Communications – where do you fit in the telecoms infrastructure ecosystem, particularly in Africa?

We design, build and operate networks, providing turnkey services, systems integration and managed services. Our Managed Services include first line, second line, front office, back office, core, as well as running the NOC/Trouble Ticket System. Most of our services are executed in-house, avoiding middle man mark-ups, and more importantly ensuring KPIs and SLAs.

We’re also actively bidding for tower portfolios across Africa, Asia, and the Middle East. The financial backing we have from our partners means we have a good appetite for risk and investment to lower opex. We tend to favour countries where we have a presence on the ground.

TowerXchange: What can you tell us about Hayat’s financial credentials, and your experience of acquiring tower portfolios?

As a public company, Hayat Communications has some $30m of paid-up capital, and a market cap that varies between $40-100m.We partner with a number of private equity firms across the region that are interested in making a play in the telecom infrastructure space.

Hayat Communications and Alcazar Capital are currently engaged in a tower transaction in Vietnam.  We’ve already established a team on the ground and are in discussions with multiple sellers and tenants.  Vietnam is an attractive market for foreign investment and also has enough room for a tower player to grow.  Highly fragmented tower ownership allows us a lot of flexibility on how to approach the tower space.

We’re also looking at additional transactions in Asia and sub-saharan Africa.

TowerXchange: Do you believe managed services should be delivered using in-house resources, or is it a case of subcontracting to local market experts?

We find we can deliver quality services faster, meeting and exceeding customer expectations by provisioning most services in-house. We have 1,200-1,500 staff, about 30% of our workforce fluctuates depending on active projects. Around 98% of those staff are technical resources (engineers, technicians and project managers).

Occasionally we will outsource non-core services.  For example when we construct a site we would subcontract the concrete foundations, but focus on erecting the tower and installing the equipment with our own teams.

We would provide energy management services, but subcontract filling of diesel and the related fleet management of trucks. Similarly, we keep site acquisition in-house much of the time, but sometimes work with local real estate companies in complex markets where they may better access to landlords as well as a larger database.

The Service Level Agreements in managed services are tight; we don’t want the risk of outsourcing. Approximately 400-500 of our staff are focused purely on managed services.

TowerXchange: Why should operators outsource to specialist infracos such as Hayat? Why can you deliver the same services cheaper than the operators’ own in-house teams?

In our opinion, the operators role is to finance and envision the network, and once it’s built, to focus on the customer.  Just as it is not practical (or necessary) for the operator to manufacture their own telecom equipment, they also don’t need to focus on building networks.

Building infrastructure is our actual business model, whereas for an operator, it’s a means to an end – a platform for delivering their core services.  As a result, we are more focused on finding ways to be leaner and more efficient in delivery.

The same applies to Managed Services.  The size of our organisation compared to an operator, allows us to operate more cost-efficiently.  Additionally, using the same teams that constructed the network to maintain it allows a quicker and more accurate response.  Our teams understand it, because they built it.

TowerXchange: How has the managed services market changed since Hayat first got into the business six years ago?

The biggest change has been the privatisation of state-owned operators, and the entry of second and third operators into several markets. Those new entrants were more willing to outsource, and when they did, there were dramatic opex savings realized.

Then the OEMs started seeing managed services as a growth area. Again, it wasn’t just about reduced headcount; the focus is increasingly on saving energy, and on energy management skills. At first managed services were purely passive infrastructure – civil and electrical – but with the emergence of reliable local service partners, it wasn’t long before the scope of work started to include active, radio, and microwave equipment.

While managed services pricing per site is likely a third of what it was five years ago, volume has gone up and has allowed companies such as ours to establish scale.

There are still areas that are considered off-limits for outsourcing with some clients, such as core and second line support, but we see these barriers coming down as well.  With both operators and OEMs looking to reduce headcount, companies like Hayat are being counted on to absorb high level resources and provide these services directly.

The hero of this category is IHS Africa, who built a reputation for engineering excellence building and selling tenancies on their own towers in Nigeria, while managing towers on behalf of third party owners in Nigeria, Sudan and Ghana. IHS graduated from respected managed service provider to become Africa’s leading towerco (by number of towers owned and managed) by winning a fiercely competitive auction for 1,758 of MTN’s towers in Cameroon and Cote d’Ivoire, and backed by $125m of equity investment from European investment firm Wendel and its subsidiary Oranje-Nassau. IHS are proof that companies can make the breakthrough from managed service provider to credible bidder for African tower portfolios.

Prospective new market entrants in this category have the advantage of substantial experience of the logistics of installing and maintaining towers in Africa. They know how to navigate the specific requirements of leasing and permitting authorities in local markets. They know how to deliver steelwork to remote locations within tight delivery timescales. They have the engineering capability to reverse engineer an acquired tower that lacks CAD drawings. They are comfortable taking on the risk of selecting and implementing the right energy equipment and services, and the RMS systems to manage assets from their NOC. They know how to get maintenance crews to sites during the rainy season when roads are impassable to everyone else. In short, prospective new market entrants with a turnkey infrastructure provision pedigree in Africa have proved that they have the “competence” and “experience” to be trusted with crown jewel assets.

All the turnkey infrastructure players might lack is the real estate and investment management skills of the pureplay towerco. Blend in some seasoned tower industry veterans in the management team to tick the “real estate” box, and a private equity investment partner to tick the “investment management” and “funding” boxes, and you might have the ingredients for a highly credible bidder.

There are not a lot of small entrepreneurial towercos in Africa, so this is a small category. Perhaps the most historically significant player here is Helios Towers Nigeria, one of the pioneers of the tower industry in Africa. But HTN are not a new market entrant, and their pan-African expansion is fulfilled through a separate entity in Helios Towers Africa.

Another example from the niche market towerco category also hails from West Africa. “SWAP Technologies have been in the build-to-suit market since 2005 and did the first towerco deal in Africa with Zoom Network in May 2009, followed by a deal with Starcomms in August 2010,” says the company’s Chief Executive Tunde Titilayo. Helios Towers Nigeria and SWAP Telecoms and Technologies make the ‘Big Four’ a ‘Big Six’ in West Africa – SWAP’s portfolio extends beyond Nigeria. “Our footprint includes over 700 owned towers in Nigeria, we’re managing towers for MTN and others in Ghana, and we were the first towerco in Côte d’Ivoire.” Where would SWAP seek to expand, and do they have the funding to participate in capital intensive deal structures? “We’ll continue to focus on West Africa and are interested in all types of infrastructure sharing deals,” concludes Titilayo.

Niche market towercos building upon localised portfolios have “competence” and “experience” from the front lines of the African tower industry. If they are backed by solid funding, then players in this category can be credible bidders too.

The hero of this category is of course American Tower, who in Q2 2012 announced that their international segment had generated higher commenced new business than their domestic segment for the first time in their history.

American Tower, and indeed their US domestic market rivals Crown Castle, have been great proving grounds for some of the greatest minds in towers. A lot of their former senior executives are now on the management teams of some of the most successful towercos in emerging markets. Of course there’s Chuck Green at HTA, formerly CFO at Crown Castle. Jim Eisenstein, once ATC’s Chief Development Officer, heads up Grupo TorreSur in Latin America, while former ATC Vice Chairman and President of their international division Michael Gearon is a leading mind behind Protelindo in Indonesia. If you see an ex-ATC or Crown Castle Director on the management team of a new entrant towerco, you should expect them to be credible players. But this is an article about new entrant towercos, and American Tower is anything but a new market entrant!

What about new market entrants from India? When Bharti Airtel acquired Zain’s assets in 15 countries Africa, many analysts foretold the swift entry into Africa of Bharti Infratel, with many speculating that India’s other towercos would follow. Rumours persist that India’s towercos remain in dialogue about potential partnerships and investments that could see them enter the African market, perhaps by acquiring an existing African towerco or in a joint-venture with an operator. Yet one cannot help but feel they have enough on their plate dealing with the turbulent domestic Indian market. In particular the effects of the recent cancellation of 122 licenses has prompted some commentators to forecast that the Indian tower industry could lose as much as 10-12% of it’s total income.

Interest may not just come from India. The strategic links between some of Africa’s leading operators and investors/owners in Europe mean there are transferable relationships between Group Strategy functions in Europe and European towercos.

The United States has one of the most mature tower industries in the world – could other American towercos follow ATC into Africa? TowerXchange spoke to one US towerco prepared to admit that they are looking at opportunities in Africa.

TowerXchange: Tell us about Atlas Tower’s interest in Africa.

Atlas is interested in opportunities in Africa. We are currently assessing the African landscape for acquisition and Build to Suite opportunities of all shapes and sizes that might couple well with our long-term revenue goals. We’re currently in a due diligence phase.

TowerXchange: Do you agree that Africa has been a seller’s market to date, and that towercos have paid a premium for first mover advantage?

As a prospective new entrant, we’re looking for an adjustment from “goldrush fever” to a more tempered and logical market. We’ll put our feet on the ground at a time when we feel the valuations are correct.

TowerXchange: Based on your experience in the US, how important is revenue from upgrades to new technologies in driving towerco revenues?

The entry acquisition isn’t where towercos make the money – the business is owning assets in areas best positioned for wireless data growth. It matters less the technology acronym and more that the fundamentals of data usage is available to the population.

TowerXchange: Is the cell-site densification required as Africa moves from 2G to 3G or in some cases skipping to LTE going to generate the upgrade revenue for towercos that many hope? What has been your experience in the US?

I don’t know enough about Africa yet, but upgrade revenue must be a likely scenario for our investment. In the US, amendment and modification revenue represents more than 40% of our revenue. The question we ask is how soon before Africa can model like that.  Still, I believe the appetite for wireless data will continue whether the market is Harare or Houston.

TowerXchange: Are there opportunities in Africa for new market entrants?

Ask me again in 6 months, one step at a time.

Whether international towercos diversifying their portfolios and considering entering the African market come from India, Europe or the US, they are likely to satisfy all three criteria for “competence, experience and funding,” as in many cases they are managing portfolios of tens of thousands of towers already.

Perhaps new market entrants are simply being “priced out” of Africa? Certainly there are more bidders for most portfolios than just the ‘Big Four’ towercos, but the Big Four continue to win all the auctions – so far at least.

Several investors agree with Atlas’ Nathan Foster that there is a “goldrush fever” for African towers that drives acquisitions to a premium that precludes the participation of some classes of would-be participant. Will the “goldrush” end? Not anytime soon according to Standard Bank’s Nina Triantis (see the interview with Nina here). Will the ‘Big Four’ have an unassailable lead in terms of relationships, credibility and scale by that time? That is why they’re paying premium prices for Africa’s towers – to establish market leadership and build portfolios big enough to benefit from economies of scale. It’s going to be tough for new market entrant towercos to compete with the ‘Big Four’.

One investor familiar with the African market told TowerXchange “You’d be a brave soul to enter the African market now and still find the private equity to back you – the existing towercos have such a head start”.