Most potential tower transactions that come to market in sub-Saharan Africa eventually close. But the most common complaint is the amount of time it takes to close the deal. Webber Wentzel, a truly African law firm, has considerable knowledge of African towers having, amongst others, secured finance and advised on bids for IHS Africa. TowerXchange asked director of the Africa Group at Webber Wentzel, Steven De Backer, how to accelerate infrastructure sharing transactions.
TowerXchange: Why does it sometimes take so long to close infrastructure sharing transactions in Africa?
Steven De Backer, Director, Webber Wentzel:
Most of the tower deals in Africa seem to have taken longer than expected.
It’s not really a problem with the basics of the contractual framework: Tower Purchase Agreements, Master Lease Agreements, Build To Suit and Service Level Agreements become more standardised these days, also in Africa. You obviously still do get a small amount of variation because of differences in approach between American and European standards for example, but tower companies generally know what Mobile Network Operators expect to see in these agreements.
Also, the tower companies I worked with are very sophisticated, they know their business, and the technical negotiations tend to go smoothly.
The reasons why closing infrastructure sharing transactions in Africa sometimes take longer than expected to close often relate to due diligence issues, regulatory uncertainty and tax and structuring considerations of the deal. One needs to understand the local laws and structure properly to mitigate potential risks and this really is one of Webber Wentzel’s biggest strengths.
TowerXchange: Tell us about the due diligence.
Steven De Backer, Director, Webber Wentzel:
Conducting due diligence on hundreds of underlying leases – whether looking at every tower and underlying lease, or just a sample of 10-15%, takes time. Obviously there are many other issues to be considered as part of the due diligence process and some of those issues may impact the value of even the feasibility of the transaction itself. It’s imperative that these issues are identified and managed as early as possible in the transaction. Much depends on whether the Mobile Network Operator have done their homework as a seller by for example previously looking at their leases, renewing them up front where necessary, and preparing a proper data room.
TowerXchange: Is it a straightforward process to secure a license for a tower company?
Steven De Backer, Director, Webber Wentzel:
Many regulators are only now waking up to the advantages of having independent tower companies in their markets, so the law is not always as clear yet as to whether or not tower businesses fall under the existing telecommunications regulatory regime. If they do, approvals may be lengthy to obtain. This can be compounded if the vendor’s lawyers feel that the tower infrastructure business doesn’t need a license, while lawyers representing the tower companies might take a more conservative approach. Other authorities such as competition authorities might also increasingly become involved as there’s a further consolidation in the tower business in a country.
Another delay is dealing with the tax qualification of tower leases. At a fundamental level, we’re dealing with a sublease of the land, but the land, tower and equipment might each be treated differently, and different tax advisers often have a different reading.
TowerXchange: Where do the delays occur in structuring a transaction?
Steven De Backer, Director, Webber Wentzel:
It really depends whether it’s a straight sale of all towers like Cell C did in South Africa, a sale of shares or if you’re setting up a joint venture newco.
my advice to Mobile Network Operators is to involve potential bidders as much as possible in the structuring of the transaction
TowerXchange: Should tower transactions be structured as an asset transfer or the acquisition of a newco?
Steven De Backer, Director, Webber Wentzel:
We have seen different structures being used in recent transactions on the continent. Obviously, much depends on the intention of the Mobile Network Operator and what it wants to get out of the deal. Is it mainly looking at a cash consideration or rather a strategic partner? However, whatever the driver for the transaction might be, my advice to Mobile Network Operators is to involve potential bidders as much as possible in the structuring of the transaction. Look at it this way, proper structuring, taking into account potential tax benefits and investment protection mechanisms, can increase the consideration that towers company are willing to pay.
TowerXchange: What can be done to accelerate transactions?
Steven De Backer, Director, Webber Wentzel:
Again, my advice would be for Mobile Network Operators to do their own sellers due diligence to pre-empt problems that might impact on the price they’re able to realise from the towers and to properly consider the structure of the transaction, which not only suits them but is also beneficial for the Tower companies
If bidders have a problem with any discoveries made during their due diligence, for example standard terms of the underlying leases which don’t suit them, they will use that to push down the purchase consideration.
Investment banks, often Citibank or Standard Chartered for deals in Africa, are engaged to structure the transaction and solicit and shortlist bidders, but I feel it’s best to also have your lawyers involved from the outset to assist with identifying pitfalls, structuring the proposed deal and draft up term sheets for each of the agreements based on the proposed structure. You want to provide bidders with all necessary negotiation instruments from as early stage as possible.
I’d also be concerned whether additional Mobile Network Operators would be prepared to sell their assets to towercos partly owned by an anchor tenant competitor
TowerXchange: Do you anticipate the continuation of the transition from operator captive to an independent towerco business model in Africa?
Steven De Backer, Director, Webber Wentzel:
I think operators will be under even more pressure to sell towers due to continuous price pressure and increased competition, confrontation with regulators pushing to push down prices and ARPU decreasing.
In this respect, it’s interesting to note that in several of the African tower sales, the Mobile Network Operators have retained a stake. There is a risk that the towercos might be unable to unlock the full value of towers by offering the competitive lease rates to additional tenants, particularly if the Master Lease Agreement secures particularly lower lease rates for the anchor tenant. I’d also be concerned whether additional Mobile Network Operators would be prepared to sell their assets to towercos partly owned by an anchor tenant competitor.
