SWAP: Lean operator model critical to success in Nigeria

Nigeria: declining ARPU, unreliable grid and fuel theft problems contributing to sky-high opex, yet still one of the most coveted telecoms markets in Africa. Nigeria is also the birthplace of the African tower industry. In order to understand the market and diagnose the potential for tower transactions in Nigeria, TowerXchange spoke to Fazal Hussain, veteran of Helios Towers Nigeria, Eltek and now CEO of SWAP International.

TowerXchange: Great to meet you again Faz. Please tell us about your new role at SWAP.

One of my key responsibilities is to make SWAP a pan-African player in the tower business. We have some investors lined up, who are interested in acquiring assets in new markets. I am also responsible for consolidating our positions in Nigeria, Ghana and Cote d’Ivoire. We own and manage over 680 towers in Nigeria.

The business continues to consist of the managed services piece and the tower piece. I’m personally pulling together our strategy, engaging additional investors and looking at operating efficiency - implementing my proven “lean tower model”.

TowerXchange: As a veteran of Helios Towers Nigeria and now a leader at SWAP, you’re uniquely qualified to tell us about the Nigerian infrastructure sharing market...

SWAP remains West Africa specialist and Nigeria is still our biggest market. Any investor who wants to be a major force in African towers must have a footprint in Nigeria: it’s the biggest market for infrastructure sharing and it’s the toughest market - as they say, “if you can make it there you can make it anywhere!”

From the towerco’s perspective, Nigeria is all about four main players: MTN, Glo, Airtel and Etisalat. It’s a huge market with a population of over 160 million, yet with falling ARPU - it could decline as low as US$3 in my opinion. With fierce competition for subscribers in urban areas, subscriber growth will primarily come from rural extension, where there are more marginal customers.

With revenue fairly stagnant and ARPU falling, operators’ capacity to invest capital is reduced, which leads to many operators considering adopting the ‘Lean Operator Model’ looking at different outsourcing options including infrastructure sharing.

There is still growth to be found in voice revenue in Nigeria. While true teledensity is at 60-70% and continuing to grow, the real challenge is going to be data. With 3G and, in due course, 4G coming along, there’s an opportunity to revive ARPU through value added services.

With all this going on, operators don’t want to spend capex on towers.

TowerXchange: What is going to trigger the crossover when data revenue becomes more important than voice in Africa?

New smart phones will start to go mass market when they drop below US$40-50. While the price remains above that level, data remains a niche market for high-end customers on 3G. Western Europe and North America are almost saturated with smart phones and prices are dropping at a very fast rate. The next big growth area for the handset manufacturers will be emerging markets like Africa. For example, we’ve seen Nokia come to market with a US$15 smart phone; other manufacturers will follow with more low cost phones.

The cross over where telecoms shifts toward attracting more revenue from data will happen in emerging markets, and it’s beginning to happen in Africa. The majority of subscribers don’t have PCs, so cheap smart phones are key to broadband penetration and the associated economic benefits. Today, the bulk of African telcos’ revenue comes from voice, but this will definitely shift. In three years time, voice should be free - just another app on mobile wireless broadband.

TowerXchange: Tell us about the tower landscape in Nigeria.

Nigeria was the first market in Africa for infrastructure sharing and is the most mature in many ways. With Helios Towers Nigeria, IHS and SWAP all active, there are about 2,500 independent towers in Nigeria, representing around 10% of the market. There is some bi-lateral tower sharing between operators, but it’s not that widespread, just like any other market.

In the end, I don’t believe operators will be building many new towers in Nigeria - most new towers will be built by independent towercos under build-to-suite contracts, but we’re not there yet. MTN probably has the most mature network, but has a busy network as they have the most subscribers. It seems like all the operators in Nigeria are struggling for capacity - my personal experience has been that around a third of my calls fail, which indicates a huge market opportunity for towercos.

TowerXchange: What’s the grid power and fuel theft state of play in Nigeria?

The state of play in Nigeria is pretty horrible for both grid power and fuel theft, and it’s not getting any better!

Power contributes the major proportion of opex in Nigeria, and that situation is not going to get much better in the near future. It varies by region, but cell sites often get only three to four hours of grid power, and the grid is unreliable even when you have got it. So most cell sites are powered by double diesel generators and a stack of batteries, making Nigeria one of the worst markets in terms of diesel usage. By any definition, the fuel theft situation is pretty serious.

The challenge for operators is to work out how to address this market with low ARPU and high opex.

TowerXchange: There’s always speculation that operator x or y’s towers will come to market in Nigeria...

All of the Nigerian operators should be looking to put their towers on the market. Whoever sells their towers first gets the best valuation.

Nigeria is too important for any of the towercos to ignore. There is country risk, but the biggest challenge is operational risk. With so many challenges to overcome - unreliable grid resulting in a reliance on diesel compounded by fuel theft and security risks - it’s critical that the Nigerian operations partner with someone who knows how it’s done. Risk is relative to what you know.

TowerXchange: How can we evaluate the success of tower transactions?

Buying towers is the easy part; you conduct your due diligence and work out whether it’s good value or not. Managing towers to improve tenancy ratios, improve site level profitability and improve EBITDA is the greater challenge - you have to wait a few years to evaluate whether a tower transaction was a success.

Africa has a huge amount of telecoms infrastructure assets on the market, but there isn’t enough capital available. A sizable transaction in South Africa alone could cost several US$ billion.

The towerco industry is highly capital-intensive. Private equity investors have to consider how much investment they should plough into the market. What sort of gearing do the towercos have? When will investors be happy to buy more assets? If a towerco becomes too highly geared, their investors will want to wait for proven results from their acquisitions to date. This means private equity backed towercos are in a catch 22: they need capital to grow and unlock economies of scale, but if they grow too fast they become too highly geared.

All the towercos are trying to become pan-African. There will be consolidation three to five years down the road. The more competition in a market, the tougher it is to make money; with multiple towercos in a market comes pressure on lease rates.

Lease cost benchmarks depend on the amount of space, the location and its revenue potential, and on opex costs. There are higher lease rates in Nigeria because of high opex, particularly compared to lease rates in countries with 24-hour power. The mobile network operators incur a certain opex on their own sites, which becomes the tower industry’s benchmark for lease pricing. With such a high opex in Nigeria, it’s critical to practice the lean operator model to ensure as much of that lease revenue as possible reaches the bottom line.

Towercos in developed markets have proved to be a good investment. Opex is relatively low, markets more mature, growth more reasonable. In emerging markets the risk is higher, but the potential returns are higher too. I see towers as an ‘infrastructure’ not a ‘telecoms’ investment; it’s highly geared, and you’ve got to optimise site level profitability to get assets to produce cash flow.