Assessing the factors that would shape Nigeria’s towers market

Third-party tower-sharing and site management services have taken off in Nigeria, with two of the big four regional players already active in the market. Helios Towers Nigeria (HTN), IHS and SWAP are the most prominent players in Nigeria’s tower market. The three companies own around 3,000 towers in the country but manage many more on behalf of network operators. This means that the majority of the estimated 25,000 towers in the country are still owned by telecoms service providers.

Meanwhile, the Association of Licensed Telecommunications Operators of Nigeria (ALTON) estimates that the market needs another 50,000 to 60,000 towers for optimum mobile network coverage across the country. With a price tag of up to US$200,000 in some cases, to build a tower in Nigeria, including the cost of obtaining all necessary permits, acquiring land and providing private power supply, the industry is capital intensive and potentially worth tens of billions of dollars.

Market data from the Nigerian Communications Commission (NCC) show there were 116.877mn active mobile subscriptions in Nigeria at the end of March 2013, a penetration rate of 68.6%. The regulator’s data comprise 114.173mn GSM-based lines, or 97.7% of total mobile subscriptions, and 2.704mn CDMA-based lines. BMI forecasts total mobile subscriptions will reach 150mn by the end of 2016, equivalent of net additions of around 35mn subscribers over the next four years. In value terms, we believe the market generated total revenues of around NGN1.6trn (US$10bn) in 2012. The market average mobile ARPU has been trending down for the most part of the last decade, falling to approximately US$7 in the first quarter of 2013.

Although most Nigerian telecoms service providers, particularly the GSM operators, are managing their cell towers, we do not believe this strategy is sustainable in the long term in view of emerging market dynamics and other external factors that make a strong case for third-party tower management in the country. This means independent tower firms will, at some point in the future, need to play a more prominent role in the management of tower infrastructure in Nigeria.

However, two key concerns will need to be resolved for this to happen. Firstly, operators appear reluctant to relinquish the management of a significant proportion of their cell towers. For some operators, retaining control of ‘key’ tower infrastructure, even at a higher cost of maintenance, is a strategic decision. The second major concern is the ability of tower firms to generate enough resources to own and manage many more towers than they presently do. We expect these concerns to dissipate over the next few years, opening the market to new growth and investment opportunities.

There are some factors we expect to drive growth in the towers market over the next few years. However, these will not come without risks. Below, we highlight three key growth factors and three risks we expect to shape Nigeria’s towers over the next five years.

Wireless technologies dominate data market - Nigeria is perhaps the only country in the top 10 economies in Sub-Saharan Africa without a functional fixed-line service. This limits the prospect of the wireline broadband sector challenging the growing dominance of wireless access technologies. It also means that a significant amount of tower infrastructure will be required to provide adequate data services across the country. Nigeria’s wireless data market is relatively fragmented, with more than 10 service providers using various technologies, including 3G, CDMA and WiMAX. Meanwhile, the country is not very far from seeing the launch of commercial 4G LTE network services, a development that could have a significant effect on the tower market. Newly formed Capcom is keen to build a competitive advantage in the broadband market with the LTE technology, while mobile operator Airtel revealed in December 2012 that it has successfully completed its first 4G LTE trial in Lagos.

Rural rollout will be lucrative but not in the near term - Nigeria’s mobile penetration rate of 68.6% masks the fact that a significant proportion of the population is yet to own a mobile phone. Most people in this category live in rural parts of the country where mobile network coverage is limited or non-existent. Since the start of a brutal price war in the telecoms market across Africa in 2010, network operators have been caught in a strategy dilemma: expand into rural areas to stimulate subscriptions growth or target wealthier urban dwellers with higher value services such as mobile data. While many operators seem to be leaning towards the latter, we retain the view that the former is inevitable for a number of reasons ranging from regulatory requirements to competitive pressures.

Considering the elevated cost of rural rollout, mainly because of poor social infrastructure, and the likelihood of weaker revenues because of generally low-income levels, we argue that operators will need to implement cost-effective solutions for their rural rollout strategy. Tower sharing is on top of the list of solutions available to operators. However, independent tower firms appear to be more interested in buying existing assets in urban areas, where there is a better guarantee of tenants, as opposed to building new infrastructure in rural areas. We therefore see rural rollout as a potentially lucrative but long-term opportunity.

Government more likely to use carrots than stick - There have been suggestions from some quarters for the government to compel operators to adopt tower sharing through legislation. On the surface, this looks like a silver bullet for the tower market. However, we are doubtful it will materialise, at least under the present government. Assessment of the government’s supervision of the telecoms sector, through the Ministry of Communications, shows a reluctance to use legislation or similar tools to influence operators’ strategies. One case in point is the debate over the listing of telecoms operators on the local bourse. The Minister of Communications is more favourably disposed towards offering incentives to encourage operators to list their shares locally as opposed to compelling them through legislation.

We expect the ministry to take a similar view on tower sharing, using the carrot approach to incentivise operators rather than compel them to adopt tower sharing. Presently, there are no significant government- led incentives for operators to adopt tower sharing. However, we expect this to come to the front burner soon in view of the growing complaints about poor network quality and the likelihood that tower sharing will officially be recommended as part of the solution to improve service quality. Nigeria’s next general election is in two years and we cannot rule out the likelihood that a new government may adopt a different approach.

Long-term credit worthiness of anchor tenants - This risk is more pronounced among second tier operators, which are burdened by less popular fixed wireless technologies and are facing intense competition from the more financially buoyant GSM-based operators. SWAP and HTN have both experienced some negative consequences from the poor performance of anchor tenants. SWAP sealed an US$81.4mn sale and leaseback deal with Starcomms in December 2010 for 407 of the CDMA operator’s 557 towers. The agreement was for an initial 15 years. For its part, HTN signed a long-term tower lease agreement worth hundreds of millions of dollars with Multilinks and claimed it was owed around US$252mn at the time former parent company Telkom South Africa was looking to divest its stake in 2011. Starcomms and Multilinks suffered subscription losses and have recently been acquired by Capcom, which hopes to leverage their assets - spectrum and infrastructure - to roll out LTE services. MTS Wireless is also part of the Capcom project, while two other struggling wireless operators Zoom Mobile and Intercecullar are reported to be on Capcom’s radar.

Although Capcom is a second tier operator, BMI is sanguine about the company’s growth prospects, provided it fully implements its network development and product marketing plans. Our view is mainly based on company’s proposed transition from CDMA to LTE network services, a move that could improve its competitiveness in the telecoms market and give it a significant advantage in the broadband market. Nigeria’s broadband market is grossly underserved and Capcom, leveraging the assets of its target companies, is well placed to take advantage of the expected growth. BMI forecasts broadband penetration in Nigeria to rise from 4.7% in 2012 to 13.1% by 2017, mainly driven by wireless access technologies.

Tower restrictions - Cell tower owners - operators and independent tower firms - are facing growing restrictions on the location of their towers by environmental agencies and local governments. The NCC and tower owners have had a running battle with environment watchdog the National Environmental Standards and Regulations Enforcement Agency (NESREA), for much of the last three years. NESREA is reported to have sealed hundreds of cell sites during this period, causing disruptions to telecoms services. The latest case was reported in late May 2013, where NESREA sealed a site belonging to Globacom in Plateau state for failing to conduct a site environmental impact assessment.

While the dispute between the telecoms and environment watchdogs can be easily resolved (the parliament is believed to have entered the debate) as they are both government agencies, another risk to the building of tower infrastructure is brewing gradually. This is coming from state and local governments creating extra bureaucracy for tower owners in the form of levies on cell sites. In November 2012, ALTON raised an alarm over the Lagos state government’s decision to levy tower owners NGN3mn annually on each of their cell sites, an astonishing 75-fold increase from the previous charge of NGN40,000. With about 5,000 towers located in the state, the new levy would raise up the annual bill on the cell sites from NGN200mn to NGN15bn. It was not clear if both parties had reached a settlement at the time of writing. However, ALTON had stated its willingness to pay NGN80,000 per tower, a significant increase nonetheless. Also in 2012, the Niger state government asked tower owners to pay about NGN493.4mn outstanding debts in respect of their 2009 and 2010 land use fees for around 464 towers located in the state.

It is worth noting that Nigeria has 36 states plus the federal capital territory Abuja. A move by every state government to levy tower owners for each cell site located in their state, in addition to similar charges, often arbitrary, by local communities in some rural areas poses a downside risk to growth of the country’s towers market.

Insecurity - Most tower infrastructure in rural and semirural areas in Nigeria face numerous security challenges ranging from diesel theft to outright vandalism. The destruction of towers by Islamic insurgents in the northern part of the country in early 2013 underscores this risk. With around half of the population and majority of underserved consumers living in rural areas, the threat to tower infrastructure and site management in those areas is significant.

The risks notwithstanding, Nigeria’s towers market promises to be one of the most active in the region. The second-tier operators will remain eager users of tower-sharing services, mainly because of cost constraints. However, we expect the bigger tier one operators to soon follow suit. MTN and Etisalat appear to be the most likely tier one operators to venture into tower sale and leaseback deals. We believe the two key factors that could stimulate activity in the market are capital and sufficient guarantee of operational efficiency by the tower firms.