Vodacom and Etisalat’s tower strategy

One of the highlights of the TowerXchange Meetup on October 1 and 2 in Johannesburg will be the operator keynote panel session, seeking insights into the experiences and strategies of the top tower decision makers at some of Africa’s leading operators. TowerXchange shares a sneak preview of that panel in conversation with Vodacom’s Douglas Lubbe and Tim Knowles of Etisalat.

Michel Faivre of Orange will also be part of the panel - you can read a separate interview with Michel and Marc Rennard, Orange’s EVP Africa, in this recent TowerXchange article.

TowerXchange: Please you to introduce yourself and your role in tower strategy.

International Business Development, Vodacom Group: I’m part of the International business team, involved in tower strategy across Vodacom’s non-South African businesses: DRC, Lesotho, Mozambique and Tanzania, where we recently closed a tower transaction. My role includes central strategy and operational responsibilities.

I run the M&A team at Etisalat. My team also supports our OpCos on any tower transactions. Within Etisalat, tower transactions tend to be led at an OpCo level, although I have some dedicated members of my team to support transactions.

TowerXchange: How would you summarise Vodacom and Etisalat’s current tower strategy in Africa?

We evaluate each market on its own merits, considering the local market dynamics. We have no rigid tower strategy applied across the organisation. If we arrive at a view that a tower transaction makes sense in a certain country and it helps us achieve our organisational goals, then we’ll pursue it.

Etisalat tried to do pan-African tower deal, but it didn’t work out, and it made us late to market. Now we take a more opportunistic, country by country approach, considering tower transactions if it makes sense for the local OpCo. But we don’t view towers as a core asset.

TowerXchange: What criteria inform the structure of a tower transaction - for example a full sale and leaseback versus a long-term managed service deal versus structuring a joint venture where you retain equity in the towerco?

In some markets Etisalat might need to retain a stake because of the credit worthiness of the country and the financial strength of the assets, while in others we would be happy to fully exit - whatever maximises the attractiveness of the portfolio to the towercos, while meeting our needs.

We consider the requirements of each market individually and would structure a transaction according to the needs of that market.

TowerXchange: Can you talk about the role of the Group HQ-level strategists in tower strategy and the role of the local OpCo stakeholders.

In general we favour outsourcing technology or towers - there’s a push toward outsourcing across the whole portfolio.

As I mentioned, tower strategy is driven locally by OpCos, but our Group team will help to diagnose the needs of that OpCo, for example supporting them in fulfilling coverage obligations, or if they are later to market, accelerating rollouts.

If there is limited capex available, we’ll advise what financial structures and transactions they should look at, we’ll recommended advisers, and use our Group leverage over towercos as relationships can be extended from one market to the next.

Usually there is no problem getting the local management teams engaged with a potential tower transaction. If the OpCo needs several millions of dollars in extra capex and we don’t have it for them, yet they have to compete with other operators on coverage, then it is easy to bring up the possibility of a tower deal. If the towercos are already active in that market, and if we can still secure first mover advantage, then we have no problem getting the local management team and stakeholders engaged.

Whether there’s the possibility of a tower transaction or not, we encourage our OpCos to spend less on new builds and to use co-locations where they can.

The group role is to support the OpCo in achieving the desired operational results. When we look at potential tower strategies at a group level, we come up with the best scenarios available for each market, and that could include tower transactions. Negotiating a tower deal takes a lot of management time, so we tend to manage it centrally to free OpCo management to focus on day-to-day issues.

TowerXchange: I appreciate you can’t talk about any active tower auctions that may be in the market, but if you were going to solicit interested parties to bid for a portfolio of towers, how would you do it?

As a whole we tend to use advisers, again to protect management bandwidth. There are three or four banks with some depth of experience of transactions of this nature, a couple of which know Etisalat particularly well.

Once there’s board-level approval for a deal, there is a lot to sort out internally - having all the documentation and permits is not a foregone conclusion in Africa. It can be surprisingly difficult to work out the real opex costs at each site.

Once we get all that information together, we have to define our organisational priorities, for example whether we’re going to sell and leaseback our towers to maximise the cash released, or whether we are going to prioritise stabilising and reducing opex. Then we go to market with a teaser to solicit indicative bids. We evaluate the offers, choose the most valid bid, and bring that back to our clearance team, who negotiate to maximise the price.

That’s how we’ve typically run the process. In one previous instance we were trying to maximise the proceeds, in other instances our priorities were more focused on outsourcing and reducing the amount of management time concentrated on towers.

Our recent transaction was not an auction however this does not rule out the possibility that this type of approach could be followed in other markets. Of critical importance is understanding the capabilities and abilities of the tower operators in our markets and what they bring to the table. We also use advisers, and a similar process to the one Tim described.

Because of the long duration of a towerco relationship, you have to evaluate all the commercial offers, and evaluate the towerco’s strategy, management team and investor goals and then see how these fit with your long-term organisational goals. Partnering with a towerco is like a marriage, and a quick separation is not possible, so it’s important to choose the right partner on what is important for the business.

TowerXchange: Can you give us a bit more colour on the preparation of information about a tower portfolio - what kind of information is required for due diligence, and how do you gather that information?

The data sets are pretty standard for a tower transaction - towercos are clear on the information that they need to run their models. You have to rely on your local team to assemble the documentation - sending a secondary team to support information gathering is not really an option for us as it would not add any value to that process.

If you decide you want to embark on a tower transaction, you’ve got to ensure all your ground leases and approvals are up to date. Simple things like the ability to cede a lease can often frustrate a transaction.

Most big operators have been running for ten or more years, so it can be a real challenge to get the required documents in place. You also need to understand what information the towerco is looking for, as their metrics are different from yours - try to get a handle on those data sets prior to the negotiation; understand their requirements to future proof yourself!

From my experience this is the biggest headache!

Some of our OpCos are old, and the documentation may not always be complete. At times in Africa there has been a culture of not always getting all the permits you need - only when selling assets do you need to chase paper and ensure everything is stamped and done properly.

Sometimes we’ll send a couple of people from Group to be on the ground and support this process.

At some of our newer companies, such as Afghanistan, all the information is in place. But in Etisalat’s older markets gathering information for due diligence can take many months. Calculating the opex can take a surprising amount of time, we’ve found that OpCos don’t always have true grasp of costs on a per site basis.

Tower deals are time consuming and complex, and can take many months!

TowerXchange: Please talk to us about the implications of tower transactions for your existing supply chain partners. For example, when do your suppliers find out about a deal?

In our case we already had a managed services contract, and we felt we could engage with certain external parties without jeopardising the deal.

Etisalat have not closed any tower transactions in Africa yet, although we have a number of transactions in progress.

Many of our outsourcing contracts are structured to allow review if towercos were to take over.

Unfortunately suppliers further down the food chain often have to be the last to find out. We try to make sure existing suppliers are taken over by towercos - if we’re joining forces with a towerco that has already been formed, it’s a different situation compared to when we’re first movers.

TowerXchange: What happens after a portfolio of towers has been transferred to a towerco - what is the role of the operator, for example in equipment and service partner selection?

After a tower deal, passive equipment is no longer our concern. We hold the towerco to SLAs and how they achieve those SLAs is their business.

Again, we haven’t closed any deals yet, but I’d imagine the role of the operator would depend if they retain a stake in the towerco. Operationally, it’s now the towerco’s problem.

TowerXchange: From your perspective, do the existing towercos have the digestive capacity to acquire a substantial portion of African towers? Are there gaps in the market for niche towercos targeting smaller markets?

I think the real question is whether they have the financial capacity. The big tower market not in play yet is Nigeria, where MTN alone have 10,000 towers. I think it would be tough to do a single deal there.

We’re also concerned about management bandwidth at the towercos; are they able to ensure QoS across all their local companies as they expand?

Personally, I’m not sure if additional towerco players have the necessary appetite for and understanding of Africa. The existing four leading towercos should be able to meet market requirements, but if Nigeria does come to market, it will be interesting to see the impact.

In some smaller markets, I don’t believe towercos are necessarily prepared to invest the capital they need to. They don’t see them as attractive markets. The towercos seem to focus on large markets first, to achieve growth, then they may look at clusters of small markets.

Hear more from Douglas Lubbe and Tim Knowles as they participate in the operator keynote panel at the TowerXchange Meetup, taking place on October 1 and 2 in Johannesburg. For more information, click here.