A hot topic on two round tables at the recent TowerXchange Meetup was the potential for a ‘middle market’ of towercos in Africa. Does the aggressive bidding and accumulated experience of Africa’s “Big Four” towercos preclude new international, local or niche towercos from acquiring assets? Could new entrant towercos target markets too small or too risky to attract interest from the “Big Four”? Could debt and equity capital be accessed by niche towercos targeting BTS opportunities in urban areas, or by ‘rural infracos’ managing passive and active infrastructure and building low energy cell sites in rural areas?
Different breeds of ‘middle market towerco’
TowerXchange categorises the African middle market towercos into five broad categories:
1. Regional, urban-focused tower operators acquiring individual sites on a build-to-suit (BTS) basis, typically prompted by the requirements of an anchor tenant
Examples: Infratel (South Africa), Pro Hi Site Communications, SWORN
2. Larger countrywide towercos, often initiated through acquisitions from tier two operators but growing through BTS, and driving toward tower counts in triple or low quadruple digits
Examples: SWAP Telecoms, Helios Towers Nigeria, TowerCo of Madagascar
3. ‘Rural infracos’ managing active as well as passive infrastructure and specialising in provision of low capex, low opex, high autonomy sites, usually dependent on renewable energy, for lower ARPU areas. ‘Rural infracos’ typically operate on a revenue share basis
Examples: Connect Africa, Africa Mobile Networks, Rural NetCo
4. Aspiring new market entrants established in International markets and seeking to transfer their expertise to Africa
Examples: Atlas Tower, Frontier Tower Solutions
5. Managed service providers leveraging their experience of constructing, fueling and maintaining cell sites in Africa, and seeking to ‘move up the value chain’ to own and market towers, following a similar strategy to IHS
Examples: Confidential - but TowerXchange are tracking several such companies
The role of ‘middle market towercos’ in more mature tower markets - a comparison with the US
One always has to be cautious when comparing the mature tower market in the US with the relatively immature tower market in Africa, but perhaps it provides a hint as to how middle market towercos could fit into the African tower industry.
While the US market is dominated by it’s ‘Big Three’, Crown Castle, American Tower and SBA Communications, who between them operate 81.6% of independent towers, Wireless Estimator counts 89 different towercos in North America that own 10+ towers. Source: www.wirelessestimator.com
These US middle market towercos fall into two camps; some buy and hold telecom towers satisfied with the solid cash flow they yield, others are built to be sold. Much depends on the investment horizon and source of capital. If they are built to sell, the hold might be five to seven years, whilst the towerco builds value through the lease up rate. There are several consolidators eager to gobble up middle market North American towercos but, despite a healthy volume of acquisitions, the middle market category keeps growing at a steady rate - well connected local tower developers always have pipeline of 50-100 sites they can build on when needed.
A lot of these North American middle market towercos have their roots in relationships with one of the carriers, for whom they may have initially built to suit a dozen or so towers. If a regional RF manager has a hole in his coverage, he may go to his trusted local towerco to lease from a their site if they have one, or he may bring them the BTS contract.
TowerXchange wish to acknowledge the contribution of Ryan Lepene, Managing Director of Peppertree Capital, who kindly shared his views of how the middle market of towercos functions in the US. Peppertree has invested in or acquired over 2,500 tower sites across 17 different towercos, mostly in the US, and they specialise in towerco investments in the US$10-70mn range, hence their expertise in this topic.
So, the question remains, is there a role for middle market towercos in Africa?
The leaders of the African tower industry’s views
Opportunities for middle market towercos were debated passionately at the recent TowerXchange Meetup Africa. Round table host Nina Triantis, Managing Director and Global Head of Telecoms and Media at Standard Bank, summarised discussion on her ‘Investibility’ round table.
“There was scepticism among established towercos, as well as some other parties (including operators), as to whether there is really room for second tier towercos. But there was consensus that the ‘Big Four’ will not want to venture everywhere (also due to the issue of management capacity) and therefore, there should be opportunity for others to acquire and manage other portfolios. Though these portfolios may have lesser quality anchor tenants,” summed up Standard Bank’s Nina Triantis.
“Key considerations against investment in second tier towercos were their African track record and relationships, particularly as the continent is not homogeneous as the US, and whether the big operators would entrust the running of their infrastructure by the new entrants,” continued Standard Bank’s Nina Triantis. “Another consideration would be funding, both equity and debt, as even the existing players had to put some effort to get to the funding position they currently enjoy. It is possible that there would be other pockets of money for these new players, for example from the US who are very familiar with the tower model and its success.”
We should emphasise that Nina Triantis is summarising a round table debate featuring over a dozen participants in her remarks in this article. As such Nina’s words don’t necessarily represent either her personal opinion or the views of Standard Bank.
Operator scepticism about middle market towercos
Let’s analyse the conclusions Triantis reported from the TowerXchange Meetup round table, starting with established players’ scepticism that there is room in the market for second tier towercos.
One operator TowerXchange spoke to suggested that smaller towercos were not credible bidders because they wanted to know their towerco partner would still be around in ten plus years. They felt that new entrant towercos in Africa would be a pure private equity-play, picking up a “few crumbs” in terms of assets in smaller or higher risk markets, with a view to quickly adding tenants then selling to one of the ‘Big Four’. The operator suggested they had a willingness to take tenancies on towers built by new entrants, particularly in rural areas, but didn’t see them as viable partners for a substantial sale and leaseback transactions. Middle market towercos clearly have a long way to go to achieve the scale to become credible bidders.
Sale and leaseback opportunities
Next, let’s examine the “consensus that the ‘Big Four’ (American Tower, Eaton Towers, Helios Towers Africa and IHS) will not want to venture everywhere.” With Airtel’s towers coming to market, TowerXchange counts over 30,000 towers (worth approximately US$2-3bn) coming to market in Africa. But not all those towers are in countries that meet the ‘Big Four’s’ different criteria, and some are in markets perceived to have substantial political and sovereign risk.
There certainly seem to be markets where country risk precludes American Tower’s interest, but Helios Towers Africa is in DRC and IHS is in Sudan, so the ‘Big Four’ have been active in markets affected by conflict.
Perhaps a better gauge of the ‘Big Four’s’ interest in acquisition opportunities is a simple tower count. Given the number of substantial tower transaction opportunities on the market and coming to market in Africa (see the Tower Transaction Heatmap on page 20 of this edition), it’s difficult to see the ‘Big Four’ taking the time to do the due diligence on a portfolio with a tower count in double digits. There may be an opportunity for ‘middle market towercos’ to acquire and consolidate assets in smaller markets.
Counterparty risk
What of the suggestion that sale and leaseback opportunities accessible to middle market towercos may have “lesser quality anchor tenants.” With few second tier MNOs profitable in Africa, substantial consolidation is forecast among the 176 operators in the region.
Adding more tenants offers towercos an opportunity to diversify from counterparty risk; one towerco reported that less than half their revenue in one African country now comes from their anchor tenant, diversification achieved in less than three years since acquiring the towers. However, the credit worthiness of anchor tenants remains critical to the emerging market tower industry - cautionary tales can be found in Nigeria where the financial difficulties of CDMA operators were disruptive for the local towercos.
Last mover disadvantage
Representatives of the ‘Big Four’ seem to agree that ‘first mover advantage’ for operators selling towers is largely a myth - second movers can realise value from their assets. But there is a risk of ‘last mover disadvantage’ for operators who wait too long to bring their assets to market, especially if their network rollout mirrored competitors’. Late to market towers seem to hold little interest for the ‘Big Four’ - while the opportunity might be there, should a middle market towerco really consider acquiring assets under such circumstances?
Investibility
By way of a conclusion, what does this all add up to in terms of the prospects of middle market towercos securing funding, both equity and debt? Cautious investors are going to want to see proof of concept before they commit limited capital, debt will not be cheap or they’re likely to want substantial equity. But there are investors with an appetite for smaller emerging market tower acquisition opportunities and BTS startups. I think we’ll be counting the towers of 10-12 African towercos in our tower count (see page 57) by this time next year - there is a middle market for towercos in Africa, but it’s a high risk opportunity until the concept is proven.
Recommended further reading: profiles of middle market towercos:
TowerCo of Madagascar
