The independent tower company business model is adapting and spreading from one emerging market to the next. Enda Hardiman has been advising some of the world’s leading operators, towercos and investors on opportunities in the global tower industry for many years. TowerXchange met Enda for a coffee and a chat to compare opportunities in the tower industry worldwide...
TowerXchange: What is your background and where does Hardiman Telecommunications fit in the telecoms infrastructure ecosystem?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
I started Hardiman Telecommunications in 1994, prior to which I had spent 16 years in the line in multinationals in various sales, marketing, business development, engineering and general management roles. I first worked in Africa and the Middle East in the early 1980s. Asia followed in the mid-80s.
I had been on the commissioning and receiving end of consultancy from the Tier One majors. While I thought that they were very good on macroeconomic and broad-brush developments, I thought that they became progressively less sure when dealing with real-world issues of strategy implementation, realistic planning, risk mitigation, and most notably engineering and capex. There was a clear gap in the market for a consultancy adept in engineering and operations, but that could with equal depth span the continuum across commercial operations to private equity and corporate finance. We now have two principal locations, being London and Hong Kong, from which we address the world. Our business mix features M&A, strategy and planning.
In the towers sector, we have been involved in one way or another, buy-side or sell-side, in most major transactions in EMEA and Asia. We have worked across site inspections, network inspections, consolidation, RAN / spectrum planning and power. We’ve worked for most of the world’s largest towercos, carriers and private equity firms, including several boutique telecom funds, across Asia, Europe and Africa.
TowerXchange: In your experience, what is the typical divergence between what’s in the asset register what’s actually on sites?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
It varies markedly by region. In Europe and in the more developed regions of Asia correlation tends to be pretty good. In emerging markets differences can be quite substantial. We have seen instances of divergence up to 10%. Sometimes this is simply a result of very rapid growth, and sometimes substantial issues of governance are raised. If the latter is the case, it is usually a good indicator that other issues require detailed risk analysis. Requirements for effective due diligence are underlined.
TowerXchange: Given your broad experience of due diligence on tower transactions across the world, how would you compare the different regions’ maturity and investibility? If you had US$500mn to invest in towers, where would you invest it?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
As in all areas of investment, risk balancing is advisable. The sector is very vibrant at this time. The European scene was pretty moribund when operator planning focused on 2G and 3G voice, with some consideration of data. That was because major operators, by and large, had built out similar facilities. The explosion of demand for data, and the advent of LTE have been major disruptors. So has DTT planning by broadcasters. Precise tower locations are much more important now than previously, so economic cases for consolidation have strengthened. Europe is now very vibrant.
In Africa landing of submarine cables has increased available bandwidth in coastal regions, and access to that is now being built out inland. Africa is on the cusp of a quantum increase in data use, and the same arguments apply regarding tower locations and consolidation. Furthermore, in Africa, tower sharing is a prerequisite for economic extension of coverage outside of dense urban regions. Rationalisation of overlap, thus freeing up capital for more productive use, is also a major consideration.
Asia has in common with Africa that radio is often the only realistic mechanism of last-mile connectivity. Data is a major driver of consolidation in developed Asia - which mirrors Europe. Economic coverage and overlap considerations in lesser-developed Asia are similar to those of Africa, as are overlap considerations.
TowerXchange: What’s your view of the prospective sale of Airtel’s 15,000 towers in Africa?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
Very positive. There was some initial speculation that Airtel would seek to encompass towers in all operating countries in a single transaction. That seems less likely now - correctly so. A single transaction, as various parties discovered during the Millicom rationalisation, would be very complex from a legal perspective. Airtel African assets have been under-invested against the somewhat turbulent history of ownership changes. Bharti has however put some very smart people in. Manoj Kohli did a terrific job in getting matters under initial control. The recent appointment of Christian de Feria as CEO for Airtel Africa is another positive step. He really understands African telecoms. Airtel is a strengthening force in Africa, and the capital released by the imminent tower transactions will, I do not doubt, be put to good use. The selloff provides excellent opportunity for the independent towercos to reach major critical mass against a coherent process.
There was some initial speculation that Airtel would seek to encompass towers in all operating countries in a single transaction. That seems less likely now - correctly so
TowerXchange: What appetite do investors currently have for opportunities in African telecoms infrastructure?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
Rollout of African telecoms to date has been funded mainly by debt. The total is substantial - US$70-75bn deployed since 1998. This has been largely funded by leveraging of balance sheets by international MNOs and, in the case of smaller operators, by European, US and locally syndicated debt.
Private Equity until recently was circumspect about African TMT. That has changed. There had, I think, been something of a tendency to cast all of Africa in the mould of regions in which egregious political and economic events captured the attention of the Western media. There is now a much better understanding that there are more than a few African countries in which political and economic vistas can be cast forward with some confidence. Private Equity sentiment has improved accordingly, and, according as acceptance of the independent tower company business model spread from the US to Europe, and thence to Africa people have become a lot more comfortable with drivers, and much more comfortable with mechanisms of risk quantification and mitigation. One might cite the investment in Helios Towers Africa of Madeleine Albright’s operation, together with those of George Soros and Jacob Rothschild as a “legtimising” bellwether. We’re starting to see deep-pocketed investors, able to write US$200m+ cheques, attracted to African towers.
With that said, the larger Private Equity investors are hard-headed business people, and are very far from naive. Compelling business cases need to be made. There is funding accessible to African towercos, but only on the right terms. Ops people in Private Equity Firms still need to make cases to Investment Committees who will consider African investments against competing opportunities. While that is of course fully appreciated by towerco people - industry veterans with dust on their boots - I am not sure that African regulators always share appreciation to an adequate degree. Some regulatory thinking is still distressingly parochial.
TowerXchange: We’ve seen encouraging tenancy ratios of 1.5-1.7 in Africa (seldom in the public domain) that suggest that pent up demand for tenancies on previously unavailable towers drives an initial uptick in tenancy ratios post transaction. How proven is the tower industry in Africa?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
I agree that there’s often a surge in tenancies post-deal. Most of the business plans I’ve seen make money at a tenancy ratio of 1.6 to 1.7. But I have also seen “pure” outsourcing deals, involving taking over facilities of a single operator, that also made sense.
Networks in Africa were built for coverage, not capacity, so as urban demand intensifies, capacity increases are necessary, especially with regard to provision of adequate quality data services. Mobile remains the only viable option in the absence of copper or fibre infrastructure. It is also often the case that tower sharing is a prerequisite for economic extension of coverage outside of major conurbations.
there’s often a surge in tenancies post-deal. Most of the business plans I’ve seen make money at a tenancy ratio of 1.6 to 1.7. But I have also seen “pure” outsourcing deals, involving taking over facilities of a single operator, that also made sense
As data demand intensifies, we see increasing demand for lower base station sites. The relatively low tower density required at 900 MHz is not the same as the much greater density required at 2,100 or 2,600 MHz. Thus simple “superimposition” of further facilities on towers designed for long-distance propagation at 900 MHz can result in coverage black spots, driving demand for low towers, rooftops and new BTS, which is all good news for towercos.
As a general answer to your question, though, I would state that the case is very well proven, as evidenced by the successes of Eaton, Helios Towers Africa, IHS and American Tower. Proven models include sale and lease-back and joint ventures, and within both, build-to-suit. So tenancy ratios, while important, are not the exclusive determinant of success.
TowerXchange: Why are some leading operators hanging on to their towers?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
There are still instances in which ownership of all infrastructure can yield competitive advantage. This can be the case in regions in which one operator has much better coverage in the absolute than others. It can also be the case with regard to operators who seek competitive advantage on quality of service rather than price. In the long term, however, those advantages tend to erode.
It should be added in this context that consolidation is coming on the operator front. Outside of South Africa and Nigeria, it has hard to see many countries in which more than three, and in some instance two operators can be viable. Fragmentation against sub-US$5 ARPUs has as inevitable consequence that the smaller operators simply will not be able to make the ongoing network investments required in order to remain competitive. We thus expect to see a flurry of towers now owned by operators who will be constrained to exit coming on the market. It is to be hoped that regulators will take an enlightened view of spectrum re-allocation when this occurs.
TowerXchange: How would you compare the tower market in Southeast Asia with Africa?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
The tower industry in Southeast Asia, particularly Indonesia, is two to three years ahead of Africa. Indonesia licensed about 12 operators, and, as in India, unrealistic expectations regarding tower demand resulted. Inevitably, and as foreseen by informed commentators, the Indonesian operator sector is now consolidating. This has led to more realistic valuation of towers, and also has the welcome concomitant of freeing up capital for investment in initiatives that have a realistic chance of yielding good financial returns. LTE is starting to be rolled out regionally.
Without straying in to too much detail, Vietnam and Cambodia will follow the Indonesian pattern of consolidation. So will Bangladesh and Pakistan. There are interesting initiatives afoot in Malaysia too. The Malaysian sector overall is both well-managed and well-regulated. Malaysia may yet overtake Indonesia as a paradigm of consolidation giving rise to much more effective deployment of capital.
Myanmar is unique, in that, pretty well uniquely in the world, there is little meaningful mobile infrastructure in place at all. Telenor and Ooredoo are cooperating, sensibly, to roll out to virgin territory. Expansion in to Myanmar by Indian, Indonesian and international towercos is highly probable – in fact some of the Indonesians are there already. One might state without exaggeration that Myanmar is at this time characterised by a single large build-to-suit market, with two guaranteed high-quality and well-funded anchor tenants on the preponderance of sites. It is hard to believe that the close attention of the independent towerco sector will not be engaged.
Myanmar is at this time characterised by a single large build-to-suit market, with two guaranteed high-quality and well-funded anchor tenants on the preponderance of sites. It is hard to believe that the close attention of the independent towerco sector will not be engaged
TowerXchange: What’s the status of the potential tower transaction in Russia? We understand Vimpelcom has 7-10,000 towers for sale - could a successful tower transaction trigger further deals across Russia and the CIS?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
Without doubt. Major industry drivers are as evident in Russia and the CIS as elsewhere. Russia is not a place to be approached starry-eyed, though. Drivers are clear, and opportunities very significant, but anyone seeking to enter Russian markets will be well-advised to have thorough familiarity with Russian preoccupations and business practice. It was against this that we brought fluent Russian speakers with experience of line operations in Russia on to our own staff. Correct risk identification and containment, while important in all markets, are particularly important in Russia. The Russian regulatory regime is evolving, and not all participants, at all levels, have adequate insights in to key industry drivers. We have seen much time-wasting against superficially plausible propositions that were never going to see the light of day.
TowerXchange: Is there now value to be found in the Indian tower industry? What will it take for a new wave of tower transactions to start up again in India?
Enda Hardiman, Managing Partner, Hardiman Telecommunications:
Until three years ago, Indian towercos were over-valued against unrealistic expectations that 10-12 mobile operators could be viable in each circle. 3-4 is more realistic, even against the scale of the Indian market. High profile operator withdrawals, including withdrawals by some very well-funded entities, stand testament. The towerco sector is now much more rationally valued - perhaps even under-valued - in consequence. Current towerco valuations of 5.5X - 6X on EBITDA have piqued Private Equity interest. We expect to see ferment - consolidation and fund-raising - at the higher end of the market, and significant consolidation at the lower end of the market, which is very fragmented at this time.
I think that the Indian regulators have learned some tough but ultimately positive lessons. Excessive regulation is never a good thing, and neither is any perception that decisions are being made against other than transparently stated objectives. It can be challenging to deal with Indian bureaucracy on occasion. However, one of the major strengths that India possesses is that public service structures and accountabilities are well-defined. An overlay of transparency and efficiency, long overdue, is now encouragingly in some prospect.
Don’t miss the upcoming TowerXchange Meetup Asia being held on 13-14 December at the Marina Bay Sands,Singapore. For more information visit https://meetup.towerxchange.com/event/779b884f-2156-4a99-81e0-747a2f905382
