Daniel Lee, the ‘rainmaker’ of emerging market towers, helped Africa’s private equity backed towercos raise their early rounds of capital. He also led the sale of the vast majority of tower transactions in Africa to date, advising mobile operators such as MTN, Millicom and Cell C, whilst working at Citi, whom he left last year to form Intrepid Advisory Partners - an independent advisory firm focused on the tower industry. Daniel has recently been appointed Chairman of the TowerXchange “Inner Circle” network of advisers.
TowerXchange: How would you characterise investors’ appetite for emerging market towers now compared to five years ago?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Investor appetite has increased significantly. While everybody obviously saw the success of the independent tower model in the US, there were a lot of questions whether mobile operators would allow the model to grow in the emerging markets. That is no longer the case and investors don’t have the same concerns regarding proof of concept. Now it is a question of which team to back and who will be more successful.
TowerXchange: Is there a finite universe of investors with an intersecting interest in both telecoms infrastructure and emerging markets?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
The investor pool has evolved. While the pool is still finite, it has broadened as towercos have matured and established a track record. Additionally, the pipeline of opportunities is robust which gives comfort to investors only looking to deploy a significant amount of capital. That being said, investors appreciate that the model is very different in Africa with much more operational risk. Some investors view this as a significant upside, while others are more comforted by a pure real estate model.
TowerXchange: How long does it take to raise capital?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
In any capital raising, it is always easier to raise capital when the use of proceeds is clear. It is much harder to raise capital for a “war chest” which has limited visibility today. To the extent there is limited visibility, it is much harder as it is generally harder to capture any investor’s attention and drive focus. Again, given the volume of opportunities expected in 2014 and beyond it is much easier to raise capital in this environment than previously.
TowerXchange: What are investors looking for in an investible towerco platform?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
First and foremost, investors are focused on selecting the team they believe are the most capable tower operators. The advantage of selecting the most capable team is two-fold. First, these tower operators (in the minds of their supporters) will have the most credibility with mobile operators and be better positioned for potential transactions. Secondly, these tower operators will be able to generate the most value from the same set of assets by maximising collocation while doing a better job of managing expenses. Additionally, there are meaningful differences between the independent towerco platforms today. While there is some overlap between the African players (such as in Ghana), the reality is the overlap is fairly limited. For example, IHS and Helios Towers Africa do not overlap in any market today. Some of the tower operators also only own sites versus others that manage sites so again there are pretty meaningful differences between the various platforms.
TowerXchange: Do investors expect to see the management team themselves invest?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
It’s always comforting for any investor to see a management team with “skin in the game”. Otherwise, the risk versus reward profile is asymmetric. Investors have capital at risk with a potential reward. Absent any capital at risk, the management team (notwithstanding an opportunity cost which maybe significant), only has a potential reward. This dynamic can be concerning as it has the potential to create unhealthy incentives for management to be more aggressive and play for an option value.
TowerXchange: Is there pressure to deploy the capital once it has been raised?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Yes - investors typically only commit capital for a certain time period. So in some way, there is urgency for towercos to “use it or lose it”. That being said, investors will typically have strong rights regarding capital calls - sophisticated investors do not want to be a blank cheque that blindly funds any capital call. The trade-off for towercos is that they do not necessarily want to sell more equity than they can deploy. Every towerco has the belief that even just by harvesting what they may have today they are generating incremental value.
there is urgency for towercos to “use it or lose it”. That being said, investors will typically have strong rights regarding capital calls - sophisticated investors do not want to be a blank cheque that blindly funds any capital call
TowerXchange: What is the impact of country risk on investors’ appetite for emerging market towers?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Country risk is a significant issue that investors have different perspectives on. More stable markets have lower return thresholds. Conversely, riskier markets need to generate a higher return to compensate for the risk of operating in a certain market. While currency risk can be mitigated with the potential of dollar based contracts, there are certain country risks that can not be mitigated such as political risk, corruption, et cetera. These risks impact both willingness to deploy capital and valuation. A tower company operating in riskier markets is not valued the same as one operating in more stable markets.
TowerXchange: Given the maturation of the emerging market tower industry, is there still room for new market entrant towercos?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Yes. The “Big Four” towercos are only currently active in 13 of 56 countries across Africa. (TowerXchange: the 13 countries being Cameroon, Cote d’Ivoire, DRC, Ghana, Kenya, Nigeria, Rwanda, South Africa, South Sudan, Sudan, Tanzania, Uganda and Zambia). Compare Africa to the more mature North American market, where American Tower, SBA and Crown Castle each all have sizable portfolios of over 14,000 towers - none of the African towercos has achieved that scale yet. Up until recently, you had a second tier of towercos that had significant scale such as TowerCo and Global Tower Partners whose North American assets were recently acquired by the top US players. Thereafter, there’s a layer of regional ‘middle market’ towercos with ten to a thousand sites that is highly fragmented. Clearly, there is an opportunity for new entrants in Africa. The challenge for these operators will be competing in sale-leasebacks against the “Big Four” absent any operating experience in Africa. That is a meaningful obstacle, but not an insurmountable one for new entrants - particularly if they are focused on alternative ways of entering a market such as build-to-suit versus a sale-leaseback.
TowerXchange: When preparing towerco business plans and negotiating deals, one of the most important factors is the leaseback rate. What are the main factors that determine the leaseback rate that can be achieved?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
There are a number of key factors that impact an operator’s preference. The key consideration is understanding the operator’s main objective of pursuing a sale-leaseback. To the extent it is to release capital, that will generally yield a higher leaseback rate. To the extent it is to realise cost efficiencies, that will result in a much lower leaseback rate. No two operators are the same and most have very different perspectives on this issue. The value creation potential for an operator may not be linear within the leaseback rate given tax considerations and a whole range of other issues that complicate things.
TowerXchange: Is there a minimum deal size to be attractive to investors?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
The tower model is highly scaleable. A similar sized fixed cost base can support 500 or 1,000 towers. Conversely, you wouldn’t want to invest in the same fixed cost base to support only 100 towers. I think the scale of the platform is more important than the actual deal size. It’s worth noting that some of Millicom’s deals across Africa had very low headline values given lease-back considerations. These deals were highly coveted despite the small deal size.
the tower model in Latin America differs from Africa and is actually more aligned with the US model. In some ways, that provides more comfort to more traditional tower investors. Additionally, the ability to back a management teams they might have known previously from the US and had success with, is also another important consideration
TowerXchange: How would you contrast the investibility of sale and leaseback compared with build-to-suit opportunities?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Theoretically, a build-to-suit portfolio should outperform a sale-lease back portfolio given the ability to “cherry pick” sites. In general, the tower sales across Africa have involved a carrier’s entire portfolio which does not provide an ability for the buyer to do the same sort of cherry picking.
That being said, there is much greater uncertainty about achieving scale given the highly leverageable nature of the model. It’s worth noting that most of the towercos in Africa today are focused on a sale-leaseback strategy to enter a new market. The downside being, the decision for a mobile operator to pursue a sale-leaseback is generally outside of a towerco’s control and success is likely contingent on winning an auction.
TowerXchange: How does investors’ appetite for towers in Latin America compare to Africa?
Daniel Lee, Managing Director, Intrepid Advisory Partners:
Investors are highly interested in the Latin America. Deal activity in Latin America has been incredibly robust with significant activity also expected in 2014. It’s worth noting that the tower model in Latin America differs from Africa and is actually more aligned with the US model. In some ways, that provides more comfort to more traditional tower investors. Additionally, the ability to back management teams they might have known previously from the US and had success with, is also another important consideration.
Daniel Lee will be speaking at the TowerXchange Meetup Americas, taking place of May 20-22 in Orlando, co-located with the PCIA Wireless Infrastructure Show.
