25,000 towers are already owned, or managed and marketed, by Africa’s independent towercos, representing 17% of the Africa’s estimated 150,000 towers. There are currently 38,500 towers for sale in Africa, with a major deal involving Airtel’s 15,000 African towers expected imminently. By the end of the year, Africa’s independent towercos will own more towers than MTN – TowerXchange forecast that towercos will own 38.8% of Africa’s towers at the end of 2014.
The African independent tower market is led, and will continue to be led, by the ‘Big Four’ African towercos; IHS (10,500 towers), American Tower (5,099 towers in Africa), Helios Towers Africa (4,851) and Eaton Towers (2,500), supplemented by a couple of significant West African regional towercos, Helios Towers Nigeria (1,300) and SWAP Telecoms & Technologies (1,459). See Figure 1. TowerXchange are also tracking half a dozen or so African ‘middle market towercos’, although none yet has a tower count into quadruple-digits.
It’s not just the proportion of towers owned by towercos that make the African tower industry so important, it’s the fact that the independent towerco’s assets are among the most bankable infrastructure assets in sub-Saharan Africa, yielding proven, relatively low risk revenues over long term contracts with ‘investment grade’ anchor tenants.
The separation of telecoms infrastructure from the retail risk contained within the mobile network operator is rewarded by relative favorable relative multiple arbitrage – investment into African tower companies values some at fifteen to twenty times EBITDA. Meanwhile mobile network operators divesting their towers benefit from the opportunity to release cash and pay down debts or invest in new technologies, and/or stabilise opex, while refocusing on their core business of selling airtime, improving the customer experience and developing value added services.
TowerXchange are often asked, “for what multiple of TCF (Tower Cash Flow) are African towers changing hands?” Unfortunately, with only one publicly listed towerco in Africa, TCF data, lease rate and lease term information is not readily available – rightly so, it’s competitively sensitive! Thus we have to resort to cost per tower as a very crude indication of value – figure 3 consolidates what data is available in the public domain. Digest this particular table with caution – the value of a tower is a function of the existing tenancy ratio, structural capacity, lease back rate and lease term, so looking at dollars per tower in isolation tells only a fragment of the story.
Investors’ appetite for African towers
An estimated US$1.6bn of capital has been pumped into tower transactions in Africa to date, and twice that amount could be spent in the next year, driven by Airtel’s sale of 15,000 towers, the potential sale of MTN’s prized 9-10,000 Nigerian towers, Etisalat’s tower sale in Nigeria, and the continuing restructuring of the ownership and management of Orange’s African tower assets.
Where once upon a time, at the beginning of this decade, Daniel Lee was pitching a relatively unproven African independent towerco business model to a shallow pool of prospective early investors, now it can seem that there is more capital chasing towercos than there are investible opportunities.
The biggest challenge for towercos is no longer raising capital. It’s no longer a battle to convince management teams at operators to release the value locked in their towers, because while ‘first mover advantage’ may be largely a myth in terms of the impact of bringing towers to market first on valuations, there certainly seems to be ‘last mover disadvantage’, and nobody wants to be left with fast-depreciating assets stranded on their balance sheet.
The biggest challenge for towercos is simply to keep up; to develop and recruit scarce talent to manage new local towerco opcos; to concurrently close one deal while conducting due diligence on the next; in the meantime securing the next tranche of investment; while at the same time structuring programmes to optimise the site level profitability of the assets they’ve already acquired.
So, if you’re frustrated because you can’t get the CTO or CEO of a towerco on the phone to pitch your company’s proposition, try hanging about in the departure lounge of one of Africa’s hub airports, because these guys are clocking up the air miles in pursuit of the next deal!
Operational challenges
While most towercos are very lean enterprises, with much of the construction, maintenance and energy logistics outsourced, the towerco management team still has to steer the business through substantial operational challenges, ranging from the evaluation and upgrade of structures for multiple tenants, to improving visibility and accountability within the O&M supply chain and evolving from reactive to predictive maintenance, and combating fuel theft. These operational battles are fought against a backdrop of strict Service Level Agreements that impose harsh financial penalties if uptime drops below targets that are often substantially higher than had been achieved within the portfolio pre-sale.
However, with few exceptions, anchor tenants and co-location tenants report satisfaction with the quality of service they receive from tower companies – in most cases uptime targets are being met and exceeded, and it seldom takes many weeks to add a new tenant to a tower, so it seems Africa’s towercos are getting to grips with the operational challenges.
What makes many emerging market towercos unique is that the ‘traditional steel and grass’ business model is supplemented by a substantial energy logistics play. Power pass through contracts, which leave energy largely in the hands of the tenant, are falling out of favour in sub-Saharan Africa, and TowerXchange would be surprised to see any deals closed this year with a power pass through clause (with the possible exception of South Africa, where we are not forecasting a tower transaction until 2015). To date, only American Tower has made substantial use of power pass throughs in their African transactions, with power pass through clauses in effect at ATC Ghana, Uganda and South Africa.
Is the balance of power shifting from MNOs to towercos?
Yes, the balance of power is shifting insofar as if you want to sell equipment and services for telecom towers, an ever-increasing proportion of those towers are transferring from operator-captive to owned and/or managed by independent towercos. And the sale of assets is typically accompanied by an extensive build-to-suit programme, so whether you focus on legacy towers or greenfield new builds, towercos are becoming your most important clients in Africa.
But no, the growing scale of the African independent tower sector is not likely to result in unchecked increases of lease rates. Lease rates have declined and stabilised in Africa since the early days when a tenancy in downtown Lagos could fetch US$7,000 per month. And the tower industry is ‘kept honest’ by the simple fact that if the cost of leasing a tower becomes too high, mobile network operators would resume building their own sites. Fierce competition between towercos in several markets also serves to keep lease rates fair, ensuring value for towerco investors, for tower tenants, and ultimately for African mobile subscribers.
What next?
TowerXchange forecasts that the independent towerco sector in Africa will more than double in size to a tower count of 64,000 by the end of 2014, increasing again to 84,500 by the end of the following year – see figure 5. Figures 6 and 7 show where tower transactions have taken place and where we anticipate them taking place in the coming year. The current explosive growth of the tower industry will slow from late 2015 as the tower companies will have acquired assets from the majority of tier one African operators.
The implications? If you have aspirations to build a towerco of scale in Africa, then your time is running out. It may be better to acquire than bid against Africa’s ‘Big Four’, who are largely seen as the only credible bidders for African tower portfolios of scale. However, TowerXchange is picking up the early signals of an emerging middle market of regional and frontier-market towercos, targeting markets too small or perceived as too risky to attract the ‘Big Four’, or leveraging relationships with local RAN Planners and Rollout Programme Managers to target build-to-suit opportunities.
While universally acknowledged to be a ‘lumpy business’, most African towerco business plans are broadly on track. Tenancy ratios are approaching the magic number of 1.8 in several markets, great news for towercos and their investors, with the promise that this may unlock more capital intensive, longer term payback investments to improve site level profitability. If 2014 and early 2015 is best described as a ‘land-grab’ period for the African tower industry, from late 2015 a period of consolidation is likely to commence – if for no other reason than by then, the majority of the most desirable tower portfolios, associated with credit worthy prospective anchor tenants, will have been transferred from operator-captive to Africa’s ‘Big Four’ towercos.
If your company are interested in opportunities in African towers, then join 250 of the most infludential decision makers in African towers at the 2nd annual TowerXchange Meetup Africa, taking place on October 20 and 21 in Johannesburg.
