Terry Rhodes back on familiar ground: Eaton acquires 3,500 African towers from Airtel

Congratulations to Eaton Towers and Bharti Airtel on the conclusion of a year-long negotiation, culminating in the announcement of an agreement for Airtel to sell over 3,500 towers in six countries to Eaton. Terry Rhodes, Co-founder and Director of Eaton Towers, is uniquely qualified to discuss the transaction; as a 20 year veteran of African telecoms and as one of the co-founders of Celtel, many of Airtel’s towers were built under Terry’s watch before being sold to Zain then Airtel and now Eaton.

TowerXchange: Respecting the fact that Airtel don’t want to disclose which countries are included, we can deduce from the announcement that the transaction must include Airtel’s towers in Ghana, Uganda and Kenya. What are you able to tell us about Eaton’s footprint in SSA after this transaction?

This agreement to add 3,500 Airtel towers in six countries gives Eaton Towers the most diversified footprint of the African towercos, transforms the scale of our business and brings the total number of towers we own and manage to over 5,000.

This is the first time anyone’s signed so many deals concurrently, which illustrates the effort put into negotiations by both parties and their advisors. Eaton hired Mott MacDonald for market due diligence, Moelis as our financial adviser, Allen & Overy for legal and PwC for tax advice. Airtel managed the process largely in-house with help from their external lawyers

This acquisition will supplement our established operations in Ghana, Kenya and Uganda, where we already have strong relationships with the local mobile operators. Airtel prefer that we don’t disclose the other countries whilst regulatory dialogues are ongoing.

However, I can reveal that we chose not to go to into Nigeria after IHS recently bulked up their portfolio in the country significantly. Instead we’ve focused on markets with 500-1000 Airtel towers where we’re either strengthening our existing position or where we’re the first towerco in the market.

There has been an outbreak of rationality – there will be no more experiences like Ghana with multiple towercos chasing same assets – with this deal we’re focusing on markets where we have an established presence or new markets where there is an opportunity to have a regional presence. We weren’t bidding for the same towers as Helios Towers Africa, for example, not as a result of any collusion, it just fell that way naturally.

TowerXchange: What can you tell us about the structure of the deal?

It’s a straight 100% sale and leaseback. No joint venture equity stake has been retained by Airtel. So Eaton Towers continues to be completely independent with no operators sitting in our boardrooms.

The deal includes all the Airtel towers in each country, with a ten-year anchor tenant lease.

TowerXchange: Appreciating the valuation is not in the public domain, can you give TowerXchange readers some guidance?

At beginning of the process, the Indian press speculated that Airtel had an objective to realise US$1.8-2bn from the sale of their African towers. With this deal and the sale of 3,100 towers to Helios Tower Africa, I believe they are broadly on track to achieve that, with their portfolio in Nigeria still pending.

You can usually assume African towers will raise US$150-200k per tower unless the deal is structured to focus on opex reduction, which is not the case in this instance; Airtel is using the cash released to retire debt.

TowerXchange: Are Eaton raising new capital to finance the deal?

We have deployed very little of our third round of equity finance which raised US$195mn in Q1 2013 - most of that capital is still available. Plus, as you would expect, we are in negotiation with banks to provide debt finance in each country before the closing of the deal, which typically takes 3-6 months.

We do currently have an active fund raising process, being led by Moelis, seeking further equity and debt finance ready for new opportunities.

TowerXchange: Does this transaction conclude Eaton Towers’ interest in Airtel’s African towers?

We were originally negotiating for the towers in seven countries and have announced the acquisition of six. Airtel have several thousand African towers still for sale.

With the deals declared to date including 3,500 sold to us and 3,100 sold to Helios Towers Africa, there are still plenty of Airtel towers left on the market.

TowerXchange: How has the creation of Airtel’s Africa Towers subsidiaries affected the transfer of assets?

The legal structures are different for different countries. In markets where Airtel has transferred their tower assets into a separate Africa Towers towerco, we’re acquiring that towerco.

The timetable for our operational transition plan is accelerated in countries where we already have a team on the ground, compared with the countries where we’re setting up a new operation.

Eaton’s COO Pankaj Kulshrestha has run similar transition plans integrating acquisitions during his tenure with American Tower in India; it’s all about the detail, from asset management to regulatory issues and tax structures which need to be correct before the real business starts: providing superior service to customers.

TowerXchange: Are there many tenants on these towers prior to the deal? Or will you have to evangelise infrastructure sharing in the markets where Eaton will be the first towerco?

Yes there are some colocations in each country where we’re acquiring Airtel towers, but we want to increase tenancy ratios significantly.

Each of our new markets has also got one or more of Africa’s other leading MNOs who are in favour of partnering with towercos at a corporate level as they’ve sold towers themselves. So entering new markets is not about evangelising infrastructure sharing – it’s about implementing and improving local operations, and about more about moving from bi-lateral swaps to full commercial arrangements with no restrictions.

TowerXchange: Talk to us about the resourcing of your new operations in the green field markets.

Eaton had already added to our management team and had recruited several more people provisionally who will now join us. Plus we will take some people from Airtel – and we are always trying to recruit the best people locally.

We like to operate our own independent NOC rather than using the operator’s, so after an initial period, that’s another priority. We had already established legal structures and local offices in the new countries – so now all we need do is accelerate our programme.

TowerXchange: What is the improvement capex budget to refurbish these towers for co-location?

We have budgeted for refurbishment and upgrade capex, both to make towers available for co-location, and to make sure we can meet the service level targets Airtel have set.

The improvement capex required per tower depends on the average lifetime of the structure; how recently they were built, the quality of the steel and the build, and whether they were built with capacity for multiple tenants – it can vary significantly within a portfolio. Some of these towers date back to my Celtel days, and they’ve lasted well.

(Editor: as we’ve seen with previous tower transactions, sometimes maintenance projects are postponed when tower portfolios are for sale. With Airtel’s towers having been for sale for a year, there’s bound to be a lag in maintenance investment which needs catching up. TowerXchange estimate that the budget will be around US$10-15k per tower).

TowerXchange: Does the deal include any build to suit (BTS) programmes in these markets? What will be the effect of the current wave of sale and leasebacks on BTS in Africa, now that so many more towers are being made available by independent towercos for co-location?

We are expecting to undertake some BTS programmes, but scale of BTS opportunities depends on demand and quality in each market.

When towercos enter a new market, you often see a big pickup in co-locations as it’s quicker and cheaper than building towers, but when the co-location opportunities start being exhausted, BTS programmes are typically led by the towerco in locations where there is the possibility of a second tenant.

Like most towercos, Eaton like to secure right of first refusal on BTS, but we need to make sure that the new towers are economic in their own right – as we are doing in South Africa where we have chosen to build a portfolio from scratch rather than to acquire towers.

TowerXchange: Why did Eaton choose to bid for these particular towers?

Eaton evaluated the countries individually based on the existing market structure, competitive position and growth potential. It helped that, personally, I was familiar from my Celtel days with all the countries in which Eaton has acquired Airtel towers.

TowerXchange: Why did Airtel choose to partner with Eaton?

While Bharti Airtel are exploring various options to pay down debt, selling towers is a ten-year deal, it’s not like a normal M&A deal from which you can just sell and walk away – your counterparts have to be able to perform operationally.

Airtel have been a significant customer of Eaton’s in Ghana and in Uganda, so they know our operational track record and they know we can deliver. MNO’s emphasis on knowing and trusting who they do business with is one of the reasons you don’t see many new entrant towercos successfully coming into Africa.

That’s why operating credibility is so important – if tower deals were just about maximising cash, the MNOs could sell directly to, say, a private equity house. But the operational complexity of Africa means private equity has preferred to invest in companies like Eaton with management teams with operational expertise.

The four African tower deals in the last few weeks cement the status of the four serious towercos in the market.

TowerXchange: Those three deals (Eaton acquiring 3,500 Airtel towers, Helios Towers Africa acquiring 3,100 Airtel towers and IHS acquiring 11,287 towers from Etisalat and MTN Nigeria) bring the ownership of African towers by independent towercos above 25%, with over 41,000 towers now owned and operated by towercos, and a over 20,000 more towers still on the market or coming to market in the next quarter. At what point should we consider the African tower market saturated for independent towercos?

I think we’re all getting more selective about the countries we’ll invest in and the deal structures we’ll agree to.

Tower deals won’t be as concentrated in SSA in future as they are today – there are also opportunities in North Africa. But the very small markets are not really interesting now for companies with 5000+ portfolios. The Airtel transaction has attracted interest because the towers sold were in markets of decent size.

TowerXchange: What will be the next phase of development for Africa’s towercos?

Everyone participating in this latest round of deals will spend a year or so getting their arms around their new assets.

The next phase may see financial rather than operator deals – consolidation and potential changes of ownership. Our strategy has been to develop a balanced portfolio across Africa where we are not over-dependent on one country or one customer. This deal gives Eaton Towers the most diversified portfolio in Africa –  which is particularly attractive to investors seeking to minimise risk and maximise returns.

TowerXchange: Does the progression toward major capital events preclude Africa’s towercos from making capitally intensive investments, such as hybrid energy and energy storage innovations?

While as a management team we are certainly concerned about total cash flow, the financial community still tend to measure towercos’ performance in terms of EBITDA – they spend less time looking at capex, so operating performance matters. If investment in capitally intensive assets reduces opex and improves EBITDA, we’re always going to be interested.