TowerXchange’s analysis: American Tower’s acquisition of 4,800 towers from Airtel Nigeria

Kieron Osmotherly

November 25, 2014 03:31 PM

‘Big Four’ competition for IHS in a market where towercos now own 76.4% of the towers

Read this article to learn:

A comparison of the cost per tower realised by the Etisalat, MTN and Airtel Nigerian tower sales
Why American Tower likes Nigeria
Which towerco has acquired, or will acquire, towers in which country from Airtel?
Who now owns Nigeria’s towers?

The last of the dominoes has fallen in the Airtel African tower sale; American Tower has acquired 4,800 towers in Nigeria for US$1.05bn. Congratulations to Airtel on raising over US$2.5bn in the sale of passive infrastructure in Africa, a transaction that has driven Africa’s ‘Big Four’ towercos to scale, and which has seen American Tower complete their first transaction on the continent since 2011. By Kieron Osmotherly, CEO, TowerXchange. kosmotherly@towerxchange.com.

Is it a fair price?

$1.05bn is right about par for American Tower’s acquisition of 4,800 Nigerian towers from Airtel; a good deal for both parties.

It’s tough to evaluate any tower transaction without being able to discuss the leaseback rate, which as usual is not in the public domain, but it’s not heavily discounted. TowerXchange understand Bharti Airtel Group’s focus on reducing debt means the deal structure is balanced toward maximising cash released. The initial term is ten years. At $218,750 per tower, America Tower’s deal with Airtel is close to replacement cost in Nigeria, but represents a fair valuation for both parties since the tenancy ratio is 1.15 from the outset, and TowerXchange are bullish about the potential of the Nigerian market to yield tenancy ratios >2.0 at good lease rates in the near term.

The Nigerian towers were always the crown jewels in the Airtel tower sale, accordingly they’ve attracted a 33% better valuation in Nigeria than in the rest of SSA; the 6,600 announced Airtel towers sold to date outside Nigeria have been sold to Helios Towers Africa and Eaton Towers for an estimated $1.085bn, or $164,773 per tower.

To put the American Tower-Airtel Nigeria transaction in context, IHS paid $196,700 per tower to MTN Nigeria ($1.8bn for 9,151 towers), although the two deals are difficult to compare as Airtel and American Tower’s deal is a pure sale and leaseback, while MTN retained 51% equity in their Nigerian deal. A better comparison can be sourced earlier this summer, when IHS acquired 2,136 towers from Etisalat Nigeria in a pure sale and leaseback for a little under half a US$billion, realising a yield per tower 4% greater than that realised by Airtel.

Cost per tower comparisons, 2014 Nigerian tower transactions

TowerXchange think the acquisition of 4,800 towers (representing 17% of the country’s towers) from Airtel Nigeria is a smart move for American Tower. Once American Tower realised they had to engage with DC power to meet operators’ service expectations in SSA (American Tower provides a full DC service in Uganda, and is migrating to that model in Ghana), American Tower’s main barrier to entry into the most lucrative telecoms market in Africa ceased to exist. Network planners in Nigeria are used to leasing rather than building towers, lease rates are established, and the tenancy ratios on older vintages are already over two. Indeed towers in attractive locations in urban Lagos, Abuja and Port Harcourt are packed with four to five tenants. The notorious unreliability of Nigeria’s grid, compounded by the ferocity of the country’s diesel mafia, mean operating towers in Nigeria is not for the feint-hearted! But American Tower knows what it is getting itself into – they’ve operated in markets affected by poor grid and fuel theft, in regions of Uganda in particular.

In analyst guidance, American Tower indicated that the 4,800 towers they are acquiring from Airtel in Nigeria are expected to generate annual rental revenue of approximately US$255mn, more than half of which is US$ denominated, generating a gross margin of approximately US$91mn, with SG&A costs of 11% of revenue, falling below 10% after year one. American Tower expects to generate 20% IRR on this investment, consistent with expectations from their other African investments.

American Tower had been interested in the Etisalat and MTN Nigerian portfolios, but a lack of operational footprint in the country narrowly edged them out of the Etisalat transaction, while MTN’s unprecedented requirement to retain a majority stake probably dissuaded the publicly listed towerco giant from participating in the latter stages of the MTN process.

The final map of Airtel’s African tower sale

Airtel’s Nigerian tower sale effectively closes the books on a job well done by the world’s fourth largest MNO. Through the sale of 17,935 sites on Airtel’s African Network (site count according to Q3 results, minus whatever towers are retained in Sierra Leone), Bharti Airtel have raised over US$2.5bn to relieve debts estimated at US$9bn.

While the American Tower deal is added to previous announcements of 3,100 Airtel towers sold to Helios Towers Africa, and 3,500 towers sold to Eaton Towers, several other tower transactions are agreed but awaiting the approval of local regulators before announcement.

When the dust settles on the deal, TowerXchange’s research suggests that Helios Towers Africa will have acquired Airtel’s towers in Tanzania, Chad, DRC and Congo Brazzaville, with HTA’s addition of Airtel’s towers in Gabon to be announced in due course. Meanwhile Eaton Towers will have acquired Airtel’s towers in Ghana, Niger, Burkina Faso, Kenya, Uganda and Malawi, with Eaton in prime position to acquire Airtel’s towers in Madagascar.

IHS are the only logical counterparty for the sale of Airtel’s towers in Rwanda and Zambia, in a transaction expected to be announced imminently.

Airtel will retain their towers in Sierra Leone.

How TowerXchange forecast the Airtel towers will be divided among Africa’s towercos

Implications of the deal for Nigerian tower industry

It will be interesting to see how the fallout from this transaction affects the other towercos in Nigeria. Operators will be relieved that IHS, which has acquired 51% of Nigeria’s towers, has another member of Africa’s ‘Big Four’ towercos to provide competition and benchmarking on lease rates and service, while some of Nigeria’s smaller towercos look ripe for consolidation.

SWAP telecoms and Technologies, with 700 towers including some prime locations, is in need of reinvigoration and may be open to investment. Helios Towers Nigeria, owners of 1,300 towers, whose books have been rebalanced away from their CDMA tenant origins to secure a significant majority of their revenue from GSM tenants, has now been left on the sidelines of three major transactions despite a recent successful bond issuance.

With only Globacom’s assets still operator-captive, and no indication of an imminent tower sale by Nigeria’s #2 ranked operator, the restructuring of the Nigerian tower market is complete for now. Independent towercos now own 76.4% of Nigeria’s towers, led by IHS with 51% of the country’s towers and American Tower with 17%. Let’s take a look at the new telecom tower industry landscape in Nigeria (TowerXchange estimates) below: