2015: the year of the middle market towerco in SSA

Africa needs more towercos. But only at specific levels of the tower industry. While Africa’s “Big Four” towercos are snapping up the majority of towers in the most investible markets through sale and leaseback transactions, often bundled with build to suit programmes focusing on multi-tenant towers, gaps are opening up in the market for “middle market” towercos able to focus on smaller transactions in higher risk markets, or able to deliver low cost, single tenant towers. Meanwhile, the Nigerian and South African markets remain big enough to sustain entrepreneurial towercos targeting niche opportunities in BTS, rooftops, billboards, IBS and other “special structures.”

As 2014 concludes, we can declare it the “year of the private equity backed towerco” in SSA. IHS, Helios Towers Africa and Eaton Towers have driven to scale, fuelled by an unprecedented wave of sale and leaseback transactions that will soon draw to a close. For Africa’s ‘Big Four’, 2015 will be a year of integration and a drive toward profitability.

Whilst the “Big Four” towercos are immersed in the improvement of large towers and large tower portfolios in Africa’s larger countries, TowerXchange has identified four specific gaps in the market for “middle market” towercos.

1. Acquisitions in smaller / higher risk markets with less established counterparts

2. Building low cost towers in locations where a second tenant might not be added for more than two years

3. Build-to-suit-centric towercos in prime towerco markets such as Nigeria and South Africa

4. A finite opportunity for middle market towercos to target rooftops, billboards and other ‘special structures’

Let’s look at each of those opportunities in turn, but first let’s define what we mean by a “middle market” towerco.

The top end of the towerco market consists of publicly listed, established towercos with many tens of thousands of towers. Companies in this category, such as American Tower, Crown Castle, SBA Communications and Bharti Infratel, benefit from the low cost of acquisition capital resulting from the tower cash flow generated by their mature portfolios.

Next is a tier of well-funded private equity-backed towercos with many thousands of towers, each progressing on a path to IPO or trade sale to one of the publicly listed towercos. Three of Afrcia’s “Big Four” are in this category: Helios Towers Africa, Eaton Towers and IHS.

Then at the bottom of the market you’ve got “Mom and Pop” towercos – highly localised portfolios with single or low double digit tower counts generating decent returns but with finite aspirations for growth.

Between the “Mom and Pop” towercos and the private equity-backed towercos are the “middle market” towercos. Typically driven by an entrepreneurial management team with direct experience of scaling towercos or planning networks, “middle market” towercos are typically driven by organic growth, although they sometimes indulge in smaller acquisitions of double digit tower counts. There are a variety of flavors of “middle market” towerco; some are driven by:

1. Build to suit programmes

2. Managed services contracts with license to lease

3. Opportunistic acquisition or access to a portfolio of sharable structures such as billboards, energy or rail structures

4. Rural network development, often under opex sharing business models

While some middle market towercos aspire to achieve the scale and credibility necessary to raise capital and make the jump into larger sale and leaseback transactions, many middle market towercos exit through a trade sale to one of their larger publicly-listed or maturing private equity-backed towerco cousins.

There are many middle market towerco success stories in more mature tower markets such as the US, Brazil and India, but the category is relatively under-developed in SSA. TowerXchange has identified four specific opportunities for middle market towercos to take root in SSA.

Before I explain where I think there ARE gaps in the SSA tower market, let me reiterate where there AREN’T gaps.

If you want to get into the business of buying portfolios of 500+ towers from SSA’s tier one MNOs, unless you are part of the team at American Tower, Eaton Towers, Helios Towers Africa or IHS, forget it. The “Big Four” have the SSA tower market sewn up. MTN, Airtel, Vodacom, Vodafone, Etisalat, Millicom and (to a slightly lesser extent) Orange aren’t going to entrust their towers to anyone who doesn’t already own and operate at least 5,000 towers in Africa.

So the entry price to get into the top end of the SSA towerco market is now well over a billion dollars, which is what it would cost to acquire one of the three private equity backed members of the “Big Four”.

There are always exceptions to the rule of course, but you’re going to need a lot of credentials and capital to enter the top end of the SSA tower market this late. You’re going to need the credentials from operating many thousands of towers somewhere else, and the low cost of capital that is generated by a mature portfolio of towers to compete for the few remaining obvious sale and leaseback opportunities in SSA. So perhaps the door hasn’t closed completely on Crown Castle, SBA Communications, Bharti Infratel, TDF, edotco and other substantial towercos, but we don’t see those towercos queuing up to get into Africa either – if they wanted to be in Africa, they’d probably be in Africa.

For everyone else, the following are the opportunities I feel remain on the table in SSA towers.

The “Big Four” towercos are unlikely to acquire assets in many new markets – they will concentrate on integrating their acquisitions and perhaps adding one or two complimentary portfolios in their existing markets. There will always be exceptions of course – the issuance of a third operator license would make Angola very attractive for example, while North Africa has long term potential, but generally the “Big Four” are in most of the SSA markets they want to be.

The catch of course is that there are good reasons why the “Big Four” aren’t in Somalia, Ethiopia, Sudan, South Sudan, Central African Republic, Burundi, Mozambique, Zimbabwe, Mauritania and Namibia. Whether the market lacks scale, has too few credit worthy prospective tenants, has operators reluctant to engage in infrastructure sharing, or scores high on country and market risk metrics, virgin tower territory has been left well alone by the Big Four for good reason. There may be pockets of value to be found in the cooler SSA countries on the TowerXchange tower transaction heat map, but investment opportunities in these markets should be viewed through a lens of caution.

Towercos at the top end of the market are reluctant to build towers that lack the potential to add a second tenant within 12-18 months – few if any have the obligation to build sites in less attractive, typically less populace locations. Given that many MNOs are divesting all their towers to the large towercos, they are left with finite in-house capability to manage the build and maintenance of new towers. So if the coverage obligations of MNOs’ licenses requires network extensions in rural areas where total Minutes of Usage (MoU) barely makes an economic case for one MNO to provide coverage, let alone two, then how do they get these single tenant towers built?

What the SSA market needs is a new breed of towerco with a business model that makes economic sense with a single tenant, and with an ability to share the risk of rural network extension, perhaps under a revenue sharing business model and maybe in conjunction with a community power offering. Such a towerco would need to specialise in low capex, low opex, deep rural sites. This sounds like a good fit for renewable energy. TowerXchange has encountered two or three funded entities that have broken ground on pilot sites along these lines; we catch up with Dion Jerling of Connect Africa later in this edition, while Michael Darcy of Africa Mobile Networks is making significant progress in Benin.

Before I write about Nigeria and South Africa, I want to tell you how this category works in Brazil. While Brazil is very different from Africa (the grid is more extensive and more reliable, for example), there is a similar need for more sites; Brazil has 70,000 towers and needs at least twice that many, Africa has 165,000 towers and needs at least twice that many. Brazil is host to three towerco giants; American Tower, SBA Communications and Grupo Torresur have all been aggressively acquiring towers under sale and leaseback (SLB) transactions. Africa is host to four towerco giants all aggressively acquiring towers under SLB transactions. But neither market is saturated.

In Brazil, half a dozen decent sized build-to-suit-centric towercos are adding macro towers, rooftops and special structures, and the market need is so great that they are not significantly duplicating the capacity of the big SLB-centric towercos – indeed most commentators feel Brazil needs even more tower building capacity. The end-game for Brazil’s build-to-suit-centric towercos is a trade sale to one of the three towerco giants; as recently completed by BR Towers to American Tower. For a C-level view of this dynamic, check out the interview with Dr Chahram Zolfaghari, CEO of Brazil Tower Company, also in this edition, who explains why he feels towers built to share are worth a greater premium than those acquired under SLBs from MNOs.

So there’s almost a feeder system of smaller, build-to-suit-centric towercos in large markets such as Brazil, creating additional build capacity, and destined to be sold to the larger towercos. There are also a handful of smaller build-to-suit-centric towercos in Nigeria and South Africa, such as those owned by SWAP Telecoms and Technologies, Hotspot Network, Communication Towers Nigeria and Square1 Infrastructure in Nigeria, which is also active in South Africa, where they are joined by Infratel and Pro High Site Communication. While one might imagine that the recent spate of SLB transactions in Nigeria, in which MTN and Etisalat’s towers were sold to IHS and Airtel’s to American Tower, might be bad news for local middle-market towercos, quite the opposite is the case. Why would IHS or American Tower build a new tower adjacent to where one already exists? If the structure is sound and the contracts are sound, why not just acquire the tower from the local incumbent and save months of leasing and permitting wrangles? If a company owns a portfolio of attractively located, well-built towers with minimal duplication of sites, why not look at buying the lot?

The sale of ~80% of Nigeria’s towers to independent towercos may have set the clock ticking on a trade sale for Nigeria’s independent towercos, but as Brazil has proved, such sales can attract good premiums. Meanwhile, the independent towerco business model has yet to fully penetrate South Africa, where just 14% of the country’s ~17,000 towers are owned by towercos (1,912 by American Tower, ~200 by Eaton Towers plus a handful by the aforementioned middle market towercos). Middle market towercos grabbing attractive locations in Sandton, Cape Town, Pretoria et cetera could find themselves ‘sitting pretty’ if and when South Africa’s independent towerco market drives to scale – which could be triggered if Telkom monetises an estimated 6,000 sharable structures in 2015.

Challenges around the legality and capacity of rooftops doesn’t make them all worthy of large towerco’s attention, but if a middle market player has the appetite to clarify ownership and access to rooftop sites, to ensure structures are safe, and to target sites attractive to multiple tenants to which a structure with capacity for multiple tenants can be added, then there may be an opportunity even in markets where large towercos are active. Similarly, forming partnerships with substantial billboard networks, railway and electricity infrastructure companies may enable the creation of decent sized portfolios of shareable structures.

Finally, by ‘special structures’ I’m referring to lamp-posts, micro-sites, small cells, DAS and other flavors of in-building and outdoor solutions. This particular window of opportunity is closing fast as Africa’s ‘Big Four’ towercos accelerate their own IBS strategies, but there remain opportunities for middle market towercos to secure prime sites where coverage is best suited to special structures rather than macro towers.

Not all middle market towercos have tapped the right vein. Not all middle market towercos are destined to be swallowed up by American Tower. Some will tick along nicely in parallel with their larger cousins. Some will falter and fall by the wayside. Others have got the formula right and will make very successful exits. Each of the four opportunities for middle market towercos we’ve identified is fraught with risk. None should be tackled by a management team that lacks telecom tower industry experience. But despite the tower industry in SSA doubling in scale in 2014, we still think there are gaps in the market for middle market towercos who can crack the secret formula for success.