How Square1 Infrastructure is building new towercos in SSA and Myanmar

At TowerXchange, we’ve been intrigued by the absence of ‘middle market’ towercos from many emerging markets. Filling the gap between a ‘Mom and Pop’ local operation and the multi-national private equity backed towercos, smart middle market towercos acquire attractive sites for macro towers and rooftops, fulfil build to suit (BTS) contracts that may be too small to attract larger towercos, and are often first movers when the market for IBS and DAS develops. TowerXchange spoke to serial tower entrepreneur/lawyer Dan Ryan CEO of Square1 Infrastructure about his middle market towercos in SSA and Myanmar.

TowerXchange: Please introduce yourself Dan - how did you get into the tower business?

I’m a real estate-infrastructure attorney by training and education. I have focused my career on infrastructure development as a developer and attorney since I entered law school in 1992.  With the 1996 Telecom Act I entered the booming US wireless industry, working initially for a network deployment firm which my partner and I later acquired through an MBO. At our peak, we were rolling out 1,000 sites a year across the Eastern seaboard. I became aware of the low barriers to a service business and decided to enter into asset ownership, and subsequently started a small tower company in the US.

With tower owners increasingly disposing of assets through brokered auctions, it has become increasingly difficult to acquire a portfolio of any size in the US in competition with the publicly listed towercos, so I started focusing on emerging markets.

TowerXchange: You’ve just launched a new towerco in Myanmar. Why?

After 15 years working in the US tower market, you don’t see 1,000 site BTS opportunities any more! In terms of new builds, you don’t find BTS opportunities of the size and scale to be found in Myanmar anywhere else in the world, and the green field rollout situation means you don’t have to pay a premium for sale and leaseback.

TowerXchange: What are your current activities in Myanmar?

Our local entity, “Myanmar Infrastructure Group”, started trading on June 1 2014. We jokingly call ourselves the “MIG fighters” because we develop so fast! We’ve secured funding from Singapore Windsor Holdings, and our goal is to rollout 1,000 macro towers and 100 or so in-building solutions in Myanmar.

We’re already working on some macro towers, but our market entry has started with multi-tenant DAS solutions for airports and in-building solutions, targeting an initial 25 properties, to demonstrate our capabilities to Myanmar’s MNO community. DAS and IBS are unlike macro towers in that once you have secured an exclusive agreement on a property with the landlord, then you have that particular coverage opportunity locked up, you don’t have to worry about nearby sites’ coverage.

TowerXchange: Tell us about your business in South Africa.

Our South African operation has its roots in the co-location management business. We trade as Square1 Infrastructure LTD in South Africa, where we were formerly known as SWORN South Africa Asset Management.

We manage rooftops, risers and ground for landlords while also providing audit services. We were fortunate enough to secure Brian Hosking from JHI, the largest property management company in SA. Brian has done a great job securing several hundred rooftop locations, primarily Class A office space in key areas of South Africa’s major cities, and we’re marketing those rooftop sites now.

TowerXchange: And what’s your footprint in Nigeria?

Our Nigerian business is known as Global Infrastructure Investors, and focuses on BTS and small one-off acquisitions. We identified an opportunity to consolidate several local service companies who had difficulty securing capital to put in proper power solutions and upgrade towers. Global Infrastructure Investors has been able to secure BTS opportunities while the Big Three towercos have been preoccupied with sale and leaseback auctions.

We’ll finish our first 100 sites in Q4 2014, and we have a pipeline of several hundred more.

TowerXchange: With Etisalat, MTN and Airtel’s Nigerian towers sold or in the process of being sold to towercos, will the expanded inventory of leasable sites have a suppressing effect on Nigeria’s BTS market?

Nigeria has around 25,000 towers at the moment, and our models suggest 57-60,000 towers are required. The sites formerly owned by the carriers will attract more co-locations, but I don’t think it will affect the BTS market – we are still experiencing strong demand.

The fundamentals of build to suit are common to both large and smaller towercos; we’re still reticent to build a tower for one tenant, we still need a multi-tenant structure to make math work, and we’re still not keen to build too close to another tower with capacity for co-locations. What differentiates Square1 is that our backers, a ten-year fund in Luxembourg, enable us to be a little more patient about attracting a second tenant than the larger towercos backed by less patient private equity firms demanding higher returns. As a result, smaller towercos like us have a slightly different appetite for BTS.

I think the transfer of towers from Nigeria’s MNOs to towercos like IHS opens more opportunities for small and mid-sized tower companies. If I bought thousands of towers via sale and leaseback, my focus wouldn’t be on BTS, it would be on integrating all these new towers. It’s similar in the US where the needle doesn’t move for the publicly listed towercos for BTS programmes of less than 100 towers – they would rather a smaller developer does the work, and they can always buy them out in the future.

Africa’s private equity backed towercos are probably driving toward an IPO in the fairly near future, which means their focus is on growing tower cash flow, and means they are less focused on the negative cash flow differential of BTS.

TowerXchange: Would you ever have an appetite to participate in sale and leaseback opportunities in SSA?

We’re still in our first year of trading in SSA, getting our feet wet. The challenges around power, and the fact that land titles often aren’t as good, means we’re happy sticking to BTS for now. Participating in sale and leasebacks is not just about raising money, in the long term it’s about the ability to deliver.

TowerXchange: What constitutes scale for a small to medium sized towerco in SSA?

You can get rich doing just 10-20 sites a year in the US, but the power issues and scale of operations in SSA mean you need to drive to 100+ sites.

As the African telcos increasingly utilise towercos to build, maintain and, in many cases, acquire their cell sites, I feel there is room for a layer of 100-1,000 site mid-sized towercos, particularly if we can work with an energy services partner so we can focus on the pure real estate game.

TowerXchange: What capabilities do you keep ‘on the payroll’ and what is outsourced? does your organisational chart look like in Nigeria, for example?

The critical resources which we keep in-house are country management, financial control, co-location sales and the guys who are our customers’ touchpoints. When it comes to field operations, Global Infrastructure Investors find quality local partners to provide fuel and resupply, which is a very fragmented market in Nigeria.

TowerXchange: What is stopping Nigeria’s O&M subcontractors and the country’s smaller towercos from getting to scale?

Local Nigerian businesses struggle to attract the domestic finance they need to scale and, with most contracts in Naira, international investors are reluctant to expose themselves to the currency risk.

In the US, my general rule is you need 10% of a contract’s value to be able to fund it, so you need US$2mn working capital to secure a US$20mn contract, with the rest financed through accounts receivable lending, which can be found at a relatively reasonable rate. In contrast the cost of borrowing in Nigeria can be 25-26%, if it’s available at all.

TowerXchange: What’s your long term strategy for Square1 Infrastructure in SSA?

Nigeria and South Africa are just the beginning of our story in Africa – we’re interested in opportunities across SSA, particularly in ECOWAS and SADC. As well as our venture in Myanmar, we’ve also started looking for opportunities in Central and South America.

I’m a firm believer that risk and reward are linked together. A country like Nigeria has the population size, GDP growth and natural resource wealth to provide excellent fundamentals for a telecom real estate business, and those who are brave enough to tackle the power challenges have the opportunity to establish a tower business that generates a good margin in it’s own right. Of course most small to medium sized towercos are destined to be acquired eventually.