Congratulations to IHS Africa on the acquisition of one of the most attractive tower portfolios in emerging markets! The deal sets records as Africa’s largest tower transaction to date in scale (9,151 towers) and deal value (around US$1.8bn), securing some of the most valuable towers in Africa for IHS, at a cost of around US$200k per site. In this analysis, TowerXchange looks at the terms of the transaction and it’s implications for BTS, for investor perceptions of IHS, and for potential interest in Airtel’s Nigerian towers, which remain for sale.
Examining the valuation and structure of the deal, and the context of the Nigerian towers
In early September 2014, IHS has announced a deal to acquire 9,151 towers from MTN Nigeria, representing all the towers in the Nigerian market leader’s network.
The deal value was not announced, but TowerXchange sources suggest the transaction value was around US$1.8bn. With MTN retaining a substantial equity stake, the valuation works out as close to US$200,000 per tower. Cost per tower remains an imperfect means of evaluating tower transactions without knowing the lease rate, and without detailed knowledge of the condition and location of sites. However, Nigeria is known to support healthy lease rates, and MTN’s sites are renowned for the quality of structures and equipment. MTN’s is also Nigeria’s largest network, supporting the largest subscriber base – MTN has market share of around 46%.
TowerXchange feel there is solid justification for IHS outbidding rival towercos to secure this portfolio. Nigeria is the largest market in Africa in terms of mobile consumption, with over 125mn SIMs in circulation. Indeed CEO Sifiso Dabengwa recently said “Nigeria (was) by far the major contributor” to MTN’s 9% increase in profits in H1 2014.
Nigeria’s market fundamentals are excellent for towercos. Nigeria has a healthy competitive MNO environment, with new data providers entering the market. There is potential for substantial amendment revenue with 3G still being rolled out, and LTE being piloted. Nigeria has a long runway for growth among a young population with a burgeoning middle class, yet where unique subscriber penetration remains just 32% (source: GSMA).
Under the terms of the deal, a joint venture newco will be formed which will be an IHS Group company, but in which MTN has a significant stake. IHS will have 100% operational control – the independence the tower company being important for customer relations and future business.
Goldman Sachs and Allen & Overy advised IHS on the transaction; Citi and Freshfields advised MTN.
Why IHS?
IHS has a substantial presence in Nigeria, with 600 staff ready to ensure they ‘hit the ground running’ with both the 9,151 MTN and the 2,136 towers recently acquired from Etisalat. IHS has a tried and tested methodology for transferring assets from MTN – they are a trusted partner and the two companies are used to working together in Cameroon, Cote d’Ivoire, Rwanda and Zambia – it will be easier to assimilate these new assets into an IHS business that was already running 4,000 towers in Nigeria.
IHS has already delivered on challenging SLAs despite the energy complexity that characterises the Nigerian tower market. Uptime of 99.9% has been achieved across IHS’s owned towers in Nigeria, thanks in no small part to IHS’s state of the art NOC.
A closer look at the portfolio and the capex to be invested in it
This is a high quality portfolio of assets. A number of the towers IHS are acquiring from MTN Nigeria already have a second tenant on them. IHS conducted the usual rigorous due diligence on the towers, many of which they will have been familiar with as IHS previously had a managed services contract with MTN Nigeria.
The press release announcing the IHS / MTN Nigeria deal calls attention to IHS’s investment of US$500mn into the network over the next four years. With no BTS programme explicitly bundled into the deal, this suggests a substantial investment averaging just under US$55k per tower.
The five year term of this investment suggests it incorporates initial improvement capex and subsequent phases of investment. TowerXchange understands the US$500mn budget will be deployed for the usual post-transaction augmentations; new battery banks and generators, strengthening towers to increase load for co-location, maintenance programmes and, in due course, alternative energy. IHS has invested over US$100mn into proprietary hybrid energy resources to accelerate the pace of tower innovation and energy management in Africa.
An additional 15,000 towers for Nigeria
Estimates of the current number of towers in Nigeria vary between 24,000 and 26,000.
The professionalisation of co-location sales and service is unlikely to suppress demand for new towers in Nigeria. Operators and towercos were equally reluctant to build within a few hundred meters of an existing site before the recent deals closed, and nothing will have changed – the transfer of assets from MNOs to towercos is unlikely to adversely impact demand for build to suit programmes. IHS, for example, are achieving organic growth of around 6% per annum within their network.
Geographical coverage extensions and population growth could see Nigeria’s tower count increase to 40,000 towers, but the main driver of growth will be data demand. Data penetration in Nigeria is currently below 10% but is forecast to rise beyond 40% in the next four years. With such unprecedented growth, the weight of data carried by the network will drive cell site densification initially in dense urban areas but, as data usage becomes more pervasive, the need for densification will spread to suburban and rural areas. Amendment revenue (adding 3G and eventually 4G antenna to 2G sites) has fuelled the success stories of the independent towerco business model in so many markets – Nigeria will be no different.
What this deal means for IHS
IHS was born in Nigeria. With the deal to acquire all 9,151 of MTN Nigeria’s towers, combined with IHS’s previously announced deal to acquire 2,136 of Etisalat Nigeria’s towers, investors will perceive IHS as focused on Nigeria (where 71% of IHS’s towers are located), with some interesting additions to diversify country risk. IHS has also established themselves as the market leading towerco in SSA – they will have 20,001 towers on the continent when the Nigerian transactions close. IHS’s long term contracts, proven operational successes, and blue chip counterparties make the towerco highly investible.
TowerXchange have spoken to some investors with a higher tolerance for country risk who feel Nigeria is SSA’s most investible telecom market, and thus IHS is the continent’s most investible towerco. Other investors favour a more conservative approach to country risk and to deal structure – indeed more than one African towerco balked at MTN’s equity requirement in the joint venture, but with IHS and their partners’ greater appetite for risk may come the potential for greater reward.
The deals with MTN and Etisalat in Nigeria have enabled IHS to finalise their transition from managed services to focusing on owned towers. IHS now owns 90% of the towers in their portfolio, having also previously stepped back from a managed services deal with MTN in Sudan and South Sudan. IHS’s sole managed towers remain 2,000 Orange towers managed with license to lease on a fifteen year contract in Cameroon and Cote d’Ivoire. In Nigeria IHS had a small ‘manage with license to lease’ business with Etisalat, and a managed services business with MTN, both of which have been absorbed as owned towers in this transaction. After these transactions, IHS now owns all their towers in Nigeria, consisting of 14,222 towers, or around 56% of the towers in the country.
What next for Nigeria
Airtel’s Nigerian towers remain for sale. TowerXchange has been able to confirm that neither the 3,100 Airtel towers acquired by Helios Towers Africa (HTA), nor the 3,500 Airtel towers acquired by Eaton Towers includes Airtel’s towers in Nigeria. Neither HTA nor Eaton is expected to bid for Airtel’s Nigerian towers. It remains to be seen whether the location of Airtel’s Nigerian towers means their acquisition would be additive to IHS’s already substantial footprint, or whether IHS might also be motivated to bid for the towers as a defensive strategy. TowerXchange expects American Tower and Helios Towers Nigeria to also be interested in Airtel’s Nigerian portfolio.
When the Airtel Nigeria tower transaction closes, as many as 85% of Nigeria’s towers will be owned by independent tower companies. With Globacom remaining disinclined to divest their towers, one will be able to consider the Nigerian tower acquisition market mature, and attention will turn to absorbing newly acquired assets, improvement capex and efficiency improvement programmes, delivering on SLAs and expansion of the network.
