The new Nigeria

Current trends indicate that Nigeria will be the first African country to reach the international metric of 75% of towers under independent ownership. This results from a flurry of major transactions during the course of 2014. Factors including rapid traffic growth, implementation of much-enhancnced Quality of Service, and rollout of fixed and moble broadand combine to sustain an interesting and vibrant outlook for the towers sector.  Enda Hardiman of consultancy Hardiman Telecommunications Ltd. reviews the Nigerian vista and prospects forward.

During the course of 2013, the Nigerian government recast the mechanism by which GDP is calculated. The new mechanism, generally agreed to provide a more accurate measure than those in use previously, sizes the economy at US$510bn. This easily outstrips the corresponding South African figure of US$370bn. Nigerian economic growth has averaged 7% pa over the last 10 years.

GDP per capita is approaching US$2,900, and is forecast by the IMF to reach US$4,000 by 2018. The country is rapidly approaching middle-income status, and already boasts an affluent middle class.  Nigeria as African economic leader is here to stay.

Vibrancy of the Nigerian telecommunications sector mirrors that of the economy overall. Mobile penetration grew at a CAGR of 14% over the 5 years to 2013, and now runs to an impressive 74%.  There is ample room for further economically efficient growth. Extrapolation forward, against conservative assumptions, indicates that 100% will be reached by 2020.

Physical rollout of mobile networks has been equally impressive. Mobile service is available across 85% of the national territory.

Nigeria has seen consolidation of the mobile sector, as a plethora of erstwhile operators, notably CDMA operators struggled for market share and profitability. GSM, WCDMA and, incipiently, LTE are now the dominant technologies. MTN Nigeria exhibits EBITDA exceeding 50% of revenues. Airtel continues, with some success, to reduce costs and has targeted pan African EBITDA of 40% of revenues within two years.  Globacom is relatively conservatively managed. Etisalat, as the last market entrant, has faced challenges to acceptable performance in Nigeria as elsewhere in Africa, but there are no current indications that other than reinforcement and performance improvement are planned.  Interestingly, alone amongst Etisalat’s African operations, Nigeria was not placed under the management of MarocTel on acquisition of equity therein by Etisalat.

 

Unusually in sub-Saharan Africa, the Nigerian market is of a scale that can support four operators. While there are thus no indications that further consolidation is imminent, it is not impossible. If it occurs, it will not significantly affect the underlying dynamics of the towers sector. The rate of increase in traffic, and consequently demand for network capacity, will not abate.

The Nigerian tower sector has followed the recent trend toward disposal of towers to independent operators.  The principal independent tower operators are IHS and Helios Towers Nigeria. IHS acquired 9,151 towers from MTN, 2,136 towers from Etisalat and built / acquired 1,950  towers from various others.  Helios Towers Nigeria’s current base runs to 1,200 again acquired from various sellers.  However, this will change radically if Helios Towers Nigeria emerges as winner of a current process engaging 80% of Airtel’s towers. On conclusion of that transaction, fully 74% of Nigerian towers will be under independent management. Nigeria is thus converging on the global metric of 75% of towers under independent management.

Recent transactions place Nigerian towers at the upper end of African valuations. Unit valuations have exceeded $200,000. This reflects both current requirements and requirements forward that may clearly be forecast.

 

MTN, Airtel and Globacom were all recently directed by the regulatory authority, the NCC, to desist temporarily from sale of SIMs. This was because of alleged failure to meet mandated quality of service metrics.  The allegations were not seriously challenged. Thus, each of the three is constrained to additional network capacity in order to improve quality of service.  In the case of MTN, this immediately translated to reduction in the number of subscribers supported per base station, per TRx and per site, and, consequently, deployment of further base stations, TRxs and sites. Demand for real estate on current sites and towers is increasing. Demand for new sites, both rooftop and free-standing is also increasing. This is particularly the case in urban areas. Demand for data capacity is already high, and will accentuate further as the national economy approaches middle-income status. Required cell sizes thus reduce.

Demand will also be accentuated by enforcement of construction and siting regulations by the NCC. While these have been on statute books for some time, it is clear that against the rapid maturing of the industry, the NCC is committed to ensuring adherence to stated requirements.  Relevant regulations include those governing zones in which towers may be constructed, permitted tower heights in urban areas and mandatory real estate area of tower sites. The regulations are not onerous, but they have not always been either observed or enforced.

Lease-up rates of two tenancies per tower may thus be forecast with some confidence. This is not egregious against forecasts that have been made by some commentators and analysts with respect to Africa in general, but is certainly much better sustained. Lease-up rates in urban areas may exceed two. This is because demand will be forthcoming from Wireless Local Access operators in addition to demand from ‘Traditional’ mobile operators. The prognosis for these, and indeed for rollout of urban LTE in general, is good.

Nigeria features a market that has matured rapidly and recently come of age. Dynamics increasingly resemble those of a developed, rather than emerging market. Regulation, in recent years, has been consistent and less susceptible to random or capricious intervention than is often the case elsewhere in Africa.  Governance, while by no means perfect, has much improved.  Market understanding of major players is good. Trends forward are visible and can rigorously be sustained by quantitative analysis. The outlook, in summary, is clement and encouraging.

Enda Hardiman (hardiman@telecoms.net) is Managing Partner of Hardiman Telecommunications Ltd. (http://www.telecoms.net), a boutique consultancy with offices in London and Hong Kong and an strong track record in emerging markets worldwide.  Hardiman Telecommunications Ltd. advises operators, towercos, investment banks and PE funds on strategy, operations and M&A.