Introduction to the Kenyan tower market

The footprint of independent tower companies is extending seemingly inexorably across Africa, gobbling up the majority of towers in countries such as Nigeria, Ghana, Cameroon, Cote d’Ivoire, Rwanda, Zambia and DRC. 75% of Tanzania’s towers have transferred from MNO-captive to independent towerco Helios Towers Tanzania. Yet over the border it was starting to seem that the independent towerco model would not take root in Kenya. Why? And will Eaton’s acquisition of Airtel’s towers, and the potential launch of Open Access LTE, change the market dynamics?

The fundamentals of the Kenyan mobile market look good for the telecom tower industry. Kenya is SSA’s fourth largest mobile market and growing fast, with 13.4mn unique mobile subscribers (behind Nigeria with 48.8mn subscribers, South Africa with 32.9mn and Tanzania with 15.2mn – data from GSMA Intelligence, Q2 2013). According to the same source, Kenya has one of SSA’s highest 3G penetration rates at 14.2% compared to the regional average of 7.6%. However, as a legacy of years of tariff wars, ARPU has fallen below US$5.

So Kenya has a lot of subscribers, more of those subscribers are on data hungry 3G than most of SSA, and there is pressure on margins.

According to BMI’s analysis of the market in TowerXchange last year “Kenya’s four mobile operators have a combined towers portfolio of around 6,000 towers (of which ~3,500 have 3G antenna). This is grossly insufficient for the country’s population of almost 45mn and land area of around 570,000 sq km”.

This sounds like a good combination of drivers for the kind of asset sweating, cell site densification, BTS programme administration and efficiency improvements towercos can deliver, right?

So why is the jury is still out on the Kenyan tower market?

Safaricom has participated in plenty of bi-lateral swaps, but they seem reluctant to part with their towers – and why should they? Safaricom’s market share is just under 70%; they have Kenya’s largest network, and a sticky mobile money service. They don’t need the cash from a tower sale, and they feel their towers remain a source of competitive advantage.

Bob Collymore, CEO of Safaricom, shared his perspective on the independent towerco business model in a recent interview with the London Financial Times (see http://video.ft.com/3620725831001/Africas-telecoms-frontier/markets): “It really only makes sense if you can put other people onto that infrastructure, otherwise you’ll only be running it as inefficiently as we are… So they (the towercos) speculate that when they buy someone’s towers they will be able to get other tenants, and typically they need to get between two and three tenants on. So whilst there’s been a lot of talk about it, there’s been very few real success stories on towers.”

Collymore seems skeptical that the Kenyan market can yield the kind of tenancy ratios Eaton Towers have already achieved in South Africa, where their tenancy ratio has raced beyond two with a portfolio that is less than two years old. But do tenancy ratios need to reach between two and three for a towerco to prosper in Kenya?

Airtel’s Kenyan towers have been sold to Eaton Towers. The reality of the Airtel tower sale, given the Indian operator’s focus on paying down debt, is that the structure of the deal probably favors up front cash over maximising opex reduction, resulting in a healthy leaseback rate. This means Airtel’s towers may be EBITDA-positive for a towerco even with a single tenant. There is upside too for Kenyan towercos, such that we wouldn’t forecast a stagnant tenancy ratio for the Airtel vintage of Kenyan towers. Safaricom is a tenant on plenty of other operator’s towers in Kenya, so while they may be reluctant to sell, they are not reluctant to co-locate. And there are no shortage of Wi-Fi, ISP and broadcast tenants for the towers.

The outlook for co-location sales is less good when looking at Kenya’s third and fourth ranked operators. YuMobile (Essar Telecom) is exiting the market, with assets and subscribers being split between Safaricom and Airtel respectively. Investors in towers don’t like in-market consolidation as they feel it lowers the glass ceiling on tenancy ratios.

Telkom Kenya’s financial distress may culminate in the withdrawal of partners Orange, and has already led to the cancellation of Eaton’s contract to manage and market Telkom Kenya / Orange’s 1,000 towers.

However, the Kenya Communications Act expressly forbids the existence of either a monopoly or a duopoly in the telecommunications sector, so while the owners may change, we still expect there to be at least three different operators’ antenna hanging on Kenya’s towers.

Safaricom achieved Kenyan market leadership through innovation – an entrepreneurial culture fostered by Michael Joseph and continued by Bob Collymore. Despite fierce tariff wars, Safaricom’s market share has held firm, and the firm enjoys unparalleled brand recognition and trust. In comparison, Safaricom’s competitors have been hindered by slow decision making processes and by red ink on their books. Telkom Kenya and Orange were wise to explore partnering with a towerco to reduce opex, improve QoS and extend their network whilst deploying the minimum capex, but the strategy was discontinued in part due to the financial turbulence in the broader operation. Making efficiency improvements within parastatals has proved challenging in many markets, and Kenya has been no exception.

It seems that Orange may be soliciting bids for their 70% stake in Telkom Kenya, which could attract an innovative market new entrant. Investors are increasingly bullish about some of Africa’s new operators and their ability to disrupt SSA’s incumbent operators, grabbing both market share and margin. Success stories like Africell’s in DRC owe a lot to leveraging independently owned towers. The entry of a similarly innovative or aggressive new player into Kenya, such as Viettel, who are rumored to be bidding for Orange’s stake in Telkom Kenya, could be the stimulus needed by the Kenyan mobile market.

Kenya’s ICT ministry has championed the cause of a public private partnership “Open Access” LTE network. A shared wholesale 4G network would certainly have a disruptive impact on the Kenyan telecoms ecosystem – accelerating new entrants time to market, while at the same time placing a de facto cap on the number of prospective 4G tenancies on towers. However, the Communications Authority of Kenya’s enthusiasm for infrastructure sharing suggests that if a 4G PPP network were launched, it would leverage shared towers.

With Safaricom’s leadership position threatened by an Open Access LTE venture, could the move even prompt the Kenyan giant to divest their towers, or perhaps spin them off into their own towerco to maximise the value created by those Open Access LTE co-locations?

Speculation about Open Access LTE in Kenya should be tempered by the fact that a launch was initially mooted by the end of 2013, yet three financial Quarters later there is no sign of agreement being reached on the venture.

The independent tower industry made ‘first contact’ with Kenya via Eaton’s relationship with Telkom Kenya. That didn’t worked out, most would say, through no fault of the towerco. But with the transfer of Airtel’s Kenyan towers to Eaton, there is a new dawn for the Kenyan telecom tower industry. But with operator consolidation afoot and a wholesale LTE network potentially imminent, Kenyan tower industry continues to offer a mixed bag of potential and uncertainty.