Is operator consolidation a friend or foe of the independent towerco business model? What shape could future MNO consolidation take in Africa? Is it better to have fewer, more credit worthy counterparties? TowerXchange spoke to UBS’s telecom equity research analyst Chris Grundberg to find out how he sees the map of African MNOs and towercos changing in the coming five years.
TowerXchange: Please introduce yourself and your research at UBS.
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
My name’s Chris Grundberg, and I’m the Telecoms Equity Research Analyst covering African markets at UBS Investment Bank, as well as the Head of Research for South Africa. I’m based in our Johannesburg offices. Our research revolves around providing our institutional clients with insights into the major themes shaping the industry, as well as the financial implications of those themes and ultimately the share price implications (for the publically traded equities).
UBS is 150-year old financial institution serving private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. UBS has offices in more than 50 countries, including all major financial centres, and employs approximately 64,000 people. UBS Investment Bank provides a broad range of products and services in equities, fixed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, financial intermediaries, alternative asset managers and UBS’s wealth management clients. The Investment Bank provides financial solutions to a whole range of clients, and offers advisory and analytics services in all major capital markets.
TowerXchange: Please summarise the trends toward MNO consolidation in Africa - is there a long term future for unprofitable #4, #5, #6 and #7 ranked MNOs in crowded markets?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
Our view is that you’ve seen a proliferation of operators across Africa over the past decade, with the weighted number per market increasing from two to over five from 2000 to 2012. Mean-time however, the ‘effective’ competition across these markets has not increased. That is to say that the addition of smaller players has not dramatically shifted the true competitive balance in these markets, and inevitably the smaller players resort to more aggressive pricing tactics, in turn whittling away at returns in the market. Over time, these smaller, unprofitable MNOs face tough choices, and being bought is sometimes a good route out for shareholders.
the addition of smaller players has not dramatically shifted the true competitive balance in these markets, and inevitably the smaller players resort to more aggressive pricing tactics, in turn whittling away at returns in the market
TowerXchange: Who do you see as the most acquisitive MNOs and what are their targets?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
We’ve previously highlighted the relative balance sheet strength of operators like MTN, Vodacom and Etisalat (especially prior to the Maroc deal), and noted that strategic M&A in markets which make sense for them, could be an option. Inevitably, the larger the operator, the larger a deal would have to be to be meaningful – and we believe the bigger players are more likely to focus on markets which are above a certain threshold in size. In addition, simply buying a #4/#5/#6 positioned asset as an entry point into a market is unlikely to be a good route in, so these players we see as more likely rolled-up as part of in-market consolidation.
TowerXchange: Investors get very nervous about the implications of MNO consolidation for towerco business models, given that it would appear to lower the glass ceiling on potential tenancy ratios. TowerXchange see it differently - the credit worthiness of prospective tenants is almost as important as the number of prospective tenants, so consolidation “comes out about even in the wash”. What do you think are the implications of MNO consolidation for towerco valuations?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
Our view here is that the towercos, and operators partnering or selling their assets to towercos, are likely to do so on the basis of the sustainable medium to long-term number of operators in a market. Assuming that most tower deals are struck on the basis that most markets will continue to have effective competition provided via two or three operators, we would broadly agree with the TowerXchange synopsis.
TowerXchange: Do you have a view on potential consolidation within the African towerco segment? Either among the ‘Big Four’ (HTA, IHS, AMT and Eaton... plus HTN) or among the growing ranks of ‘middle market’ regional towercos (SWAP, TASC, ToM, Hotspot, Square1 etc)?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
In this area we believe the trend seen in other markets globally for a few large towercos per region, given the benefits of scale in this industry, is likely to persist. So consolidation is certainly possible amongst towercos, yes – caveated by the consideration of overlapping tower estates.
TowerXchange: Are MTN optimising the valuation of their business by divesting towers in some markets, retaining equity in joint venture towercos in others, but retaining towers in certain markets like South Africa? And what’s your view on MTN retaining 51% equity in the joint venture towerco with IHS in Nigeria?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
We’ve commented previously that MTN’s tower deals are evidence of a sensible approach to balance sheet rationalisation, and part of the evolution of the group. The different strategies pursued in different markets are indicative in our view of the local market nuances, and assessed on a case-by-case basis, but we also view the retention of equity stakes in towercos in key markets as strategically very sound, especially given the longer term opportunity for value creation for MTN shareholders by a potential spin-off or flotation of MTN’s combined towerco stakes.
TowerXchange: Finally, how do you see the map of African MNOs and towercos differing in five years time from how it appears today?
Chris Grundberg, Head of Equity Research – South Africa, UBS Investment Bank:
We’ve noted that the likely picture is one of fewer, larger traditional operators, with potentially a larger group of smaller and probably asset-light operators, especially focused on data (potentially pure LTE plays). On the towerco side, we would not be surprised to see consolidation, and a similar picture of fewer, larger towercos with regional portfolios.
Chris Gundberg will be hosting a round table on “MNO consolidation: implications for the tower industry” at the TowerXchange Meetup Africa, taking place on October 20 and 21 in Johannesburg. For details, click here.
