An auspicious panel of investors in towers convened at the TowerXchange Meetup Africa in October 2014. Moderated by expert advisor Enda Hardiman of Hardiman Telecommunications, the panel included Ed Stumpf from AIIM, Ayman Al Adl from Standard Chartered Bank, Aniko Szigetvari from the IFC, and Nina Triantis from Standard Bank. . The debate spanned the maturation of the asset class, the growing preference for SLB deals, and the structure of African tower markets both in terms of the number of active towercos and potential consolidation of MNOs.
Maturation of the asset class
Enda Hardiman, Managing Partner of of Hardiman Telecommunications, kicked off the panel with a comparison of the maturation of investment in African telecoms, from the days when pioneers like Mo Ibrahim of Celtel were first movers to the established entities we see today, with the similar maturity achieved in the tower sector; pioneering TMT funds and development banks moved first into African towers, then as the asset class proved itself, more hard-nosed private equity capital is now moving in. The IFC concurred – as an investor since day one of the private equity backed African towercos, they’ve seen an evolution from the early days when it was relatively difficult to raise funding, to the different ballgame we see today.
Ed Stumpf from AIIM noted that each of the African towercos is a different player, focused on different deal structures and on different markets. AIIM invested in IHS because they like the markets that they’re in and the strength of position they have in those markets.
Standard Bank’s Nina Triantis noted that as the African towercos have scaled up, driven by the 2014 Airtel African tower sale, the differences between towercos have become less pronounced. Initially some would pursue certain models, for example some would entertain managed services or manage with license to lease deals, while others wouldn’t.
Sale and leaseback preferred in long term
Ayman Al Adl of Standard Chartered Bank noted that the differences between Africa’s ‘Big Four’ towercos were driven by the different interests of their MNO counterparts. The differing goals of MNOs include Orange, who were keen to retain asset ownership in key markets, while Airtel preferred full divestiture, and MTN often preferred to retain a stake.
In the long term, it seems that the sale and leaseback deal structure best meets objectives of towercos – maximising their expose to sector, securing full ownership, opening the door to substantial build to suit programmes, and providing the most incentives to maximise tenancies and generate efficiencies. In comparison, managed services agreements give a feel for the management of towers, but do not release the same upside for co-location, hence the addition of marketing rights (‘manage with license to lease’). TowerXchange note that over the course of 2014, African towercos have acquired assets such that they own more than 90% of the towers they market, up from 69% at the end of 2013.
Is there room for multiple towercos in each market? Will there be more deals in 2015?
The economics of the independent towerco business makes it a natural monopoly in most markets. The benefits of scale are regional in nature, and towercos need to maximise colocations to maximise revenue and value creation. Only the bigger markets, such as Nigeria, can support two towercos of scale, perhaps supplemented by a few smaller towercos doing build to suit programmes and flipping assets to the bigger players.
Tower transactions and the structure of markets are ultimately driven by MNO intentions. So while MTN has disposed of their towers in most large markets except South Africa, and retains very few additional markets of interest to towercos, a minority of operators still remain dead set against divesting towers.
The panel felt that the tower market was somewhat self-limiting; a period of deal hiatus is predicted after the recent Nigeria and Airtel transactions, with the exception of the pending Egypt and Sonatel deals. The towercos might refocus on integration for a couple of quarters after which we could see a few more deals if new operators were willing.
More sophisticated debt available
As more debt providers become familiar with the African tower sector, there is a growing realisation that the asset class is not as risky as one might imagine. It took a while to build comfort, but towercos secure ten year contracts with concrete, investment-grade counterparties. As people better understand the market dynamics, the big question becomes one of tenancy ratios. Investors are looking for 2-2.5, while a tenancy ratio below 1.5 often means these companies get stressed.
With many tenancy ratios already approaching two, the African tower industry is seen as relatively mature, so the debt market is becoming more comfortable at relatively high leverage levels. It’s becoming a re-finance play from debt perspective – most towercos have refinanced once, twice, even three times. Until recently you couldn’t see how an African a tower deal could be done as pure acquisition finance – you needed to see co-locations first. But 45-55% of African tower transactions are funded through debt now.
There are always stratifications of debt investors; senior lenders lend purely on the basis of contracted revenue from anchor tenants – there is no risk taken on colocations and tenancy ratios. At a mezzanine level, funders are willing to take a risk on a certain subset of tenancy ratios.
The bond market becomes an option a bit later in the transaction lifecycle, after a towerco has acquired towers and has a track record. Three years of statements are typically needed – so it’s an option maybe a year post-transaction. The Helios Towers Nigeria bond was two and a half times oversubscribed, and to a wide investor base.
Access to local capital remains a challenge at times in Africa. Where local rates and liquidity are appropriate, local lenders can play a role, but not at the scale one can source from international banks and DFIs.
The impact of consolidation and the restructuring of Africa’s mobile operator markets
Enda Hardiman posed another provocative question; with MTN making ~80% of its EBITDA in Nigeria, South Africa and Iraq; Etisalat only making money in Togo and Nigeria; Orange seemingly withdrawing from several markets; and Vodacom’s appetite for tower transactions limited, was there a risk of systemic consolidation and withdrawal of investment-grade counterparties in prospective future tower transactions?
While MNO consolidation has always been a major concern for investors in African towers, for ten years they’ve been waiting for it to happen and, isolated instances such as Uganda aside, they’re not convinced there’s going to be widespread consolidation at levels that significantly affect towercos. While typically only the top two or three MNOs in any country are profitable, such MNOs are usually the only counterparties towercos will buy towers from.
While towercos only partner with credit worthy anchor tenants, they also tend to focus on Africa’s larger, more stable countries. Certainly there is a scale below which the ‘Big Four’ African towercos are not interested – they don’t want set up a team to manage 200 towers.
Market risk remains one of the biggest risks in making investments in this asset class. But while investors evaluate the acceptability of downside risk, there is also significant potential upside particularly in a market like Nigeria.
The glass ceiling for tower cash flow isn’t solely a function of the number of traditional MNOs able to pay their bills in a market. Tenancy ratios are important of course, but adding new services as markets transition from 2G to 3G and 4G generates important tower cash flow. In many markets, established MNOs don’t have access to spectrum for 4G, enabling smaller new market entrants. While the long term bankability of urban TD-LTE players may have to be evaluated on a case by case basis – many are ultimately built to sell to incumbents – they generate demand for tenancies concentrated in the urban regions where towercos are typically strongest, and on the lower reaches of towers less sought-after by traditional MNOs. The transition to 3G and 4G also produces a vibrant build to suit market, albeit more typically from incumbent operators as new TD-LTE players often lack the capital to invest in substantial new builds.
From a density perspective Africa has a long way to go – Africa averages around 4,000 subscribers to a point of service compared to 1,500 in India. The only way to improve capacity is to increase the amount of spectrum available; Africa is not close to proper data coverage and 3G.
Africa needs more towers, more points of service, and more co-locations. The real explosion in demand for towercos’ services will not come from today’s TD-LTE pioneers but from tomorrow’s FD-LTE players and when the big operators are able to secure the spectrum to rollout these new services. While the African tower market has matured considerably in this decade, it’s not yet an infrastructure play. However, we’ve seen AIIM put money into IHS and Providence Equity invest in Helios Towers Africa; the doors have been opened to these funds and the ticket size for investments in African towers is getting bigger.
