Zain propose tower divestment in three markets

TowerXchange understands that Zain has commenced a process to divest towers in three countries: The Kingdom of Saudi Arabia, Kuwait and South Sudan. The deal was rumored  to encompass approximately 8,000 towers, but that count seems high given the number of towers Zain reportedly owns in the markets concerned. Depending on the balance of cash released versus opex reduction, a tower sale could attract between US$200-300k per site. Citi are believed to be leading the process.

In terms of the deal structure being proposed by Zain, we understand it is a sale and leaseback, but it’s not yet clear whether Zain wish to retain some equity. Zain are believed top be open to dividing the three country portfolio between different bidders.

The markets which are rumoured to be included are among the least profitable in Zain’s portfolio, with Saudi Arabia in particular a market in which Zain has not yet achieved profitability according to BMI’s statistics in September 2014.  Nonetheless, Zain represents an attractive counterpart and prospective anchor tenant in what would be the first major tower transaction in the Middle East.

In the maturing Kuwait market, where Zain retains its position as market leader, network coverage no longer confers a significant strategic advantage and the company is coming under increasing pressure from STC-backed Viva.

In terms of Zain’s beleaguered South Sudan operation, their market share is declining, while ongoing tensions between Sudan and South Sudan, exacerbated by the power struggle between South Sudan’s President Salva Kiir and former deputy Riek Machar and the associated conflicts, have made operations extremely challenging since the country was created in 2011. At time of writing, peace talks had collapsed and the UN threatened sanctions.

Unlike markets such as Iraq, Jordan and Sudan, where Zain’s position as market leader is supported by a superior network, divesting towers in Saudi, Kuwait and South Sudan would allow Zain to make significant efficiency savings without ceding a competitive differentiator.

With a population of 30.6 million, a GDP per capita of $30,600 and mobile penetration among the highest rates in the world at 179%, the Kingdom of Saudi Arabia (KSA) is a wealthy and potentially very profitable market. However Zain (20% market share) has struggled to compete with STC (45% market share) and Mobily (34% market share) in the country since they entered the market in 2008. The announcement by Saudi Arabia’s regulator, the Communications and Information Technology Commission (CITC), in June 2013 that it had awarded three mobile virtual network operator (MVNO) licenses, two of which (Virgin and Lebara) began operation in late 2014, will also no doubt put pressure on tariffs in a market where pricing has remained flat for several years.

Although high ARPUs and cash-rich MNOs across the region are often cited as being one of the main contributing factors to the lack of towerco activity in the region, Zain continues to carry a significant debt from the purchase of its US$6.1bn operating license when it entered the market in 2008, which could well be a significant motivator for releasing cash tied up in passive assets.

BMI suggested that in September 2014 Zain owned just 1,680 of KSA’s 30,600 towers, or 5.5% of the total towers in the market, meaning the divestment of towers in this market wouldn’t have a significant impact on the balance of operator-captive assets vs towercos. However CITC do promote tower sharing and, with continued network demands to support 3G and LTE rollout and capacity upgrades, a foothold in this wealthy market could well drive further activity for an ambitious towerco.

The potential for the Zain process to trigger other tower sales in KSA is illustrated by a tender recently issued by another KSA operator seeking to engage an advisory firm to review their tower strategy.

The smallest market in the deal by population, Kuwait’s 4 million inhabitants are also among the wealthiest in the world, with a GDP of US$40,200 per capita and a mobile penetration rate of 180%. Despite holding its position as market leader (44% market share) ahead of Ooredoo (38% market share), new market entrant Viva, backed by STC, has grabbed 18% of market share in the last six years and continues to grow.

Zain’s divestment in Kuwait would have a much larger impact on the tower market, as BMI suggested that Zain own 1,807 of Kuwait’s 5,100 towers, or 35% of total towers in the country. Although there is no regulatory imperative for tower sharing, there is a degree of network densification needed to support ongoing 3G and LTE rollouts and Zain’s passive network could represent a strong foothold in the market for the right towerco.

Despite a population almost three times bigger than Kuwait’s (11.3 million) South Sudan is a significantly smaller market for Zain. GDP per capita in the country stands at US$1,045 and with only 20% mobile penetration this region, contributed only 1% of the Zain’s total revenues before the most recent conflicts flared up. Getting cash out of the country remains a challenge to Zain monetising towers, or to any entering towerco.

Zain’s position in South Sudan has been dogged by problems since the country’s creation in 2011, as the company was ordered to shut down 43 of its towers in South Sudan in April 2012 due to fears that Sudan could be tapping calls. With only 300km of paved roads in a country roughly the size of France, fuel supply issues and a six month long rainy season complicate operations on the ground, two towercos have recently discontinued operations in South Sudan, including African market leader IHS Africa, who ended a managed services relationship with MTN South Sudan.

However, as a country with strong natural resources, South Sudan’s mobile market has the potential for enormous growth if and when the political situation becomes more stable. 80% of the population live outside of the country’s main cities, making South Sudan a prime market for mobile payment and mobile banking solutions. In order for the South Sudanese market to take off, MNOs in the region will need to expand their networks significantly, requiring significant capex from those who still manage their own infrastructure. The growth of a towerco in South Sudan would allow MNOs to harness growth much more effectively and to limit risk in the region.

TowerXhange believes that Zain’s network of 265 towers (count again courtesy of BMI and dated to September 2014) is currently the most extensive in the country, although it is rumoured that MTN are currently investing in network rollout, creating a potential market for any towerco with appetite to take on considerable country risk.

With no significant towerco activity in the Middle East, the acquisition of the Zain portfolio could offer a towerco the first foothold in a potentially very profitable market. It is believed that the portfolio can be broken up by country, offering opportunities for strategic acquisitions market by market.

The investment profile of Middle Eastern towers is very different from SSA, which might potentially attract different bidders., from the big US players to more niche experts in individual markets. Local experts Towershare, with the former President of Ericsson GCC Ray Hassan at the helm, may well see this as an opportunity to consolidate their position in the market. With a wealth of experience in the African market, Helios Towers Africa, Eaton Towers, and IHS Africa could all make a legitimate case to their investors that the Middle East represents a natural extension of their footprint, although all three are at a scale which means they may be more focused on integration and building toward an exit than on new acquisitions.  The wealthy, low risk opportunities in KSA and Kuwait may suit the investment thesis of American Tower Corporation or even tempt SBA Communications to look beyond the Western hemisphere. Protelindo may be interested – they have a lot of experience from American Tower’s early international forays in their management DNA, have already dabbled in towers outside of it’s home market of Indonesia, acquiring towers in the Netherlands and investing in Pan Asia Tower in Myanmar. Turkey’s Global Tower, one of the biggest towercos in Europe, has an appetite for international investment. While tower valuations in the Middle East are expected to be high by international standards, left-field bidders for smaller components of the portfolio could include US-based Square1 Infrastructure, which already has operations in South Africa, Nigeria and Myanmar, and TASC Towers which already has presence in Jordan. We’d expect a couple of the usual private equity firms with an appetite for towers to also submit bids.

Despite Zain’s decision to divest representing the first instance of a GCC-based operator committing to sell their towers, there are still challenges in the market and considerations which will impact towercos’ appetite for acquisition and willingness to meet Zain’s asking price for these assets.

With high levels of government ownership in Middle Eastern operators, willingness to share towers will not be driven entirely by market forces. Concerns about National Security in all three countries, driven primarily by the rise of Islamic State and ongoing civil unrest in South Sudan, means there may be reluctance to transfer control of critical network infrastructure to a commercial third party.

As a wealthy region whose business owners have access to substantial funds, there also remain questions around the willingness of GCC network operators to co-locate on third party towers and surrender the concept of the network as a strategic advantage.

There have been rumors of tower sales and joint ventures in the Middle East in the past, yet with complex ownership structured meaning there are many stakeholders to convince, no deal has been consummated to date. There remains an opportunity for Zain to achieve first mover advantage, but we expect Etisalat to maintain a watching brief and to evaluate their own tower strategy in the meantime – Etisalat were able to beat Airtel and MTN to market with their tower sale in Nigeria, attracting a healthy valuation, so we expect moves and counter-moves before the dust settles on what would be the first major tower transactions in the Middle East.

Sticking with MENA, it seems that the long anticipated MobiNil transaction may be closing in the next few weeks. Reports on the grapevine that Eaton Towers would scoop the estimated 3,500 towers have been all but  confirmed with the registration of Eaton Towers Egypt Limited in the United Kingdom on March 2. Unconfirmed reports suggest MobiNil may retain selected towers in Cairo, while the status and security of the towers in Sinai remains to be seen.

TowerXchange will analyse the transaction in more detail when the deal is announced.