Operational risks delay development of Senegalese tower market

BMI View: Following the completion of Mobinil’s tower sale in Egypt, we expect Orange to turn its focus to completing a deal for subsidiary Sonatel’s towers in Senegal and across West Africa. While local operating risks in Senegal have likely been the cause of delays, Sonatel’s strong market position and the country’s rapidly growing data market create an attractive opportunity for one of Sub-Saharan Africa’s leading tower companies.

Orange first announced that it was considering selling off Sonatel’s tower assets in Senegal, Mali, Burkina Faso, Guinea and Guinea-Bissau in 2013, but has made little progress on the plan since then. BMI believes one of the main causes of the delay in the implementation of tower sharing in Senegal is due to strong opposition from Sonatel’s workers’ union. As one of the country’s largest and most successful companies, Sonatel’s union has considerable clout with the government, which still retains a 27.67% stake in the operator. We believe this has hindered Orange’s ability to implement tower sharing and other managed services strategies, despite holding operational control and a 42.33% stake in the operator. A further 25% stake is floated on the BRVM, Francophone West Africa’s regional stock exchange, and the final 5% is held by employees.

The strength of unions in Senegal is reflected in BMI’s Operational Risk data for the country, where Senegal scores poorly in the Cost of Labour category compared with other markets where Sonatel operates, and compared with the Sub-Saharan Africa regional average. However, Senegal also has a weak score in the Electricity and Fuel category, which assesses the cost of electricity, generation capacity and the quality of distribution networks. With staff and power accounting for a large share of network operation costs, these data suggest that Sonatel’s operational costs are high, thus underpinning its desire to improve efficiency by selling its assets to a tower firm. Despite these weaknesses, Senegal’s aggregate Operational Risk score beats every other country where Sonatel operates as well as the regional average, highlighting the country’s overall attractiveness as an investment destination.

Senegal vs regional operational risk indicators, 2015

BMI expects Orange will eventually manage to come to an agreement with Sonatel shareholders on a tower outsourcing strategy, although this may require making a few concessions to the union. One development that bodes well for progress on a Sonatel deal is the conclusion of another drawn out process - the sale of Orange’s Egyptian unit Mobinil’s towers to Eaton Towers in May 2015, in a sale and leaseback (SLB) agreement. Notably, this marked a return to outright sale of towers, not undertaken by Orange since Uganda in 2012, Orange having since opted for manage with licence to lease (MLL) agreements in Côte d’Ivoire and Cameroon. Since these earlier agreements in 2013, tower companies have increasingly favoured SLB deals, which give them greater control over their long term strategies. If Orange’s appetite for SLB agreements extends to West Africa, this will increase the appeal of Sonatel’s tower assets among tower firms.

Despite the operational risks highlighted above, there are many factors that make Senegal an attractive prospect for the region’s tower operators. These include: the presence of Orange as a solid anchor tenant; Tigo, another major regional player, as a secondary tenant; a sharp acceleration in take-up of mobile data services in 2014; and the anticipated allocation of 4G licences.

Orange (Sonatel uses its parent company’s branding) is by far the largest operator in the country by subscriptions, with 8.1mn subscriptions by the end of 2014 for a market share of 56.3%. Although Sudatel-backed Expresso has gradually chipped away at Orange’s share, the latter’s subscriber base has grown steadily, up nearly 14% over the two years to December 2014, despite approaching market saturation. BMI believes Expresso’s gains have been mostly among low-value subscribers, given that Orange’s ARPU erosion has also been gradual, by Sub-Saharan African standards. Orange reported blended mobile ARPU of EUR4.7 (USD6.27) in Q414, down from EUR5.5 a year earlier. Alongside Orange’s position as a leading regional operator, its dominance of the Senegalese mobile market makes it an attractive partner for tower firms.

Senegal mobile market shares (%) 2011-14

Senegal’s second mobile operator, Tigo, also has a strong regional presence as well as a history of tower sharing across other markets. Early on, in 2010, Tigo sold its towers in Ghana, Tanzania and the Democratic Republic of the Congo (DRC) to a joint venture with Helios Towers Africa. While it has not sold any assets in its remaining markets, also including Rwanda and Chad, if Sonatel reaches an agreement to sell its towers, Tigo may be prompted to quickly follow suit in order to secure a good valuation. We have observed that, as a rule, the first operator to sell towers gets the best price per tower, with every subsequent deal dropping in value as the number of duplicate towers increases. Tigo’s history of tower sharing therefore makes it a fairly reliable second tenant for any prospective tower firm, with the potential bonus of acquiring a second batch of towers in the market.

Third operator Expresso has no history of selling tower assets. However parent company Sudatel has struggled financially since 2013, owing to the challenging macroeconomic situation in its domestic market of Sudan, as well as the underperformance of its other operations in West Africa. While Expresso may not be a likely seller, Sudatel’s financial circumstances also make it a potential co-location partner as it seeks to continue expanding its network and market share.

Senegal’s mobile market reached a penetration rate of nearly 99% by the end of 2014, with slowing subscriptions growth over the last year suggesting approaching saturation, at least in urban areas. Nevertheless, usage has been on the rise, with telecoms regulator ARPT reporting that total voice traffic increased by 24.4% year-on-year in December 2014, while the number of 2G and 3G data users rose by a very impressive 223% during 2014. Although BMI believes the majority of these users still rely on 2G technology, the cost of smartphones dropped significantly during 2014 and mobile operators are launching innovative bundled smartphone and service plans, both of which we expect to drive steady growth in 3G subscriptions throughout our forecast period. We forecast 3G subscriptions to rise from 2.2mn in 2014 to more than 6.7mn by the end of 2019. This increase in demand will require ongoing densification and upgrades to mobile networks, creating solid revenue growth opportunities for a prospective tower operator.

2G/3G subscribers (’000) 2013/14

Meanwhile, both Orange and Tigo completed 4G trials in March 2015. The aim of the trials was to assess quality of service and inform the regulator on how to proceed with 4G licence auctions. The ARPT has not yet announced a timeline for 4G licence allocations, but BMI expects it to occur within the next two years.

The anticipation of 4G licences is attractive to tower firms on several levels. The new technology will require network upgrades and boost demand for data and therefore capacity on tower infrastructure. The allocation of 4G licences also opens the possibility of new entrants to the market, either as full mobile network operators or as data only providers, thus creating potential opportunities to increase tenancy ratios. Finally, the high cost of rolling out 4G networks is the strongest argument for network sharing, and the allocation of 4G licences will therefore encourage tower sharing among any operators not already co-locating capacity. These opportunities depend, however, on Sonatel reaching a sale agreement before the emergence of 4G.

Our positive outlook for take-up of 3G and, over the longer term, 4G mobile data services is further supported by Senegal’s improving macroeconomic environment. While real GDP growth averaged just 3.2% between 2010 and 2014, BMI’s Country Risk team forecasts robust growth of 5% in 2015 on the back of economic reforms and heavy investment under the administration of President Macky Sall.

This will be the fastest economic growth in Senegal since 2007, and we forecast it to be sustained with average annual GDP growth of 4.7% between 2016 and 2019.

Private consumption will be the major driver of real GDP growth in 2015, contributing 3.4 percentage points to the headline figure. Growth comes from a low base, though, as most of Senegal’s population is poor. The USD916 GDP per capita we forecast for 2015 is actually a decline on 2014’s USD1,084 (though this is in large part a result of the depreciation of the euro-pegged West African franc against the dollar), and places Senegal outside the World Bank’s lower-middle-income countries bracket, less than USD1,046 per capita. However, the collapse in oil prices in the second half of 2014 led to a 10% drop in the cost of fuel in Senegal in January 2015, while the government has also cut prices for other necessities such as rice, flour and gas. This will enable consumers to divert spending towards non-essential goods and services, such as mobile voice and data. We forecast average annual private consumption growth of 4.8% between 2016 and 2019, and GDP per capita to rise to USD1,158 by 2019.

Meanwhile, Macky Sall’s government is tapping global debt markets to finance heavy investments in developing new infrastructure essential to future growth. Senegal launched a USD500mn eurobond in 2014 and plans to return to the international bond markets to issue another eurobond of up to USD1bn in 2015. In February 2014, President Sall also secured USD7.8bn worth of investment pledges when presenting his investment plans at a gathering of private and public institutions in Paris. This injection of capital into the economy will also help boost demand for telecoms services from consumers, enterprises and the government.

Our brightening economic outlook is further strengthened by Senegal’s well established democratic system and stable political environment. Senegal ranks second out of 48 countries on BMI’s Short Term Political Risk Index for Sub-Saharan Africa, only tailing Mauritius, and takes fifth place for Long Term Political Risk, making it one of safest investment environments in the region.

Mobile data and economic growth forecast to 2019