Breaking new ground: how the first MENA deal could open the door to a flood of new tower deals

In the wake of the Eaton/MobiNil deal and following the commencement of two more substantial tower sales in the MENA region, TowerXchange assesses the opportunity to invest in an independent tower market in the MENA region, which towercos may be interested in acquisitions in the region and how the MENA tower landscape differs from comparable markets in SSA and Europe.

The concept of ‘MENA’ is a fairly loose description, dictated by geography and religion rather than by socio-economic factors. Indeed, wealth and mobile usage in the region varies dramatically, with Gross National Income per capita hitting just US$3,000 in Morocco but reaching US$86,000 in Qatar, almost 30 times more (Source: World Bank). Consequently, mobile usage is heavily varied across the region, with Kuwait and Algeria having 73% and 17% of their populations able to access mobile broadband respectively.

Although many regions still have heavy state involvement in telecoms, and often the mobile market leader is a former or partially-state owned entity, there are several entities who lead the telecoms landscape across the region, as well as having a presence in SSA and elsewhere. Ooredoo, for example, operates in Oman, Algeria, Tunisia, Qatar and Kuwait and Zain provides services Bahrain, Iraq, Jordan, Kuwait, Lebanon, Morocco and Saudi Arabia. Saudi market leader STC is also present in Kuwait and Bahrain. With Etisalat operating in KSA, Morocco and Egypt, and Orange and Vodafone active in several MENA countries between them, there are plenty of potential tier one tenants in the market.

As the availability of 4G-enabled devices has increased and the popularity of new handsets has soared, operators in the Gulf region have scrambled to bring their networks up to scratch in order to improve capacity and QoS and fight off a new round of competition for subscriber numbers.

Across the Gulf region, 3G is well established and 4G has been rolled out in urban areas for several years. Indeed, in 2011 all three Saudi operators (STC, Mobily and Zain) claimed to be the first in KSA to launch a high-speed network, which made KSA one of the first countries globally to roll out 4G coverage.

In the UAE, du and Etisalat are also racing to provide extensive 4G coverage to meet customer demand, with du announcing a 25% acceleration in 4G rollout in 2014 due to huge demand.

Qatar and Oman launched 4G services in 2012, with Ooredoo offering 4G across all of Qatar by early 2014.

Kuwait fell slightly behind the curve, as a lack of telecoms infrastructure meant 4G could not be launched until 2013, but investment in passive infrastructure has allowed Kuwait’s operators (Zain, Wataniya and Viva) to roll out rapidly in an attempt to capture market share.

Across the North African part of the region, where GNI is considerably lower and political upheaval has slowed technology roll-outs over the last few years, mobile data has penetrated less deeply into the market and has been slower to roll out.

In Algeria, state owned Telecom Algeria is leading the charge in taking Algeria into the 4G era. Fixed wireless LTE was launched in May 2014 with mobile 4G set to be rolled out in 2015.

Tunisia could see its first commercial 4G mobile service by the end of 2016, the country’s newly appointed ICT and digital economy minister, Noomene Fehri, said in a recent radio interview. LTE is viewed as a key component of the high-speed broadband services Tunisian citizens must be able to access in order to guarantee the success of the ‘Digital Tunisia’ national development strategy.

Moroccan telecoms regulator, the Agence Nationale de Reglementation de Telecom (ANRT), has announced that it had awarded three 20-year (LTE) licences to the country’s mobile operators – Itissalat Al Maghrib (IAM, Maroc Telecom), Inwi (Wana) and Medi Telecom (Meditel). The operators are required to establish and operate 4G networks covering 65% of the Moroccan population within five years from the date of licence authorisations, and must provide minimum average download speed of 2Mbps for 90% of the population.

Egypt, well covered by 3G at present, plans to award 4G licenses in June 2016, with conditions being announced nearer the time. However with parliamentary elections being pushed back several times in 2015, there is some uncertainty as to whether the government will be in a position to make decisions according to the timescales they have set out.

Although there have been some bi-lateral swaps in the MENA market, independent towerco activity was minimal before the Eaton/MobiNil deal to transfer 2,000 towers in May 2015. Existing infrastructure sharing agreements in key markets such as KSA and UAE may well raise interest in any towers to come to market over the next 12 months, given the number of deals between MNOs in these markets.

How will the MENA tower market differ from its obvious comps in SSA and Europe? Much remains to be defined, including the regulatory regimes around infrastructure sharing in many markets, but what seems certain is that there is capital interested in MENA towers, and there is growing appetite from the region’s MNO’s to monetise passive infrastructure.

TowerXchange estimates that the average valuation per tower in Africa is around US$130,000 and in Europe around €111,000. Of course much depends on the deal terms; the length of the contract, the amount of equity sold and upfront cash versus long term leaseback costs. Of course, potential valuations will also be affected by the fact that most countries, including the three largest markets, host only three nationwide MNOs and in some cases there are only two potential tier one tenants. The knock-on effect of these smaller markets may be that they appeal to niche towercos who can create a profit in more creative ways, rather than those following a more traditional model of focusing on growth through increased tenancy ratios.

In countries with a huge urban population and an established mobile market, such as Dubai, the need for infill through solutions such as DAS and small cells may well draw the attention of towercos who are well versed in working in established markets such as Europe and whose expertise lies beyond the simple construction and maintenance of towers.

North Africa, however, appears to be flowing a more SSA model in terms of tower expectations. Certainly there is more room for growth in the North African markets, although equally less wealth and fewer tier one tenants.

This aside, it’s clear that in both the wealthy and less affluent markets the data boom is on an upward curve, meaning the demands on infrastructure are increasing and there is scope for significant growth for the right towerco.

Expressions of interest have been solicited and received in two parcels of MENA towers: 9,200 Mobily towers in the Kingdom of Saudi Arabia and further 5,000 Zain towers in the same market, together with around 1,600 Zain towers in Kuwait. TowerXchange also understands one of Algeria’s operators are appointing an advisor to explore the divestiture of ~6,000 towers.  Together with the already announced Egypt transaction, we could see tower transactions in MENA’s three largest tower markets within the next year.

“This is a model that is just being introduced in MENA and Egypt so I believe that people will look at it carefully and if it’s successful I’d expect that it can be replicated,” said Kais Ben Hamida, the CFO who championed MobiNil’s tower sale. “In Egypt itself we have 19,000 towers so there’s certainly potential for replication here and also in other countries in the MENA region. So yes, I would expect that people will be looking at this transaction to see how it evolves.”

Experts on Middle Eastern towers suggest that the ‘domino’ effect will come into play in the MENA region. While the current penetration of towercos in MENA is just 1.4%, TowerXchange forecast that 17% of MENA’s 139,800 towers will be owned and operated by independent towercos by the end of 2016, rising above 25% by 2017.

Over the next few months, the sale of towers in KSA, Kuwait and Algeria will allow the region to determine its own towerco identity, whether that is more closely aligned to the SSA sale and leaseback model, or whether the operators will prefer to keep a chunk of equity in the venture remains to be seen. Once the initial tower sales are completed, independent towercos will have an opportunity to prove their worth in the region, and we consider it likely that operators will begin to feel more comfortable with the concept. This may well result in less equity being retained and in larger packets of towers coming to market.

TowerXchange will continue to watch the MENA region with interest, and predicts this region will become one of the most active for asset transfer over the next two to three years.