Contrasting the appetite to divest towers among the top African and Middle Eastern MNOs

With the tower transaction deal flow in SSA slowing during 2015, TowerXchange surveys and summarises the landscape of opportunity both in SSA and the emerging tower market in MENA. We examine passive infrastructure monetisation to date at 23 different MNOs. Where tower deals have been completed, what deal structure has been preferred, what was the balance between cash released and opex stabilisation (and why?) What’s left for towercos to buy?

Even though towercos own less than 30% of SSA’s towers, many of the most prized tower portfolios have already been snapped up. Let’s review the balance sheets of Africa’s ‘Big Six’ MNOs to see what towers are left and the prospects of them being sold.

Airtel: Airtel has sold or is in the final stages of selling their towers in 10 of 17 African countries. Those towers Airtel have retained are now subject to increased uncertainty as Bharti Airtel considers a partial exit from Africa, as indicated by their confirmed negotiations with Orange to sell five opcos. Airtel have retained a substantial portfolio of towers in both DRC and Tanzania, but those towers lose value with every co-location sold by Helios Towers Africa, particularly in the context of the aggressive market entrance of Africell and Viettel respectively, both of whom will become key tenants on HTA’s existing towers. Airtel’s Madagascan towers have some value, but the market for them is somewhat stalled by the strength of local player TowerCo of Madagascar (ToM), and their apparent reluctance to meet the asking price for the Airtel towers – no-one else, it seems, fancies competing with ToM. While Chad would have made a compact but sensible acquisition for HTA, particularly if they could bundle the Airtel towers with Millicom’s, the cancellation of that transaction makes it unlikely another towerco will have much interest, both due to an unfavorable regulatory environment and due to Airtel’s negotiations with Orange to exit Chad. And finally, it seems unlikely that Airtel pushed very hard to divest towers in Sierra Leone or the Seychelles due to reasons of competition and scale respectively. In summary: when the five announced but unclosed Airtel African tower deals close, there is not much left on their balance sheets to attract SSA towercos.

Etisalat / Maroc Telecom: We’ll consider these companies together both because Maroc Telecom’s recently acquired Atlantique Telecom portfolio so recently sat on the Etisalat balance sheet, and because Etitsalat owns a 53% stake in Maroc Telecom, although the Moroccan giant controls it’s own destiny insofar as tower strategy is concerned. Etisalat has monetised their Nigerian towers, has a process under way in KSA, and has entertained the idea of divesting towers in Tanzania and beyond – so Etisalat is playing the tower game. Maroc Telecom seem less inclined to play, with a strong predilection to retain and control passive infrastructure. That could change, particularly as Airtel tower deals introduce towercos into several of their territories, but for now consider the Etisalat and Maroc Telecom axis a blend of positive and negative attitudes toward tower divestiture, with some interesting assets remaining on their balance sheets.

Millicom: Once upon a time the Millicom were first movers and leaders in African tower divestiture as they embraced partnerships with HTA to monetise towers in Ghana, DRC and Tanzania. But that’s where the strategy ended and, apart from a few mutterings of a potential deal in Chad which would have gotten louder had HTA’s deal with Airtel there not been cancelled, Tigo’s towers in Chad, Sierra Leona and Rwanda remain on their balance sheet. In terms of monetising Millicom’s African towers, the job is effectively 70% done, but whether the remaining 30% of towers comes to market remains to be seen.

MTN: South Africa notwithstanding, the most investible MTN towers have already been transferred to towercos, albeit with Africa’s leading MNO retaining substantial equity stakes in selected markets. MTN may yet divest further towers in their small opco cluster, and if and when country risk levels normalise there may be a market for their towers in Syria and Iran, but in the near term the last passive infrastructure assets on MTN’s balance sheet which the towercos are aggressively pursuing are the ~9,000 towers they have in South Africa. In summary, MTN is probably a little over half way in terms of the value of passive infrastructure assets they could bring to market.

Orange: Orange may have only agreed deals with towercos in three markets (Cameroon, Cote d’Ivoire and Egypt), but they represent three of their most investible markets – negotiations to acquire five opcos from Airtel notwithstanding. Another attractive asset portfolio in Senegal may be coming to market under an MLL deal structure, bundled with less attractive portfolios in Mali and the Guineas. Mobinil may not be done monetising Egyptian towers, having announced the sale of around a third of their towers to Eaton. Similar verdict to MTN: Orange is probably a little short of half way in terms of the value of passive infrastructure assets they could bring to market.

Vodacom / Vodafone / Safaricom: Yes they’re different entities, but the three brands in which Vodafone PLC have substantial equity stakes share a common philosophy toward tower monetisation: they do it selectively, and they are seldom first movers. It seems they are unlikely to ‘select’ to monetise their prized towers in South Africa and Kenya, indeed only Vodafone Egypt’s towers seem ripe for monetisation, given the entry of Eaton towers into the market. In summary: with the possible exception of Egypt, don’t expect any tower transactions to come out of this group of companies in the next 12 months.

Divergent answers to this question. Some towercos contend that they would be happy to acquire towers from, or build towers for, a tier two MNO providing the structure of the deal insulates them against excessive credit risk. Such deals would be particularly attractive as supplements in a market where the same towerco had secured tier one MNO assets.

Other towercos seem to take a position that there are ‘bigger fish to fry’ in terms of partnering with more credit worthy anchor tenants. Certainly Africa’s MNOs will need to invest a lot of management bandwidth into integrating and upgrading the almost 50,000 towers they have acquired since 2010.

One truth everyone agrees with is that, insofar as towercos have appetite for tier two MNO assets, by definition such assets have less tier one MNOs as tenants, thus a higher proportion of new co-locations are likely to come from market leading MNOs.

Eaton’s acquisition of 2,000 towers from Mobinil, about one third of the operator’s stock and around 10% of the country’s inventory of sites, will be a bell-weather for a potential acceleration in tower divestitures in MENA. This acceleration is already evident in the expressions of interest received in 9,200 Mobily towers and 5,000 Zain towers in KSA – Zain is also selling towers in Kuwait and South Sudan. Deal valuations and tower market structures are likely to be different in MENA from SSA, both because the replacement cost of towers is generally low, the grid is more extensive and reliable, and because the potential to lease up the towers is limited by smaller, albeit more rational, MNO competitive landscapes. TowerXchange expect a tower transaction pipeline to open up in earnest in MENA in the next 12 months, driving towerco penetration from 1.5% in Q3 2015 to 13.5% by Q3 2016.

Almost any article about the towerco business will compare three different deal structures: pure sale and leasebacks (SLBs), retention of equity in joint ventures with towercos, and manage with license to lease (MLL) deal structures. But a deeper understanding of the genuine drivers behind transactions and the valuation of towers is found within the nuances within deal structures. The nuances in SLBs are all about the balance of cash released versus leaseback rate. For example, Cell C maximised upfront capital in their deal with American Tower in order to raise capital for rollout and to grab market share, but in doing so agreed a high leaseback rate which some commentators feel distorts the South African tower market to this day. In contrast, Vodacom Tanzania accepted a lower valuation per tower in an effort to stablise opex, of which leaseback rates are a primary component. In an even more direct comparison; in 2010 Tigo realised a valuation of US$120,000 per tower in Ghana, while MTN’s towers were transferred at US$228,375. MTN’s towers were not worth nearly twice as much – they simply took more cash off the table and agreed a higher leaseback rate.

Where an MNO retains substantial equity in a joint venture towerco, that will also be traded off against the amount of cash unlocked and the degree of opex stabilisation. Nigeria provides a good example here: market leaders MTN’s towers changed hands for less than US$200,000 per tower – a good valuation but still almost 10% lower than Etisalat realised selling to the same counterparty, IHS, despite MTN having 43% market share relative to Etisalat’s 16% (source: NCC, June 2015). One of the main reasons for this valuation differential was that Etisalat Nigeria ‘cashed out’, selling 100% of the equity in their towers, whereas MTN retained 51% equity to ensure their objective to maintain a degree of financial control, if not operating control, over their prize Nigerian portfolio.

We may only fully understand and evaluate MTN’s preference to ‘hedge their bets’ by retaining equity in towercos in selected markets if and when one of their partner towercos exits. Similarly, we may only fully understand and evaluate MLL deals, as favored by Orange, when the term of that agreement concludes and the long term future of the towers becomes clear.

Since the entry of independent towercos into the market, the quality and immediacy of available towers has improved substantially across the continent. With a brief spell of operational turbulence in one market being an exception, SLAs have largely been met and uptimes are generally excellent.

Towercos have facilitated accelerated time to market for new entrants (sometimes to the chagrin of anchor tenants!) Meanwhile, the engagement of African towercos in provision of turnkey energy services has fostered new centres of excellence in energy management and energy efficiency – providing a further opportunity for towercos to create margin and value. Ultimately infrastructure sharing is unlocking genuine efficiencies and making investment in African ICT a safer bet.

In the near term, MNOs are exerting downward pressure on lease rates, particularly in markets where forex slides put extra pressure on opex. To date towercos have largely resisted that downward pressure on lease rates, but lease rate negotiations in the relatively small market of Ghana, where the Cedi has been in freefall, will seem like a minor skirmish compared to Nigeria, where the Nira is sliding. With components of tower leases in USD, and with tower leases forming a substantial portion of opex, particularly where a turnkey energy service is bundled in, lease rates are going to be a hot topic in 2016.

The ebb and flow of licensed operators, new entrants and consolidation, affects most tower markets, particularly in SSA which still features some markets yet to fully liberalise (e.g. Ethiopia and to a lesser extent Angola) as well as other markets which seem over-populated with MNOs (e.g. Ghana, where the regulator is seeking to limit LTE to indigenous operators adding to an already present six MNOs serving a population of just over 25mn). Most commentators expect a degree of MNO consolidation in the long term, which may on the one hand lower the glass ceiling on prospective tenancy ratios, while at the same time increase the credit worthiness of those tenants.

MNOs will soon start to look beyond tower sharing to consider sharing transmission, fibre and data centres. Nowadays Africa’s towercos have drafted contracts with the potential for active infrastructure sharing in mind, so terms and pricing are set, but MNOs’ appetite to share radio equipment as well as passive equipment is growing.

The near term focus of African and Middle Eastern towercos remains on ingesting assets; transferring assets and people, novating leases, deploying improvement capex and commencing efficiency programmes.

Do towercos in MEA still have appetite for more towers after the Airtel transactions drove many to scale? Certainly we believe further tier one MNO’s will continue to be fiercely fought for towers in large, competitive mobile markets with a mature regulatory environment. The prospective sale of MTN’s South African towers being a case in point where at least five credible international towercos are jockeying for position and an opportunity to bid on the assets – if indeed an open auction is inaugurated, given the depth of MTN’s partnership with IHS.

Towercos are starting to prepare themselves for the next major liquidity event, with commentators divided as to timescales: anywhere from 12-36 months hence. Either way, management and early stage investors will be anxious to sell high to take advantage of soaring valuations in the telecom infrastructure asset class (witness the valuations of AMT, SBA, CCI, Bharti Infratel and Cellnex). This creates tremendous pressure on towerco management teams tidy up balance sheets. High valuations for the towerco asset class amplifies the probability of IPOs, but lessens the chance of a private equity exit / new entrant merry-go-round, given the valuations nextgen equity would have to meet.

Download TowerXchange leading Africa & ME MNOs