How the new Nigerian tower market will work

Nigeria is Africa’s largest telecoms market, where towercos own 79% of the country’s 29,250 towers. We take an in depth look at dynamics in the country, looking at opportunities for co- locations, build to suit and future transactions as well as challenges related to power, pricing and landlord relationships.

65% of IHS’s towers are in Nigeria – the country currently dominates their portfolio, and they currently dominate Nigeria, owning 54% of the country’s towers and building the lion’s share of new sites.

Whilst IHS rolled 8,850 towers MTN Nigeria into a joint venture towerco, and acquired a further 2,691 towers from Etisalat during 2014 and 2015, IHS were already very familiar with the assets having built many of Nigeria’s new towers over the 14 years in which they’ve operated in the country.

When co-founders Issam Darwish and William Saad first came to Nigeria they were intent upon establishing what would have been the country’s first GSM operator. They turned their attention to building and managing towers, and, since its foundation in 2001, IHS has accumulated a reputation for operational and technical excellence.

The company has since expanded to a multi- country footprint with a distinctly West African flavour, and evolved from a roster of PE-backers so a combination of family fund (Wendel) and sovereign wealth fund backers, providing a substantial acquisition warchest filled with patient capital. IHS takes a conservative approach to debt, and say they are currently only levered 4x (relatively low given the longevity of towerco contracts). IHS has improved terms with debt providers significantly as the business matured, enabling IHS to compete in auctions with the likes of American Tower with their low cost of capital.

In 2016 IHS completed the acquisition HTN Towers. HTN Towers was an old growth organic build play, having built over 700 towers across Nigeria under their original guise of Helios Towers Nigeria. Their build to suit portfolio was supplemented by the addition of 491 Multi-Links towers claimed as a legacy of the restructuring of the aforementioned CDMA operator. HTN Towers boasted one of the highest tenancy ratios in Africa at 2.2 tenants per live tower and represented a highly attractive acquisition for Nigeria’s leading towerco. IHS has also agreed the purchase of 160 sites from Hotspot Network which were built under BTS agreements with Airtel and Etisalat (although the deal is yet to close). Read more on the transactions in our two articles “TowerXchange’s analysis of IHS’s acquisition of HTN Towers’ 1,211 towers” and “Challenges for African middle-market towercos and Hotspot’s tower sale to IHS”.

While an IPO is a likely exit strategy for many of IHS’s investors, there is no pressure to list, which is especially pertinent now given the uncertainty in the market caused by the MTN Nigeria US$1.7bn fine.

American Tower is in the process of integrating 4,700 towers acquired from Airtel Nigeria for US$1.09bn. The transaction marked the world’s largest independent towerco’s debut in SSA’s largest economy and largest wireless market. American Tower has placed a sizable bet on Nigeria: according to the towerco, at the end of Q3 2015, Nigeria represented 44% of American Tower’s EMEA revenue. With the integration of Airtel Nigeria’s towers, which come with a ten year anchor tenancy, AMT’s average tenancy ratio across EMEA fell from 1.7 to 1.5, suggesting the Airtel Nigeria towers were acquired with a tenancy ratio of around 1.2.

American Tower will offer a full service power model from the get-go in Nigeria, leveraging the expertise they have built in turnkey power management as their Ugandan and Ghanaian businesses transitioned to that model. Gordon Porter, formerly CEO at ATC Uganda and ATC Ghana, now leads the ATC Nigeria team.

There is a fragmented ecosystem of small towercos and private tower owners in Nigeria. The largest are BCTek, which has a 20 year contract to manage and market a portfolio of 700 towers originally built as a surveillance network, over 80% of which are police compounds. Also of note is Communication Towers Nigeria, which claims to have 500 cell sites across all 36 states.

Nigeria generally has high quality telecom towers. Initially over-specced by MNOs, then later built for co-location by towercos who have tended to deploy 45-50m structures, most towers are robust and have wind load capacity for three or four tenants. A culture of co-locating rather than building has existed for almost a decade in Nigeria, and the country’s towers have some of the highest tenancy ratios outside the Americas. Apart from the most recently constructed vintage, IHS’s portfolio has a tenancy ratio well above two, with solid lease rates that are currently holding up against downward pressure from challenging trading conditions for tenants.

The proven healthy Tower Cash Flow (TCF) generated in Nigeria means acquisitions are expensive: the average price paid for a Nigerian tower in the 2014- 15 sale and leaseback transactions was US$209k.

But those acquisitions are expected to pay near term dividends. MTN, Etisalat and Airtel have pent up demand to get on each others’ sites, with the MTN network (almost twice the size of Airtel or Etisalat’s) expected to be particularly swiftly leased up. You can literally see what’s going on: if you drive around downtown Lagos, you’ll see a lot of towers, and a lot of equipment on those towers. You’ll also experience a lot of call drops – capacity is a major challenge in urban Nigeria, and QoS as a differentiator has been the battleground for Nigeria’s highest value customers.

It no longer makes sense for Nigerian MNOs to build a new tower rather than co-locate – even if they could get a permit, the time to market advantages of taking a matter of weeks to hang their equipment on an existing tower versus months to build a new site mean network planning has evolved to strongly favour co-location.

Where co-location isn’t an option, the majority of new towers are being built to suit by towercos – with the exception of Globacom Nigeria’s MNOs don’t build their owns sites now. The cliché holds true in Nigeria: “each individual tower is a monopoly” meaning competitive towercos will seldom build another tower within 3-4km of an existing tower, urban infill sites for capacity notwithstanding. The structure of the market thus lends itself to the efficient deployment of capital and resources – a model many of the regulators of less progressive tower markets might care to study.

Of course, it’s not just about efficiency but also about the creation of value through organic growth. To date, IHS has boasted double digit organic growth in Nigeria, and regularly builds a quadruple digit count of new sites per annum. With organic growth slowing across Africa, compounded by MTN’s US$1.7bn fine from the NCC throwing some doubt on their previously announced US$1bn capex budget in 2016, there is reason to be cautious about Nigeria’s BTS market. Who will build each MNO’s towers? Airtel are believed to be contractually tied to ATC Nigeria for BTS – and their entry into the market will eventually create some pressure on pricing that had been hitherto quite stable. While IHS has no contracted right of first refusal on MTN and Etisalat new builds, they remain bullish that their anchor tenants will come to them first on the basis of performance, and with MTN retaining a 51% stake in their joint venture towerco partnership with IHS, there is good reason to suspect this will be true.

While Nigeria’s MNOs could never be described as enthusiastic to sell their ‘crown jewel’ tower networks (a policy Globacom clings to today), since 2008 a growing proportion of the country’s MNOs have come to think that tower deals made sense as a form of vendor finance. While the CDMA operators were first movers, yielding an uncertain proof of concept for towercos struggling in the turbulence in the wake of the CDMA operator’s loss of market share and financial turmoil, after many years of evangelising infrastructure sharing the culture in Nigeria has gradually shifted to an acceptance of the tradeoff of higher usage fees for better operational performance and improved time to market.

In 2014 Airtel and Etisalat’s towers coming to market forced MTN’s hands, and all three MNOs divested their towers, selling a total of 16,241 towers and raising over US$2.5bn. We don’t believe IHS were the highest bidder for either Etisalat nor MTN’s towers, but they leveraged their achievements in operational excellence to win the deals; they simply knew the cost base in Nigeria better than rival bidders. Another factor in IHS’s favor was their willingness to allow MTN Nigeria to retain 51% of the equity in their joint venture towerco, creating what executives call a “smart structure to avoid impeding exit,” whilst ensuring operational control.

The land grab phase of the Nigerian tower industry is probably over. NATCOM, the legacy of the CDMA operators, may have around 550 towers left on their balance sheet, and Globacom are believed to have around 6,000. Given Mike Adenuga’s personal control of Globacom, they’re unpredictable: he could start a process to sell those towers tomorrow, he could never sell. We won’t know until it happens.

Lease fees remain confidential but healthy in Nigeria. The market generally defines lease costs as a set usage fee for space with a variety of different escalator models employed. Most tower leases in Nigeria are CPI indexed, and some of the currency risk is offset with a proportion of revenues US dollar linked. With currency depreciation in Nigeria linked to falling oil prices, there is a natural hedge as when the price of oil comes down, opex costs come down. Both IHS and ATC charge a lease rate all inclusive of power.

Power is the big differentiator between African and U.S. tower markets. Most Nigerian cell sites have one if not two DGs on site, a fuel tank (containing a very liquid asset!), battery banks and an increasing amount of solar panels. The presence of an entrenched ‘diesel mafia’ and the value of equipment on sites means security is a big issue, and effective remote monitoring is a quality of service differentiator.

IHS Nigeria reported that sites newly acquired from operators were typically burning 1,600L of diesel per site per month initially, which they’ve reduced to an average of 1,200L now, with technology path to reduce that to 700L. A lot of the gains are made through battery hybridization and solar, while there’s an increasing use of gas at Nigerian cell sites.

IHS are delivering better than 99.9% uptime on their sites, and whilst it is too early to fully report on American Tower, Airtel Nigeria have stated that both IHS and ATC are strong in delivering power uptime on sites although there is still a lot of refurbishment work that needs to be done.

American Tower and IHS are not capital constrained. Both towercos are proud of their acheivements in optimising their cost base and performance, and happy to capture the full value of those achievements on their own balance sheet. As such, while the independent towerco business model remains more conducive to the adoption of energy efficient solutions, there is no imperative to buy energy by the kWh and migrate toward an energy services company (ESCO) business model. Having said that, Nigeria remains host to most of SSA’s landmark hybrid and renewable energy proofs of concept. While the ESCO business model may be seldom seen today, Nigeria will probably be the first country in SSA to see the model rolled out at scale.

Now that IHS Nigeria control most of the towers, they have an opportunity to rationalise consolidated networks. While decommissioning is value accretive for towercos, consolidating tenancies on one of two overlapping towers whilst eliminating the lease, operations, administration and maintenance costs of the decommissioned tower, don’t expect widespread decommissioning in Nigeria, where QoS is notoriously poor. Most of the duplicate towers are in urban areas where data demand requires infill sites, and where many towers are at or approaching their structural capacity. Even if there is structural capacity to consolidate tenancies on urban structures onto a single tower, the overlapping tower is likely to be retained or mothballed to provide supplementary structural capacity as 4G is rolled out.

TowerXchange wanted to know if there was much threat from ground lease aggregators in Nigeria. “We try to acquire the land for new sites, if we can’t buy we’ll enter a long term lease,” said one towerco. “We’ll allocate budget to acquire underlying leases next year.”

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Key stakeholders in the Nigerian tower industry will be joining MNOs and towercos from across MEA at the TowerXchange Meetup Africa & Middle East! Come and join the industry’s most focussed and influential gathering of tower industry professionals on October 19-20 at the Sandton Convention Centre, Johannesburg!

Plus interested in further insights into the Nigerian market? Read our insights into IHS’s acquisitions of HTN Towers and Hotspot Network and hear Airtel Nigeria’s perspectives on managing towerco relations

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