Reflections on 2015: Towerco CXO keynote panel report

Whilst a lot has happened in the past twelve months, we rewind the clock to October 2015 as we take a look at the CXO panel held at last year’s TowerXchange Meetup Africa & Middle East. Ably moderated by Enda Hardiman of Hardiman Telecommunications, Chuck Green, Executive Chairman of Helios Towers Africa, was joined by Hal Hess, President of American Tower’s international business, Terry Rhodes, Acting CEO of Eaton Towers, and Nawar Atassi, a Director a MENASA-focused Towershare. Respecting the Chatham House Rule and not quoting the source of lessons learned, here is a summary of key topics discussed. We look forward to welcoming you to the 2016 Meetup to progress these discussions!

The towerco CXOs agreed that the five year land grab had been focused on the most obvious countries, where the environment best fit the towerco business model and investment thesis. “A lot has been taken off the table that is of primary interest to us,” said one towerco, “we’ve all had the luxury of making our beds strategically, helped by Airtel.”

There are still six Airtel African tower portfolios yet to be acquired by towercos: DRC, Tanzania, Gabon, Madagascar, Malawi and Chad. Madagascar might be difficult for anyone but TowerCo of Madagascar to acquire, but the others are all investible to varying degrees.

“We’re happy with what we’ve got, and we’re focusing on integrating what we’ve bought and driving toward operational excellence,” said another towerco – highlighting the main theme for Africa’s Big Four towercos in 2016.

Africa’s towercos expect some remedial expenditure – a process they will all go through in 2016 as they digest newly acquired towers. When an MNO puts towers up for sale it tends to defer non-critical maintenance and upgrades, so there is a level of improvement capex necessary to get some sites up to the required standard to make co-location partners happy.

Most MEA markets currently untouched by towercos are untouched for good reason: the market might be so small that multiple operators are difficult to sustain, other markets are relatively unliberalised so there might be a single MNO, or an MNO so dominant that the towerco model doesn’t make sense. But there are still small but growing markets which may become more viable. “We’ve built organically a portfolio of less than 300 towers which has been very profitable,” said one towerco. “That’s made us re-evaluate the minimum scale essential to operate – we’d look at opportunities with less than 500 towers. So the African tower market is a long way from being saturated.”

When it comes to inorganic growth “I don’t look at 52 countries,” said one towerco, “I look country by country, counterparty by counterparty. I tend to prefer opportunities where we’d be the first or the only towerco in a market. As all Africa’s ‘Big Four’ towerco have multi-country footprints, each also reviews new opportunities with the allocation of resources in mind.

How does the tower industry get from just under 50,000 towers today to 87,500? There are portfolios coming to market in KSA and Kuwait, Algeria could come to market. “I don’t think land grab is over, but the pace has slowed,” said one towerco, continuing: “you can’t get to 87,500 without South Africa.”

There’s clearly appetite from tier two MNOs to monetise their towers. And when towercos are seeking to expand in their existing markets, supplementary sale and leasebacks are always near the top of their capital deployment priorities. But it’s more difficult to do a market entry with a small portfolio – it takes longer to build to scale – and it may not be viable at all to do a market entry with the third of three MNOs, for example. Many towercos are more inclined to start with an organic build to suit business than to start with an acquisition of less than 200 towers in a new country.

The towerco club is clearly open to new entrant MNOs; the likes of Africell and Viettel have often become the second or third tenant on shared towers to accelerate their rollouts in what would otherwise would be difficult competitive situations.

The African MNOs have used a variety of different deal structures to monetise their towers from standard sale and leasebacks (SLBs), to manage with license to lease (MLL) deals where the operator retains ownership, to a mix where the MNO retains an equity stake in the towerco.

The first joint venture towercos in Africa were purely opportunistic on the operator’s part – seeking to benefit from the relative multiple arbitrage between theirs and the towerco’s valuations – from their perspective it was balance sheet reengineering to create shareholder value by retaining a piece of the action. Such deal structures weren’t motivated by any aspiration to retain control, and they’ve created huge value for the MNO concerned already.

Expect to continue to see a mix of different deal structures being used, driven by the requirements of sellers. Each MNO seems to have preferred deal structures, but they’ll deviate from that where market circumstances require. MTN have created joint venture towercos in Nigeria, Ghana and Uganda, they’ve sold 100% equity in SLBs in Rwanda, Zambia, Cameroon and Côte d’Ivoire, they’ve taken a direct stake in IHS, and they’re thinking what to do in South Africa. Vodafone has no corporate policy on tower deal structure, and considers opportunities country by country – although they generally seem to have less appetite for towerco partnerships. Orange has done MLL deals mostly but recently sold a third of their towers in Egypt. Millicom recently restructured their stakes in Helios Towers Africa’s local opcos for a stake in the parent company. Etisalat have preferred straight SLBs to date, while Airtel commenced their African tower monetisation with an initial thought to retain 26% ownership, but to date have sold 100% equity in each country.

Newer, smaller towercos need to be flexible. For such companies, joint ventures can be easier in terms of funding capacity, while the operator maintains an interest in their continued success. MNOs can be cautious about divesting 100% of the equity in their passive infrastructure to a new entity. Credibility that comes from experience on the ground in emerging markets, and brand recognition is important for towercos. Towercos have got to get to a point where the MNOs have confidence to turn over their network to a third party.

Ultimately it’s not really in the towerco gift to decide deal structure – the MNO defines what they want and each towerco must decide if the opportunity and the deal structure meets their investment thesis. As the valuation metrics are better understood now, there are less barriers to getting deals done.

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Throughout the 2015 TowerXchange Meetup, the potential for MTN, Telkom or Vodacom’s towers to come to market was a hot topic of discussion. While all three South African MNOs’ tower strategists were represented at the Meetup, all were understandably tight lipped about their future strategies. What we do know is that the Telkom tower sale process was discontinued, and that Vodacom runs their ~11,000 South African tower portfolio very much like an in-house towerco, leasing towers to third party tenants at commercial rates – they lack any strong incentive to divest. News of MTN’s US$3.9bn fine from the NCC emerged after the Meetup: it remains to be seen whether that will provide the financial impetus for the market leader to divest their South African towers.

If an investible portfolio of towers did come to market in South Africa, there would be no shortage of interested parties. IHS would be favorites, able to leverage their relationship with MTN, and motivated by interest in securing some lower risk “ballast” to offset their West Africa-centric portfolio. American Tower have a good view into the South African market having been on the ground since their acquisition of Cell C’s towers in 2010. Also on the ground in South Africa are Eaton Towers, who have built to suit a portfolio of almost 300 towers with a tenancy ratio above two. Also building to suit but interested to buy are Atlas Towers, while SBA Communications could be a dark horse in any South African tower process.

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We’ve seen significant spreads of valuation in African tower transactions, from US$65,575 per tower (Eaton and MobiNil in Egypt) to US$231,915 per tower (American Tower and Airtel Nigeria), but this only emphasises how well the metrics are understood. If an operator wants to maximise opex savings, they can leverage an anchor tenant lease rate below the current market rate. Others prefer a reasonable lease rate to release some cash, while we have seen some high lease rates agreed to maximise capital released for rollout. The attractiveness of the market and the quality of the assets also affects valuation, among a myriad of other factors.

MNOs in MENA are learning from markets like SSA, Indonesia and Myanmar and trying to find the model that suits them. Because MENA is a virgin landscape, decision makers in Algeria, Saudi Arabia and Kuwait are looking at the experiences in other geographies where some of their regional operators have already gotten a taste – Etisalat in Nigeria, Vimpelcom in Italy and from ongoing processes in Russia. They and their advisors generally have a preference for certain deal structures which dictate the process. Like many processes, they’re coming back with a range of lease rates and trying to determine what balance of opex reduction versus capital released best meets their needs.

The pool of capital with appetite for this sector is deepening. Near the start of the decade, the investor roadshows took in a lot less stops when towercos were raising capital. The reality is that while the opportunity will drive investment in, operational experience (and in emerging markets that’s all about managing energy) often dictates success. Would-be new entrants continue to participate in processes, but investors are realising it’s more complex than meets the eye – they value operational credibility – and increasingly the view is that late entrants may be short term players destined to either partner up or sell out.

An increasing proportion of tier one investors in telecoms have invested in towers outside the US: Providence in Brazil and Indonesia for example, are emerging market tower deals too small for most tier one investors? As the established towercos grow we may see more activity at this layer of the investment ecosystem. As usual much depends on longevity.

“We’ve talked to all the tier one telecom investors, and it is tough to find something large enough to move their needles, but they’re getting more interested as we reach scale. Some realise they missed the boat in the last 24 months,” said one towerco. “I don’t see many big transactions left. It’s difficult for the big private equity players to take part in SSA now. It costs US$75-100mn to buy in to a toe-hold in African towers these days, we’re not going to see many deals for US$500mn+ outside of South Africa, or maybe consolidated transactions in MENA.”

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The tower networks in North Africa, and the Middle East, are generally more mature than in SSA. Tenancy ratios may be driven as much by decommissioning as new build, so towercos will need a business model which makes economic sense at a lower tenancy ratio as network consolidation is harder to influence. There are still infill sites needed to cater for data growth, and still coverage requirements and pent up demand for co-location in certain geographies: “we’ve chosen regions with significant co-location potential to meet our growth objectives,” said one towerco. “If you’re careful you can find good co-location demand in markets with apparently high penetration rates and high network maturity.”

“We believe the governmental context and financial dynamics are different in North Africa from SSA,” said one towerco. “It’s challenging that stakeholders have wisened-up as to how good the tower opportunity really is – there is more regulatory interest, more national security interest, more government interest. MNOs are increasingly excited by the valuations they are seeing, and are imagining numbers on their balance sheets that might not necessarily be achievable in the context of North African markets where there may be only two or three incumbent operators, saturated coverage, and fierce competition.”

Nonetheless, the towercos were generally more bullish about opportunities to extend 3G coverage in Algeria than other more mature MENA markets. “We’ve seen this in SSA and Asia: when they fall they fall like dominoes, and we’re beginning to see an increasing number of processes and a lot of interest in MENA towers – and the success of one process piques the interest of other groups in the region. I feel we’re arriving at an inflection point – it only takes one or two deals to trigger a sizable change in the direction of MNOs’ tower strategy.”

As predicted, there are as many as five formal tower sale processes under way in MENA with 30,000 towers up for grabs – that could represent US$2bn of assets. If those deals close, expect a TowerXchange Meetup in Dubai in 2017!

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Where do Africa’s towercos see the growth coming form? 2G rollout and QoS improvements, or 3G and 4G overlays?

All of the above! Smile are in a number of countries now and recently closed US$350mn of funding – there’s clearly a belief that these guys can carve out a niche. Single spectrum new entrants seldom build their own towers; towercos have the sites they need in their initial urban target markets and co-location gets them to market quicker while providing towercos with significant organic growth.

On the other hand, towercos have generally been a little disappointed by network growth of their main anchor tenants over 2015. Some are distracted by consolidation, which creates uncertainty, which in turn delays network rollout. However, this has created pent up demand, so the towercos remain confident of BTS opportunities in Africa.

“We’ve learned over last five years that it’s a lumpy business – MNOs go through stages of build, co-location, a rush to capacity, and other times when investment slows,” said one towerco. “But there is pent up demand inherent in the fundamental growth dynamic. SSA still has the best dynamics for the towerco model in the world – if it’s not a straight line, over multiple years it still represents steady organic growth.”

“We saw huge growth off fairly modest expectations in 2014, the reverse was true in 2015,” said another towerco. “The investments by new entrants like Viettel in Tanzania, Cameroon and Mozambique represents a huge growth opportunity not only because of their scale, but because they’re increasingly co-locating in urban areas and only building their own sites in rural areas. Plus new entrants like Viettel and Africell motivate incumbents to step up their own rollout to stay ahead.”

African towercos are still seeing cell site densification as the primary driver for co-location, but there is increasing demand for infill new build. “Demand for BTS is twice as high as it was five years ago in many regions,” said one towerco. Africa’s projected subscriber growth means a need for double the number of points of service, accommodated by a combination of BTS and co-location, but it can’t all be co-location. Connecting the unconnected will continue to drive new site builds.

As networks grow with given spectrum, cell sites have to shrink, which in turn drives the need to add more base stations and more towers. But new spectrum is not necessary to drive densification in SSA: when you look at the number of subscribers per tower (generally 4-8x the number in the US), even for 2G voice let alone 3G and 4G there is huge demand for capacity and coverage. Multi-SIMing masks the true level of penetration in SSA, and as mobile telephony becomes more prevalent, there will be a need for huge capacity improvement and for more points of service. QoS is becoming a major differentiator in Africa’s major cities where call drops are a continuing issue. This in turn is driving small but profitable pockets of IBS opportunities in SSA – small cells are beginning to make sense for urban infill capacity.

“I don’t think the existing infrastructure and the infrastructure on the horizon comes close to addressing demand for coverage and capacity – which itself is not static,” said one towerco. “Africa needs more base stations and infrastructure – we’re accelerating but still not keeping up with demand. Whether the end game is 1,000-2,000 subscribers per tower or not, there’s a lot to be built in Africa.” And towercos have positioned themselves to do the lion’s share of that building in Africa’s fastest growing mobile markets.

Forex impacts country by country results. But African towercos’ long term MLAs have calculable and sometimes fixed escalation rates, reflecting currency risk. On new leases and new builds outside existing MLAs stakeholders can try to redress some currency depreciation, but ultimately the market price is what it is. Towercos have limited if any flexibility to make price adjustments – so they have to eat the FX exposure, and their customers have to absorb the escalators. This serves to further amplify the appeal of partially dollarised contracts or dollar-linked currencies.

Towercos face these questions in every transaction everywhere in the world. Active infrastructure sharing will eventually be a factor everywhere in the world. In order for valuations to make sense, towercos have to preconfigure their MLAs to deal with the potential threat of active infrastructure sharing and the associated pressure on pricing in a way that’s mutually acceptable with both counterparties. The reality is that SSA’s network infrastructure is still inadequate to meet demand, and the towercos will take time to catch up, so active infrastructure sharing is a stop gap solution. But shared antenna are only going to run out of capacity faster – the continent still needs tenancies and towers!

With regard to MNO consolidation, most SSA markets have room for three even four MNOs because of the underlying fundamental growth. Continuing consolidation is to be expected, as with Bharti and Orange at the moment, but new entrants will more than compensate for that in most markets. Consolidation is typically anticipated and provisions made in contractual negotiations. “We’ve been through this in Uganda,” said one towerco, “and been surprised how little overlap and decommissioning resulted. This is partly because all countries in SSA are still seeing tremendous subscriber and usage growth – it doesn’t really matter whoever has the subscribers, they still need service.”

“Declining ARPU is a driver of demand for what we do,” said another towerco. “When network expansion and demand for growth in points of service are combined with reducing ARPU it drives further outsourcing by MNOs, even those who had hitherto been reluctant.”

Since inception, Africa’s private equity-backed towercos have prepared their businesses for some type of liquidity event – acquisitions, processes and data management have been undertaken with that goal in mind. One towerco explained that they commissioned bi-annual IPO awareness audits by a major accountancy firm to ensure systems and processes were ready if and when the time was right to IPO. But that time is not now: “we’ve got some assets we need to sweat more,” said one towerco. “We’ve grabbed the land to achieve the scale necessary for a strategic sale or IPO – it’s now about leasing up the towers and driving down the opex through smart efficiency investments.”

“We’ve completed four rounds, raising US$1bn spread across eight African countries,” said another towerco. “Our priority in 2016 is to get our arms around those newly acquired businesses and make them operationally efficient. We have no pressure from shareholders to find liquidity. It will be 2017 or beyond before we’re at a state and scale to consider our next major liquidity event.”

“We’re on the same sort of timeline for similar reasons,” said the first towerco. “We are in the midst of what I think make be our final round of private equity, and we may utilise the high yield market in early 2016. We anticipate a series of liquidity events in 2017-18 involving us and IHS.”

The success of the Cellnex IPO has got bankers knocking on the doors of Africa’s towercos, but 2016 will be a year of co-location sales, integration and efficiency – plus a few last acquisitions.

The region’s towerco CXOs are scheduled to once again come together at this year’s TowerXchange Africa & Middle East being held on 19-20 October at the Sandton Convention Centre, Johannesburg,