MTN’s multi-billion dollar fine in Nigeria will force the operator to advance its plans to sell its towers in South Africa. Smaller operators will likely follow suit, but Vodacom’s strong financial and competitive position mean it has little need to sell its towers, too. Competitive bidding between four major tower companies for access to the region’s most developed market will ensure high valuations.
The vast majority of towers in South Africa remain operator-captive. In 2010, third mobile operator Cell C sold 1,400 towers to American Tower Corporation (ATC) and TowerXchange estimates that Eaton Towers has built 170 towers in the country. This means that just 7% out of a total 22,278 towers in the country, according to TowerXchange data, are managed by independent tower companies.
BMI believes the outlook for South Africa’s towers market in 2016 depends on the final outcome of MTN Nigeria’s US$5.2bn fine. In early December 2015 MTN confirmed that the Nigerian Communications Commission (NCC) agreed to reduce the fine by around 25% to US$3.9bn, with a payment deadline of December 31 2015. For comparison, MTN’s total 2014 revenue for South Africa was ZAR38.9bn (US$3.6bn), and for Nigeria ZAR54.0bn (US$5.0bn). MTN’s inability to negotiate a more substantial reduction to the fine means it will still be forced to make serious cost savings in order to ensure it can maintain investment levels in Nigeria as well as across its Middle East and Africa footprint. MTN had already expressed interest in selling its South African tower assets in mid-2015, and BMI believes it will expedite this plan in order to help fund the Nigerian fine.
Looking at previous tower sales across Sub-Saharan Africa (SSA), using deal values and volumes as reported by operators, in the media and by TowerXchange, the table below shows that Cell C’s towers in South Africa sold at a relatively low price compared to other markets. However, the deal included a high leaseback rate for Cell C, which pushed up the overall valuation of the tower assets compared to other markets in the region. This is partially a result of it being among the first tower sales in the region, but also reflects the higher consumer spending power and level of development of South Africa’s telecoms sector.
Robust growth in mobile data demand
South Africa is attractive to all four major tower companies in Sub-Saharan Africa - IHS Towers, Helios Towers Africa (HTA), American Tower and Eaton Towers - because it is by far the most developed. Although we forecast the total number of 3G/4G subscriptions in Nigeria to overtake South Africa by the end of 2015, data usage levels are far higher in South Africa. Vodacom reported that average MB of use per subscriber increased by 28.6% y-o-y to 425MB in Q315, while both MTN and Vodacom also report rising minutes of use, despite increased opportunity for substitution with over-the-top (OTT) services. We forecast strong growth in data services to continue over the five years to 2019, with the anticipated auction of more 4G spectrum resources sometime between 2016 and 2018 to fuel further investment into network upgrades and densification.
BMI forecasts total mobile subscriptions to reach 89.3mn in 2015 and increase to 94.4mn by 2019, for a penetration rate of nearly 170%. Over the same period, we expect the total number of 3G/4G subscriptions to increase from 31.1mn to 44.5mn, to account for 46.6% of the mobile market and 79% of the population by 2019.
Table one: A comparison of selected major tower transactions
The attractiveness of the South African market is also tied to the level of economic development compared to the rest of the region. South Africa has much more developed corporate and financial services sectors, which means telecoms operators and their partners benefit from much higher demand for sophisticated enterprise communications and IT solutions. In order to tap into this demand, telecoms operators are ramping up investments in mobile and wireline broadband infrastructure, thus pushing a positive cycle of adoption of cloud-based enterprise solutions. This creates opportunity for any potential tower company to depend on both strong consumer and enterprise demand for mobile services, with the possibility to diversify into new types of network services, to support the development of the machine-to-machine (M2M), Internet of Things (IoT), and enterprise mobility solutions segments.
Aside from strong interest from SSA’s big four tower companies, the positive outlook for South Africa’s telecoms market has also attracted some new international players to the continent. First is US-based Atlas Towers, which began deploying towers in South Africa in late 2014. By June 2015, Atlas had built a dozen towers, with 25 more planned for construction. The company plans to build 75 new towers a year in South Africa, while also setting its sights on potential acquisition opportunities. Meanwhile, SBA Communications, which operates more than 20,000 sites across the US, Canada, Central America and Brazil is also reportedly interested in bidding on MTN’s towers. The main risk for Atlas and SBA is that with little experience in more challenging emerging markets, where regulatory hurdles are larger and tower operators cope with a much wider range of logistical obstacles, such as the limited reach of power infrastructure, they could find themselves at a disadvantage compared to SSA’s established players. Nevertheless, strong competition for South African towers will ensure that mobile secure high valuations for their assets.
Aside from strong interest from SSA’s big four tower companies, the positive outlook for South Africa’s telecoms market has also attracted some new international players to the continent
Not all will follow MTN’s lead
An acceleration of MTN’s tower outsourcing strategy could push smaller players to follow suit. Cell C’s backers, including Saudi Telecom Company (STC)-owned Oger Telecom, have ploughed money into Cell C’s operations to enable it to rapidly expand and improve network coverage in order to compete more effectively with market leaders MTN and Vodacom. Cell C has been successful in this strategy, reporting impressive subscriptions growth and boosting its market share from 17.6% to 25.0% over the two years to September 2015. However, Oger Telecom’s interest in cashing in on the investment is clear from acquisition discussions with incumbent Telkom and, most recently, Blue Label Telecoms. After refusing Telkom’s bid for Cell C, which it deemed too low, in early December 2015 Oger agreed to a restructuring deal with Blue Label. Blue Label will acquire a 35% equity stake in the mobile operator and buy out much of its debt, while Oger will bring its stake down from 75% to 26%, while also committing additional funding for Cell C’s further expansion. Although Blue Label’s entry as a shareholder reduces the financial burden on Oger, BMI still believes the sale of towers by MTN could push Cell C’s owners to look to a tower sale of their own as a possible option for gaining a return on their investments, especially if MTN secures a high enough valuation.
Figure one: Data demand sparks ARPU recovery
Meanwhile, Telkom needs to reassess its options in the mobile market after failing to secure regulatory approval for a network sharing agreement with MTN earlier in 2015, and Cell C rebuffing its acquisition bid. Given that Telkom had just 2.3mn mobile subscribers at the end of September 2015, despite offering many of the best value mobile data plans in South Africa, BMI considers its tower portfolio to be the least attractive in the country. Therefore, while selling its towers may also be an option for ensuring its small mobile business becomes profitable by 2016, BMI believes it would be of most value to American Tower, which already operates in South Africa, or paired to another mobile operator’s assets.
Vodacom would be less easily lured into a tower sale strategy. The operator still draws a significant competitive advantage from wider network coverage than its rivals, while its strong financial position means it has less need to implement cost saving measures than other operators. MTN has still not entirely recovered from the impact of mobile termination rate (MTR) reductions in 2014, which cut its incoming voice revenue in half and also triggered intense price competition across the market. In June 2015, MTN reported its lowest half-year revenue in South Africa since June 2011. By contrast, Vodacom’s revenue for the half year ended September 2015 was up 5.1% y-o-y to ZAR31.7bn.
Figure two: South African mobile market shares, September 2015
Telecoms market less exposed to macro challenges
The macroeconomic outlook for South Africa is bleak. Besides the marked depreciation of the rand and the possibility of additional electricity tariff adjustments, upon hiking interest rates in November the statement of the Monetary Policy Committee (MPC) mentioned ‘worsening drought conditions and their likely impact on food prices’ as one of the increased upside risks to the inflation forecast. Five of South Africa’s nine states - Free State, KwaZulu-Natal, Mpumalanga, Limpopo and the North West - have been declared disaster areas on the grounds of water scarcity. El Nino is the trigger for the crisis but it has merely exposed pre-existing weaknesses in the country’s water infrastructure, as reservoirs and dams have been run down and businesses have experienced rolling outages to their water supply, much as they have experienced electricity load-shedding. As El Nino continues to apply well into 2016, the water shortage will continue, resulting in a drop in corn production, accelerating import growth and a rise in food prices.
Looking at the performance of the various sectors of the past several years, it is clear that the supply-side, i.e. mining and manufacturing, has stagnated, while the demand-side of the economy, e.g. finance and retail, has been relatively buoyant. Therefore, in order to drive improved economic growth, BMI believes South Africa’s government would have to implement challenging structural reforms targeting the supply side of the economy.
Figure three: South African GDP demonstrating the out-performance of retail and services
However we do not envisage these reforms happening in the near-term. State-owned utility Eksom has managed to provide for stable electricity supplies during the second half of 2015, but major delays to new power capacity projects and weak finances mean the power sector will remain in crisis mode in 2016. Meanwhile, BMI’s mining research team sees a leftward shift in ANC policies to back further wage hikes as the most likely outcome of ongoing strike action, which would drive many major miners to pull out of South Africa. We therefore forecast GDP growth of just 1.6% in 2016, followed by average annual growth of 2.5% over the following years to 2020.
Nevertheless, strong mobile subscriptions growth, a recovery of ARPUs in 2015, and the sector breakdown of GDP growth above all suggest that the telecoms market has been fairly insulated from South Africa’s economic woes. The out-performance of the retail sector is also reflected in the relative insulation of the Johannesburg Stock Exchange Index from the South African macroeconomic collapse; food and drink plus personal and household goods account for 28% of the index, and although the latter has fallen somewhat since November, it is nowhere near what it should be if it were a reflection of the overall macro collapse. Therefore, while challenges relating to power supply and the strength of trade unions have impacted on telecoms operators - Telkom and MTN in particular - BMI believes demand for mobile data will continue to grow rapidly, requiring operators to maintain high levels of investment in upgrading and expanding 3G/4G networks, and creating a stable operating environment for tower companies
