M&A, towerco consolidation and maturation in sub-Saharan Africa

2016 saw the start of in-market towerco consolidation as well as the opening up of tier two MNO tower transactions; with MNO consolidation on the horizon, towerco shareholders looking to exit their investments and the rollout of 4G starting, Helios Towers Africa, Eaton Towers, Al Karama Towers and Citi explain how they expect the sub-Saharan African tower industry to evolve.

Since 2010, sub-Saharan Africa has seen MNOs divest almost 40,000 towers to independent towercos in a total of 28 transactions, in some instances retaining equity and in others electing to sell completely. Whilst the gold rush is over, the towercos still expect a handful of transactions to still filter through. Airtel have sold the majority of their sites but still retain towers in a handful of countries, portfolios which participants thought could well come to market; MTN has monetised towers in a number of countries and now their fine has been resolved in Nigeria, the operator may once again start looking at their tower strategy; and Millicom is known to want to sell out of their African operations.

In terms of M&A activity between MNOs, the panellists forecasted that consolidation would be on the horizon; in many markets there are far too many licenses and far too many MNOs. Whilst MNO consolidation can often be seen as a bad thing for towercos due to reduced tenancies, the panel commented how the stability brought by such activity could have a positive impact. Towerco business models are built on their validity of their contracts with MNOs and a healthier operator landscape brings reduced risk to a towerco balance sheet.

In discussion on MNO consolidation, panellists cautioned against operators taking steps with their towers which may jeopardise their desired M&A strategy. In the UK, a key factor in the blocking of Hutchison’s takeover of O2 was the involvement of the MNOs in different joint venture infracos in the market. If an operator is looking to consolidate, they need to be mindful of the effect that tower strategy may have on this.

Whilst the structure of an MLA and the set of terms and conditions are well defined, transactions are generally bespoke to the MNOs in line with their strategic objectives; Airtel’s tower sales have been more about raising capital  whilst MTN have been more focussed on valuation creation and the more efficient deployment of capital.

In terms of how transactions have evolved, Citi who have advised Tigo and MTN on their sale and leasebacks, have seen a maturation in the deals, with learnings from previous transactions reapplied.

One significant difference between transactions in the early days and the current day is that many deals originally had power as a pass-through. This has since transitioned to power as a service becoming the norm, with towercos also exhibiting a preference for this as the ability to improve energy opex is one of the areas where the towerco  can make its most significant margins.

Another evolution has been around the issue of active sharing. In their first transaction in Ghana, Chuck Green voiced how active sharing had been addressed by a simple clause in the contract. Today, active sharing is a key point for negotiation in agreeing the deal terms.

With Africa’s big four towercos having primarily focussed on the tower portfolios of the continent’s tier one operators, discussion turned to the appetite for the infrastructure assets of the regions tier two MNOs.

With higher counterparty risk, tier 2 MNO portfolios are typically less attractive to the larger towercos. Eaton voiced their opinion that if you are already present in a market and you already understand the operating conditions, there may be some potential synergies afforded by acquiring such portfolios and in those instances a transaction may make sense. In instances where a towerco does not however have a presence on the ground, the value proposition is greatly reduced. The panel brought attention to the proposed sale of mCel’s ~1,000 sites in Mozambique for which the operator had approached Barclays to run a tower sale. Commenting on the sale process Eaton explained that when they had looked at the government owned operator in a country facing a lot of economic challenges, they decided that their time would be best spent elsewhere.

Helios’ Chuck Green echoed this sentiment adding that there are a variety of reasons that towercos have looked at markets and passed on them, making the decision to focus their efforts elsewhere. Given the scale of the big four towercos, there are portfolios which they now view as too small or not additive to their business and so have shied away from. This does however, he added, open up opportunities for other towercos. Whilst there are risks and potentially limited growth prospects, as long as these are accounted for in the business model and pricing then there does exist an opportunity for a certain type of company.

One such company is Al Karama Towers; the newly formed towerco is in the process of acquiring Expresso Telecom’s 450 sites in Senegal. In addition to Expresso’s Senegalese towers, Al Karama also has an appetite for further tier two MNO portfolios in markets which are yet to be touched by the larger towercos.

Smaller MNOs on the continent are keen to compete with the larger operators and require significant amounts of capital to fund the rollout of 3G and 4G in order to keep up with their competitors. Such players have been looking for capital to help fund this expansion and one strategy to access this capital is through the sale of their towers.

Al Karama’s focus is on this niche, an area in which the major towercos in the continent are not keen to play. By entering these virgin territories with MNOs who have previously been overlooked but who have a strong motivation to sell, Al Karama Towers is carving out a very interesting niche for itself. By doing the groundwork in greenfield markets, should the larger towercos look to enter a later date as a response to MNO consolidation or larger tower portfolios coming to market, then Al Karama Towers would make a very attractive acquisition target.

2016 saw the first in-market towerco consolidation, firstly with IHS’s acquisition of HTN Towers in Nigeria and subsequently with American Tower’s acquisition of Eaton Towers’ South African business unit.

Speaking on the ATC-Eaton transaction, Terry Rhodes explained how they had looked at HTN Towers’ situation as a model of what could happen to a towerco in a market where a much larger player is present. Whilst HTN Towers had been in the market for a long time, the level of competition from IHS and American Tower gave HTN Towers little room for manoeuvre. Eaton could see the same thing playing out in South Africa and were keen to take the offer on the table rather than take the risk of a similar fate. The transaction also raised funds for Eaton to be able to reinvest in other areas of its business, further strengthening its position in other markets.

With private equity at work in three of the big four towercos, liquidity events are to be expected within the next 18-24 months as firms look to exit their investments. The aforementioned towerco consolidation represents one such exit strategy, a strategy that is a win-win scenario for both parties involved; whilst one towerco achieves an exit, the other increases its chances of a successful exit.

An alternative strategy would be an IPO. On the subject of IPOs, Chuck Green mentioned that it was important to consider the three phases of a towerco in the region. The first phase was the landgrab, whereby towercos focus on external growth through the acquisition of tower portfolios. This is the phase that towercos were in for the past five to six years. The second phase requires the focus to shift internally, focussing on organic growth and the drive towards operational excellence. The towerco business model is built upon selling co-locations and towercos need to now deliver these co-locations and furthermore, achieve operational efficiencies which will improve their profit margins. This second phase is where towerco attention is currently focussed.

With this inward looking perspective towercos can start to see where their weaknesses are and then work on these weaknesses in order to improve their IPO story. At present, Chuck felt, none of the towercos had an optimal IPO story and so this needed to become the next area of focus for companies.

Discussion on the panel turned towards the diversification of the towerco business model and how this was likely to evolve in sub-Saharan Africa. With such common principles between the towerco business model worldwide (albeit with sub-Saharan Africa and some other regions having a higher degree of operational complexity), the panel thought it important to look to more developed markets, such as the US, and how towercos have evolved their business model in such countries.

Panellists commented that the diversification of the towerco business model was inevitable;  with the rollout of 4G and eventually 5G, small cells, in-building solutions and DAS networks are all going to play an important role in eliminating the bandwidth bottleneck. Owning the backbone is strategic as the network moves towards this shape. In the US, Crown Castle has a big fibre network, the primary reason for this not necessarily for being in the fibre business per se, but rather as a key element in supporting smalls cell and DAS deployment. IHS have entered the fibre space in Nigeria and panellists thought that as markets mature across sub-Saharan Africa, you will see more towercos looking to play a role in fibre, both owning the fibre themselves and working with parties such as Liquid and Google.

One thing the panel cautioned that towercos must be careful of in this space is how the pricing model works. Traditional fibre models do not make financial sense in the context of the towerco business model and so new pricing structures need to be developed. Another area of caution was in relation to the failed IPO of Telxius. It is widely believed that a key reason for the failed listing was the inclusion of the cable business; fibre cannot be rated at the same multiples as towercos and so a towerco getting into fibre needs to consider the balance of their business and pricing in line with this.

The subject of operator-led towercos was high on the agenda at the 2016 Meetup with an increasing number of MNOs understanding the value in their assets and actively pursuing co-locations. In discussion of the topic, the panel commented how Airtel had created a towerco (Africa Towers) originally but then changed their strategy completely and sold their towers. In the case of Airtel, they had found that other MNOs were not so keen to lease towers from a company who had a competitor as their sole shareholder and thus they decided to monetise their towers sooner rather than later.

That level of distrust and unwillingness to share rollout plans with competitors, the panel thought, was a key barrier to the rise of the MNO-led towerco. Similarly, the panel questioned the ability of the two different companies to operate in a true operator-towerco nature, commenting that it was less likely that the towerco would act with the same discipline when negotiating a sale and leaseback contract.

Helios’ Chuck Green added that in every market, he has seen independence as crucial in optimising the value of a towerco business. Whilst there are examples of operator led towercos such as Indus Towers, questions have been raised about successful entities such as Indus Towers have truly been.

The panel raised the idea that often the creation of an operator-led towerco was the first step towards a tower monetisation. Getting the assets in order and demonstrating their value will help to achieve a better release of capital as and when you look to sell but setting a clear path to independence in the carve out of a towerco business is key. Citi cautioned that if the terms of the original sale and leaseback agreement were skewed towards the MNO during the carve out, it will be more difficult to sell or list the towerco down the road.

With the Middle Eastern market also in the spotlight at this year’s event and Saudi Arabia seeing the formation of a joint venture infraco between Saudi Telecom Company and Mobily, the panel were asked how they viewed opportunities for such entities. Whilst all agreed that efficiencies could be achieved, challenges around alignment of business objectives and a willingness to discuss strategies openly would continue to create challenges. Citi observed that they had a 100% success rate in Africa in arranging a dozen sale and leasebacks, whereas when it came to bringing MNOs together, that success rate dropped to one in six.