Vinson and Elkins hosted a discussion with Standard Chartered, the IFC and OPIC at 2016’s TowerXchange Meetup in Johannesburg, examining how the finance and investment landscape is changing in the African and Middle Eastern tower industry. Discussion topics included IHS’s bond, the role of local banks, potential exit strategies for SSA’s privately owned towercos and IPOs that we could see on the horizon; what are the key trends that we need to observe?
The IHS bond
With news of the IHS bond fresh off the press at the time of the 2016 Meetup, the subject was the opening discussion point on this year’s finance panel. The US$800mn high yield corporate bond was listed on the Irish Stock Exchange and is the largest of its kind listed out of Africa (excluding South Africa). The bond has a 2021 maturity and offers a 9.5% coupon. The funds will be used to refinance the debt of IHS Towers NG (formerly known as HTN Towers, which IHS acquired earlier this year) as well as refinance some of the IHS Nigeria’s opco level debt and fund the build of 1,650 new towers as part of MTN Nigeria’s rollout plans.
In discussion of the bond (Ba3 / B+ / B+ (Moody’s / S&P / Fitch)), Standard Chartered’s David Murphy explained that uptake of the bond had been very positive, a sentiment which was echoed by the other panellists. In addition to the positive rating of IHS as the parent company (B1; Moody’s), the fact that the bond was backed by DFI funding and also had an extensive pre-marketing campaign helped contribute to the high level of uptake. The IFC’s Eric Crabtree also added that the size of the bond was ideal which helped contribute to its liquidity.
The bond also managed to attract a number of new investors who had not previously looked at the towerco space, a development which will have a positive impact for the future of the tower industry on a global level.
IPOs on the horizon in the tower industry?
It had been suggested in the industry that the settlement of an bond may be a precursor to an IPO by sub-Saharan Africa’s largest towerco. Many in the market have expressed their viewpoint that IHS’s size may preclude an acquisition by a strategic investor and as such, an IPO may be the optimal exit strategy for IHS’s private investors.
On the subject of IPOs, the panel observed that the state of the public markets and the stage of development of Africa’s towercos may not be ideal for a listing. A couple of weeks prior to the Meetup, Telefónica was forced to scrap the listing of its infrastructure unit, Telxius, after insufficient investor demand; and more recently, leading Turkish operator Turkcell postponed the IPO of their carved out towerco, Global Tower, citing uncertainties surrounding the US election and cyber attacks.
In the case of Telxius, while some felt the structure of the MSA made Telxius less attractive to investors, others felt the inclusion of the company’s subsea cabling in the unit was the primary factor resulting in a lack of uptake from the public markets. Whilst the IPOs of companies such as Cellnex and Inwit had familiarised investors with the tower asset class, panellists commented that investors were potentially unable to reconcile the value of their cable business.
Commenting in a separate panel, Helios Towers Africa’s Chuck Green observed that the sub-Saharan African tower industry effectively had three phases. The first phase was the land grab, whereby towercos look to bolster their portfolios through major acquisitions of MNO tower portfolios. The second phase involves the integration of the aforementioned tower portfolios and driving towards operational excellence in order to demonstrate the company’s expertise in the market. The third phase is the preparation of a company for a liquidity event, be that a sale to a strategic or a listing on the stock exchange. The finance session panellists agreed that potentially the privately owned towercos were not yet in the ideal position for such an event and that current focus remained on the second phase.
Closer inspection of Moody’s rating of IHS Netherlands Holdco (awarded B1) alongside their rating of the bond (Ba3 negative) reveals the financial markets’ perception of risk in the sub-Saharan tower industry and makes for interesting reading for those working towards an eventual IPO - see “How Moody’s rated IHS”.
Stable revenues from tenants with parent company ratings of Baa3 negative and higher, IHS’ proven strong operating experience, coupled with a long serving experienced management team and a good liquidity profile supported by the ability to draw upon an intercompany shareholder loan, all contribute to the company’ credit strengths. Sovereign risk, a volatile currency, fluctuations in diesel prices, exposure to integration risk from the acquisition of HTN Towers, escalations in ground lease payments with just 15% of sites on owned land, the limited scale of the company’s revenue and a high debt/ EBITDA ratio all contributed to challenges on the company and bond’s rating. The steps that IHS are making however to mitigate some of these risks, have had a positive impact on ratings.
Whilst the Telxius and Global Tower IPOs have been postponed, there are further IPOs on the horizon globally with edotco, China Tower Company and potentially Indus Towers all preparing for a listing. As the markets become more accustomed to the tower industry, this will help pave the way for a future IPO by a MEA towerco.
Alternative exit strategies for SSA’s privately owned towercos
With private equity at work in sub-Saharan Africa’s three largest privately owned towercos, it is likely that investors will be looking at an exit within the next 18-24 months and as such we will see a churning of capital, observed the panel.
In the Latin American tower industry there are regional strategic investors such as SBA and American Tower who have a history of acquiring smaller towercos. Whilst 2016 saw American Tower acquire Eaton Towers’ South African unit (as well as IHS acquire HTN Towers in Nigeria) we are yet to see a wave of towerco acquisitions across the continent. Should a new strategic investor enter the region (for example through the acquisition of MTN’s South African towers should they come to market), this may change dynamics.
Funding expansion capital and examining refinancing options
The region’s towercos are still capital hungry, not for the repayment of dividends to their shareholders, but rather to enable them to keep investing in their networks. On the question of whether it was now easier for new towercos to raise capital than it was in the early days of the African tower industry, panellists felt that the familiarity of the towerco business model today significantly helped. Plus as towercos mature and develop stronger operational excellence practices, further confidence in instilled in potential investors
With the provision of energy as a service a critical component in sub-Saharan Africa, there are still barriers to entry for a new towerco which are higher than for their counterparts in Latin America. The evolution of the ESCO model, panellists felt, may however help to address some of these concerns, with a dedicated and experienced party taking control of the most challenging element of tower operations.
In relation to refinancing, the panel observed that towercos mature quickly which enables them to access cheaper capital. As such, they expected to see a number of towerco refinancings on the horizon.
The increasing role of local banks
On the question of the role of local banks, OPIC explained that it was in their remit to support local banks who may not have the experience in providing finance to the sector. DFIs coming into play with guarantee tools that help to absorb some of the risk also assist in supporting the influx of local debt into the tower industry. Panellists felt that it was important that local banks become more involved in providing local currency to towercos and as the market developed, expected to see more of this.
Financing in the Middle East
With a higher prevalence of towercos in sub-Saharan Africa, much of the focus of discussions remained on the region, however attention did also turn to the Middle East where a new breed of towerco is starting to emerge. Given the current liquidity issues that Middle Eastern banks are facing, panellists observed that the cost of financing had started to rise in the Middle East and as such, the economics of future transactions in the region would be affected by this.
Rooftops, DAS and small cells
The panel rounded up discussions moving away from macro sites and focussing on HetNet solutions. With many of these sites, the panel observed, the capex to deploy such systems is lower and therefore companies are able to speculate on build-to suit programmes.
The panel commented that the area of small cells and DAS had been overlooked by many of the region’s towercos and this created a niche for new players. If they could develop the technical expertise and come up with an innovative business model, there could be some attractive investment opportunities ahead.
