With most of the region’s most investible MNO towers already sold, the wave of towerco consolidation continues in SSA. With the acquisition of 300 towers but, more importantly, the acquisition of Eaton’s elite South African management team, American Tower has reinforced their competitive position in the highly attractive yet under-penetrated South African market, as rumours continue about the prospective divestiture of MTN’s towers.
Acquiring Eaton Towers South Africa shores up American Tower’s leadership position in one of Africa’s last investible tower markets where there remains the potential for exponential growth. Towercos own just 8% of the towers in the 29,947 tower South African market, but rumours persist that MTN may sell their ~9,000 towers in the country, so acquiring Eaton’s South African business may have eliminated one of American Tower’s primary competitors in that prospective auction, whilst blocking (for now) the market entry of other towercos which may have been interested in South Africa.
“Eaton Towers’ strategy in South Africa was to establish a build-to-suit presence and then scale up by buying a substantial portfolio of towers from one of the operators,” said Eaton Towers CEO Terry Rhodes in an exclusive TowerXchange interview. “However, the operators in South Africa have not given this opportunity, and they still own over 90% of the total towers. We have outperformed American Tower in South Africa over the last few years but our operation is about 1% of the total South African market, so when American Tower approached us it made sense to sell,” added Eaton’s Rhodes.
While the value of the transaction has not been revealed, TowerXchange suspect American Tower would have paid a justifiable premium to acquire Eaton’s South African business. With most of their last US$350mn capital raise yet to be deployed, Eaton Towers had no need to divest a South African business that had become a small yet spectacular success story, boasting the fastest tenancy ratio growth in Africa. American Tower are rightly renowned to have the discipline to walk away from opportunities that exceed their valuation, but their preference to delay IHS and/or SBA Communications’ entry into South Africa may have pushed the valuation for Eaton’s attractive portfolio relatively high.
The transaction remains subject to regulatory approval.
Eaton Towers was advised by Moelis & Co.
ATC acquiring a business, not just assets
A critical question when evaluating a towerco consolidation deal: did the acquirer just buy sticks in the ground, or did they buy the whole company, inclusive of proven management and their customer and municipality relationships? If you just buy the assets then, after any non-compete expires, the management team will most likely start a new towerco and start competing for BTS contracts. In this instance, ATC South Africa has acquired not just 300 well leased-up towers in smartly chosen locations, they’ve also acquired the smart people who chose those locations.
“The original Eaton Towers South Africa team led by Keith Boyd, which came from Venture Communications, understood the building environment in South Africa, from the long permitting process through to customer service,” Eaton Towers CEO Terry Rhodes told TowerXchange.
Why Eaton Towers South Africa is a good acquisition
“The acceleration in the growth of our business is based on the sound property work we started three years ago,” said Eaton Towers South Africa’s Managing Director Keith Boyd, speaking to TowerXchange in August 2014. “We’ve worked hard to balance our portfolio, devoting a lot of attention to less well off areas with high population density and high demand. As most people in affluent areas already have smart phones, the biggest percentage increase in smart phone usage is going to be in these less well off areas. We are balancing that strategy with an approach to providing aesthetically acceptable coverage and capacity in gated communities in the more up market suburbs... So a critical measure of a tower company’s ability to create value is how good we are at the property work – at selecting sites that will attract more than one tenant – and doing so two to five years before they actually occupy the site!”
Upon closing, 300 towers will be added to American Tower’s portfolio, with some potential upside depending on conversion of permits to revenue earning sites in the next year; Eaton had acquired around 1,000 sites in locations potentially attractive to network planners.
With site separations coming down to 500m between large tower sites, and filler sites in urban areas, demand for new sites in South Africa is being driven by data growth: 3G and LTE. The 300 sites ATC South Africa is acquiring features a mix of structures to meet the needs of South Africa’s increasingly modern network. “As next generation networks mature, towercos will likely diversify product offerings to include microsites and lamp post type solutions,” said Eaton Towers South Africa Managing Director Keith Boyd in that 2014 TowerXchange interview. “Eaton Towers offer products that comply with specific building guidelines and homeowner association preferences. In many cases you can’t erect a 25m tower, so you may need 10-15m flagpole or lamp-post type structures perhaps 200-300m apart to provide coverage in these estates.”
Whereas most new acquisitions depress the overall tenancy ratio, Eaton’s well leased-up South African towers have maintained a tenancy ratio of two despite rapid organic growth. ATC South Africa’s tenancy ratio was 1.9 in Q3 2015. Lease rates are reportedly healthy in South Africa.
ATC South Africa added just nine towers to their count between Q115 and Q116. In the same period Eaton Towers South Africa and Atlas Tower each built around 100 towers
Another value add for ATC South Africa from this transaction comes from improved BTS capabilities. Back in 2010 American Tower announced a deal to acquire 1,400 towers from Cell C and to build 1,800 more. But by 2014 Cell C had resumed building their own towers, and to date American Tower has added a total of 527 towers to the 1,400 they originally acquired in South Africa. In fact ATC South Africa added just nine towers to their count between Q115 and Q116. In the same period Eaton Towers South Africa and Atlas Tower each built around 100 towers.
TowerXchange’s estimated tower count for South Africa, Q2 2016
The potential for further ATC South African acquisitions
If their Nigerian fine does force MTN to divest their ~9,000 South African towers, ATC South Africa will likely find themselves competing in a fiercely fought auction with IHS, SBA Communications, Atlas Tower and doubtless several other interested parties.
Beyond the potential MTN sale and leaseback, other opportunities for ATC South Africa to scale up appear limited. A few hundred more South African towers are owned by small private towercos, some of which could doubtless be acquired. But Vodacom seems to have no appetite to monetise their towers, while they also function as a de-facto tower company in South Africa, leasing out their ~7,000 towers at market lease rates, with a tenancy ratio believed to be around 1.8.
Telkom’s on-off sale and leaseback of their ~3,500 towers appears to be off, with the creation of an internal tower management team.
Timeline of the South African tower industry
What next for Eaton Towers?
“The Eaton Towers Group still has the majority of the US$350mn equity raised in March 2015 available to deploy,” said CEO Terry Rhodes. “So an attractive exit in South Africa increases our firepower for other opportunities where we have stronger long term market positions.”
TowerXchange understands Eaton are closing in on a supplemental acquisition from Orange Egypt, strengthening Eaton’s own position in a highly investible country as the MENA region increasingly opens up to the towerco business model.
Eaton Towers has assembled Africa’s most diverse telecom tower portfolio; they will soon have over 7,000 towers spread across six countries (Ghana, Uganda, Kenya, Burkina Faso and, pending asset transfers, Egypt and Niger). Eaton may be 18-36 months away from exit, most likely through a sale to a strategic acquirer. While their dialogue with American Tower in this instance exclusively concerned Eaton’s South African business, if American Tower likes the assets, the people and the processes they acquire in this transaction, it may increase the likelihood of a larger scale consolidation in future. If American Tower were to consider acquiring Eaton Towers, one complexity to overcome would be dealing with Eaton’s anchor tenants’ concerns about MTN’s minority stake in ATC Ghana and ATC Uganda. Nonetheless, a future union between Eaton Towers and American Tower just got more likely.
Conclusions
“It is a great compliment that one of the world’s largest international tower companies wants to acquire our South African business; it really is a win-win deal,” concluded Terry Rhodes, and TowerXchange agree.
With IHS and SBA jockeying to get a toe hold in South Africa in anticipation that the MTN towers finally come to market, Eaton Towers knew the time was right to get a good price for a South African business which, while highly lucrative, represented only 5% of their business.
American Tower will have paid a handsome sum for a well leased up, fast growing portfolio delivering excellent tower cash flow, but in doing so they’ve enhanced their BTS capabilities and defended their first African tower market from the threat of new entrant competitors.
Towerco consolidation in SSA in 2016
Remaining privately owned MEA towercos with <1,000 towers**
MEA-towercos-Private 2016: the year of towerco consolidation
By acquiring smaller towercos Africa’s two leading towercos, IHS and American Tower, have added to their portfolios a total of 1,662 towers in the continent’s most investible tower markets; Nigeria and South Africa. A further ~3,000 towers can be found on the balance sheets of 13 remaining smaller towercos identified by TowerXchange (and there are doubtless several we haven’t identified!)
At the end of 2014 we declared 2015 ‘the year of the middle market towerco’, and urged independent developers to start building high quality towers in sought-after locations in Africa’s most investible markets. We didn’t see the ‘gold rush’ of tower entrepreneurs which we are seeing in the Andean countries of Latin America, for example, but a handful of towercos rose to the challenge. It now seems we are entering a phase when smaller African towercos can realise successful exits, and where Africa’s ‘Big Four’ can accelerate portfolio expansion by selectively rolling up these businesses.
Meet senior representatives from American Tower, Eaton Towers and the rest of the leading stakeholders in SSA and MENA towers at the 4th TowerXchange Meetup Africa & Middle East, taking place on October 19 and 20 at the Sandton Convention Centre, Johannesburg. Click here for more information.
