MNO competition, infrastructure quality and potential tower transactions in Mozambique

In 2012, the entrance of a third MNO, Movitel, into Mozambique caused a radical shake up of the country’s telecoms sector. With a tower sale now underway by the state owned mCel and a bill mandating infrastructure sharing having been proposed in late 2015, things could be set to change again. We take a detailed look at the Mozambican telecoms sector and ask what might be on the horizon.

Mozambique has a population of 28.4mn, with 68% living in rural areas. The country has been marred by bouts of civil unrest in Northern and Central provinces with strong opposition to the current ruling party. With a GNI per capita of just US$600, Mozambique is one of Africa’s weakest economies and is in the midst of a debt crisis that is crippling the economy. However with discovery of large offshore gas reserves, development of new power infrastructure in the next 10-20 years could enable the country to double, or even triple its GDP. There are 19.2mn mobile connections in Mozambique with SIM penetration sitting at 68% and mobile broadband penetration at 34% (source: GSMA Intelligence).

For a long time, Mozambique’s market was a duopoly, with state owned mCel and Vodacom Mozambique being the two incumbent MNOs. The entrance of Movitel however in 2012 caused a considerable shakeup, introducing strong competition in what had previously been a stagnant market.

Movitel is owned by the Vietnamese military backed Viettel (which also has entities in Cameroon and Tanzania) and Mozambican holding company SPI, which is run by FRELIMO (Frente de Libertação de Moçambique) – the main political party in the country. Movitel entered the market back in 2012 when SIM penetration sat at 30% (versus the 68% of today). With much of the country underserved by the two incumbent MNOs, Movitel invested heavily in those areas, rolling out coverage to rural areas and covering the country with high quality service in a very short period of time. Within one year of entering the market, Movitel secured 20% of the mobile subscriber market share, as of December 2015 this figure was an impressive 49%.

In response to Movitel’s entrance, the two incumbent MNOs, mCel and Vodacom Mozambique, were prompted to reduce their operational costs by outsourcing their network management, whilst Vodacom also undertook an aggressive network rollout plan to keep pace with Movitel and close the gap on mCel’s market share. Vodacom’s subscriber base grew from 2.7mn in 2012 to 5.0mn in 2014 whilst mCel had much more of a modest growth from 5.1mn to 6.1mn in the same period. The latest figures from December 2015 show a decline in subscribers for both mCel and Vodacom which can be attributed, at least in part, to the disconnection of over 1mn unregistered SIMs in compliance with the government regulations (figure one).

Long standing financial difficulties at state owned mCel led to the entity being recapitalised by the government back in 2015. At the time of going to press, the government has announced the formation of a commission to oversee the merger of mCel with the loss-making state-owned fixed line incumbent TDM with the goal of transforming the two financially troubled entities into a single competitive and stable unit.

mCel and Vodacom’s networks are concentrated in the south-east around Maputo, and in Beira (Mozambique’s major port) as well major arterial routes. Their coverage in rural areas lags that of Movitel whose expansion into these underserved areas was a central part of their market entry strategy. The northern inland part of the country has the worst coverage by all three operators but has a lower population density.

Vodacom’s 2016 results report an ARPU of 54ZAR/ month whereas Movitel’s ARPU is considerably less with their focus on the lower end of the market. The low revenues being collected by Movitel have led to reports that they are considering shutting down some of their unprofitable sites.

There are an estimated 3,000 angular towers in the country and 1,500 - 1,800 guyed masts, the majority of which belong to Movitel. In Maputo there is a significant rooftop tower market, with a number of rooftop sites in other major cities.  mCel have a reported 1,200 sites and also use the infrastructure of TDM (the fixed-line operator); Vodacom have ~1,400 sites and Movitel ~1,800 (the majority of which are guyed masts).

In response to the entrance of Movitel, Vodacom rolled out 800 sites over a two year period, more than doubling its network size. The MNO’s new build however has ground to a halt with just an estimated 20-30 rooftop sites expected to be added in 2016 (to increase capacity rather than increase coverage). mCel has not been very active from an infrastructure capex standpoint in the past few years with limited new sites added to their portfolio.

Movitel rolled out an impressive 1,500 sites within their first two to three years of operation although rollout appears to have now slowed with the operator achieving a high level of coverage through their early programme.

All three operators are rolling out fibre optic backhaul to as many towers as possible to improve the quality of service. Movitel rolled out 25,000km of fibre in just two years of operation and now reports fibre at most of their sites. Vodacom had been rolling out fibre at a rate of 1,000km a year although this has now reportedly slowed. As well as mCel’s own fibre network, they also use that of the fixed line operator, TDM and the proposed merger of the two companies is expected to improve efficiencies in this area. The extensive rollout of fibre means that microwave backhaul dishes are being removed from sites, reducing load and freeing up space for further mobile equipment.

The national utility company - Electricidade de Moçambique (EDM) has relatively good transmission by African standards and the country’s participation in the Southern African Power Pool – connecting it to other countries in the region, has added further stability to the network, but the connections still need a lot of work. The power situation is set to strengthen as Mozambique develops power infrastructure to utilise the offshore gas reserves, however this will be in the medium rather than short term. In rural areas, the majority of sites have diesel generators with any power to the sites being generally challenging.

With strong opposition to the ruling party in some areas of the country, there have been notable flare-ups and civil unrest in Mozambique. During such times, access to certain sites has been cut off temporarily, affecting the ability of operators and their partners to rollout and manage their networks.

Annual floods that occur in February and March present additional challenges in the sector, whilst poor infrastructure can also hamper access to sites. Poorly maintained roads (along with poor vehicle maintenance and low driver competency) has been cited by one stakeholder in the market as by far the biggest challenge and biggest danger in the country.

Infrastructure sharing in the country to date has been limited, with a suggestion that as few as 50 towers are shared between Vodacom and mCel. This has resulted in a significant degree of parallel infrastructure in the country. In November of 2015 the government passed the first reading of a bill to amend legislation, mandating operators to share infrastructure. The sharing proposed in the bill recommended a very deep level, covering fibre owned by the operators and municipalities as well as the towers. There has however been no progress reported in the passing of the bill and talks appear to have stalled.

In rural areas, the government has been putting pressure on MNOs to share infrastructure in order to reach the government’s universal access goals. Movitel holds a competitive advantage in this area and it is uncertain what influence the presence of FRELIMO as a shareholder will have in motivating them to allow co-locations. Guyed masts are however less suitable for additional tenancies, lacking the deep foundations of fixed towers, they have a much lower wind load capacity.

A large proportion of the older fixed structures in Mozambique are however suitable for additional tenancies. Built with a higher load carrying specification, and with microwave backhaul dishes being removed as fibre backhaul increases - the structures have significant potential for additional operator equipment.

The physical capability of towers hasn’t however been the limiting factor in the proliferation of infrastructure sharing in the country - MNOs had typically seen their networks as a competitive differentiator, considering the incomplete population coverage and network rollout of a few years ago. Things are however starting to change and MNOs are including site sharing in their network rollout plans.

To raise capital and reduce operating costs, mCel announced that it was planning to sell its portfolio of ~1,000 towers. The operator has appointed Barclays to oversee the process, however there have been concerns in the tower community around mCel’s suitability as an anchor tenant, given their financial difficulties. How the recently announced plan to merge mCel and fixed-line TDM will affect the transaction remains to be seen. With a portfolio of their own, there is the potential for the TDM towers to be added to those of mCel’s, however it is likely that the merger may slow down any potential divestment.

As well as there being questions over the suitability of mCel as an anchor tenant, there have been question marks raised over the condition of the mCel towers and what degree of investment capex would be required to bring them up to standard. Should the bill mandating infrastructure sharing be passed however, the business case for a towerco looking at the mCel towers would be strengthened significantly.

There has been speculation in the market that Movitel are also considering a sale of their towers, however a formal process has not been announced. Rumour has it that the entrance of Movitel into the market was part of a government plan to expand network infrastructure and then sell the assets. If this were the case, the decision to sell may be more likely to come from FRELIMO than Viettel.

Movitel’s strategy of rapidly rolling out low cost infrastructure means that the value and attractiveness of the company’s sites may be reduced, what’s more, the high proportion of guyed masts means that many are not suitable for infrastructure sharing. TowerXchange has also heard unconfirmed speculation that many of Movitel’s sites are not fully permitted.

At present there are no towercos active in Mozambique. In late 2013/ early 2014 a company called TowerCo Mozambique tried and failed to set up towerco operations in the country. Amidst extensive rollout by Movitel, TowerCo Mozambique held conversations with both mCel and Vodacom to facilitate the more cost effective deployment of sites for the two operators by adopting a site sharing model. Whilst the company is understood to have identified 50 potential sites following lengthy high level discussions with the two operators, they were unable to turn this into contracts. It is believed that discussions faltered as TowerCo Mozambique were unable to reach an agreement with the two MNOs on leases rates with mCel and Vodacom exhibiting a preference for bilateral swaps.

There does not appear to be a high level of interest in the mCel towers (or the Movitel towers should they come to market) from the usual suspects in sub-Saharan African tower transactions. Focus from each of the towercos remains on integrating and improving the operational efficiencies of their existing sites and at present, the potential to enter the virgin towerco territory of Mozambique does not appear to be whetting their appetites.

Whilst the transaction could present an opportunity for a new domestic towerco akin to TowerCo Mozambique, a significant barrier exists for such a company to raise the finance to participate in such a process.

With plans to merge mCel and TDM just coming to light at the time of going to press it will be interesting to see how the restructuring of the state owned telecommunications players will affect mCel’s proposed tower sale. What’s more, whilst all has gone very quiet on the bill mandating MNOs to share infrastructure, should such a bill pass it will definitely strengthen the business case for a towerco to enter the market.

Whilst the country is in the midst of an economic crisis, and the low oil prices have delayed the exploitation of Mozambique’s offshore gas reserves, it is just a matter of time before development of the country’s gas industry begins. When this happens, it will deliver a significant boost to the economy which will have a knock on effect on the telecoms sector.

The entrance of Movitel in 2012 dramatically shook up the market and with a number of significant changes to Mozambique’s telecoms sector and economy now on the horizon, Mozambique is an interesting country to watch.

For further discussions on the Mozambique tower market, join the Mozambique roundtable at the upcoming TowerXchange Meetup Africa & Middle East being held on 19-20 October 2016 at the Sandton Convention Centre, Johannesburg. Over 250 leaders of the African and Middle Eastern tower industry are set to attend, for more information visit https://meetup.towerxchange.com/event/33ac6379-8f70-407b-9760-92cef4e0919d/summary