MENA infrasharing drivers and inhibitors

To date, 99% of MENA’s towers sit in the hands of the region’s MNOs. Orange’s cancelled transaction in Egypt, coupled with the cancellation of Mobily and Saudi Telecom Company processes in Saudi Arabia may suggest that figure is set to remain, however a wave of activity has started and those closest to the market think it is only a matter of time before things start to change. Saudi Telecom Company are in the process of starting a tower joint venture with Mobily; Fanasia have pioneered a new towerco business model in Iran; and Towershare are reportedly the frontrunners in Kuwait’s first tower transaction. TowerXchange were delighted to welcome all three companies to an open panel debate at this year’s Meetup Africa & Middle East with each of these companies also joining interactive roundtable discussions with a cross section of the MENA telecom industry’s most important stakeholders.

When discussing MENA, whilst one has to be cognisant of the fact there are large differences between the countries, common threads tie the region together. A strong Arabic influence, a central involvement of government in the business sector, similar climates and environmental conditions and a prevalence of key telecom players across multiple markets (figure one). What’s more, the region as a whole has yet to see the evolution in tower ownership witnessed across the globe, with over 99% of MENA’s sites remaining in the hands of the mobile network operators.

The period in which MNOs entered a given market, their market share, how they have funded their operations, as well as whether they are an independent company or part of a broader group, are all factors which influence a company’s strategy and decision making processes.

In comparison to other regions, ARPUs in the Middle East have been relatively well preserved, with the region having some of the highest data usage and with voice still generating strong revenues. MNOs such as Etisalat and Saudi Telecom Company have particularly healthy balance sheets. Roundtable participants questioned whether the focus of such MNOs was geared more towards improving top line revenues in place of reducing costs, with some observers commenting focus was much more on the former.

Other MNOs in the market are much more capital constrained, with highly leveraged balance sheets and a need to rollout 4G in a bid to keep up with their competitors, such players are keenly focused on accessing new sources of capital.

Quality of service requirements remain a key focus for all MNOs in the market. With there often being little difference in market share between MNOs in some countries, maintaining that competitive edge through quality of service, OTT offerings or innovative packages are key focal points for companies.

It has been observed that MNOs in the region tend to be very much led by the CTO and only in recent years have the CFO and commercial teams become more involved in influencing the strategic direction of an operator, balancing the technical influence.

The government also has a very strong influence on MNOs in the region; several operators originated as government-owned entities with a number still having the government as a significant stakeholder; others that developed more independently often built infrastructure under a build-operate-transfer structure and thus in these instances the government would eventually become a key stakeholder in infrastructure. Some observers felt that regardless of ownership, MNOs often operated very much like nationalised organisations, although this opinion was up for debate. Participants questioned how a government-centric MNO behaved relative to those that were more independent; one MNO from the region commented how they had a culture of being very risk averse, adding that they were very good “second adopters”, looking at what innovative strategies have worked for others and copying them effectively.

The involvement of the government in the telecoms landscape also meant that MNOs are generally subject to high degrees of regulation and taxation and this presented some concerns to those looking to enter the Middle Eastern market. Uncertainty over how regulation may evolve and expectations that they may wish to get their cut of revenues in the sector still remained one of the biggest concerns.

Whilst there has to be moderation in the way that the government is involved in the telecoms sector in order to not be counterproductive to investment, there are areas in which observers see governments making positive steps to support the telecoms sector. There are several initiatives to improve coverage to rural areas across the region; in Oman, the government is pushing infrastructure sharing, in Bahrain the government has issued an RFP to look at how to rationalise 1,500 towers in a country that only needs in the region of 400 and in Iran municipalities have mandated infrastructure sharing, which has led to significant decommissioning.

Ground lease rates in the Middle East are generally high, more akin to lease rates in Europe than the African continent. A significant portion of the land is government owned and the land that is privately owned is often held in big blocks by real estate companies which gives MNOs and towercos less negotiating power. With regards to permitting, participants noted that slow approval times and requirements from municipalities are often a major hurdle to pass.

Whilst a handful of transactions have been started in the past, none have seen it through to fruition. In 2015, Orange Egypt (then MobiNil) agreed the sale of 2,000 sites, approximately one third of their portfolio, to Eaton Towers, only for the transaction to be called off earlier this year. Both Saudi Telecom Company and Mobily started tower processes in Saudi Arabia in 2016, only for those too to be cancelled. With no established towercos of a similar scale to sub-Saharan Africa’s ‘big four’ active in MENA, the Saudi MNOs voiced concerns over a new entrant’s ability to maintain and execute tasks to their high standard. CTOs require reassurance that the acquiring party not only has the international expertise but also a network of local subcontractors and suppliers, a prerequisite which they felt was not present amongst potential candidates.

Whilst STC and Mobily had hesitations regarding the sale of their towers, Zain is in the process of selling its portfolio of 6,800 sites in Saudi and 1,600 sites in Kuwait. The MNO has reportedly narrowed down the offers in Saudi to two bidders and in Kuwait they are reportedly in exclusive negotiations with a towerco, who many believe to be Towershare. Participants at the Middle East roundtable felt that once the first transaction had been completed there would be a domino effect and we would start to see the market opening up to further transactions. Based on previous experience however, participants felt that processes were likely to still be long and drawn out plus with restrictions on ownership in certain countries, deal structures may be complicated.

Questions were raised as to how towercos could validate the commitment of MNOs to a tower sale process and how one can identify who the serious parties are. It was commented that numerous parties had spent a lot of money on the STC and Mobily processes, only for them to be cancelled. In response to the question, those who were participating in the transactions commented that you could obtain a sense of how serious a process was by the attitudes of the MNO when you enter the formal process. They also commented that if the MNO had appointed an advisor to carry out due diligence or if they have a financial advisor in place for the process, the board must have approved at least US$4mn to get to that point, another indication of their commitment to a transaction.

Having observed the evolution of the independent towerco markets in other regions, some participants highlighted the concerns associated with disparate lease rates across the country. Whilst some MNOs may prefer to agree on a higher lease rate in exchange for a higher upfront release of capital, this can lead to difficulties down the line as MNOs benchmark their opex against that of their competitors. Stakeholders need to work together closely to ensure that the market evolves sustainably.

In terms of the business case for a towerco looking to enter the market, the mature nature of most countries’ telecom industries means that opportunities in new build will be limited. One area however where towercos can add significant value and generate revenue is in decommissioning. WIth a high degree of parallel infrastructure in the region, extensive decommissioning programmes are required and re-using those towers to meet government targets for improved high speed broadband coverage to rural areas presents lucrative opportunities.

Speaking on the Kuwaiti market where Towershare are believed to be in exclusive negotiations with at least one of the MNOs, the towerco voiced how decommissioning would be very much top of the agenda for a towerco looking to enter the market. In Iran, local towerco Fanasia’s business model is also very much focussed around decommissioning, with their latest project aiming to reduce a network of 1,000 sites in Iran’s second most populous city to just 350. The formation of STC and Mobily’s joint venture is expected to also lead to a decommissioning of a significant number of the two operators’ combined portfolio of over 25,000 sites, with STC stating that a lot of investment could have been saved had the two entered into the agreement earlier.

On the subject of active infrastructure sharing in the region panellists felt that it would be inevitable and that policy may also play a role in driving this. Active infrastructure sharing makes a lot of sense from a cost perspective for companies that would need to buy a lot of new equipment, for example the region’s WiMAX players, but participants felt that it was challenging to set up.

In the case of STC and Mobily’s joint venture, they have opted to stick to passive infrastructure sharing. With the operators being at different stages in their lifecycle as well as having different amounts of spectrum, the decision was made to not introduce extra levels of complexity and rather omit active sharing from their plans for now.

With regards to negotiating active sharing agreements where towercos are involved, there are additional levels of complexity. Towershare commented how they were open to discussions with MNOs but that meaningful contracts are very challenging to draw up when there are so many unknowns. Ultimately there had to be some agreement to agree on active sharing details at a later stage.

Participants commented that there were different permutations of active sharing and that in building solutions would likely come first to MENA. Speaking on this, Fanasia commented how they were working on active sharing agreements in shopping malls and airports in Iran and forecasted further work to be done in the field.