BMI Industry Trend Analysis: Analysing the risk profile of Africa’s towercos ahead of their prospective IPOs

BMI View: We expect that at least one Sub-Saharan African tower company will list in 2018, with Eaton Towers, Helios Towers and IHS Towers likeliest to announce an initial public offering (IPO) before long. Cash injections would give the newly listed company or companies the impetus to scale-up in existing markets or more aggressively pursue acquisitions in new markets.

Prospective investors will need to consider each player’s financial and organisational strengths and weaknesses. They must also consider the long term stability of each company’s operational foundations, with the fundamentals of the markets within their existing footprint key to understanding how likely they are to deliver attractive returns on investment.

We have used our proprietary mobile subscription forecasts, macroeconomic forecasts and operational risk indices to assess the size and growth outlook for each company’s current footprint. Between them, the three tower companies we have surveyed are active in 13 markets, each with their own very distinct investment risks and rewards profiles.

Eaton Towers has the smallest number of towers under its control than any of its rivals, with 5,000 units deployed across its five markets (Burkina Faso, Ghana, Kenya, Niger and Uganda). The company has grown rapidly since we last partnered with TowerXchange to assess its importance to the African mobile market and it now lags only a little way behind Helios Towers in terms of size. In addition, it is present in four mature markets where operators will need to manage capex costs even more tightly than ever, so opportunities arising from densification or rationalisation should not be overlooked.

From an Operational Risk perspective, Eaton has a better risk profile than Helios, averaging 36.3 points out of a potential 100 across its footprint. In our Operational Risk Index, the higher the score the lower the risk. A presence in countries with robust trade and investment frameworks means Eaton benefits from access to consumers either already owning smartphones or who will soon upgrade, with rapid growth in data service usage likely to come on the back of that trend. There will therefore be a greater need for higher tenancy on existing towers or for new towers to be built.

Additional investments in wireless or fibre backhaul might also be expected. These high-value assets are often targeted by criminals and, worryingly, only one of Eaton’s five markets has a relatively attractive Crime & Security risk profile. Niger has one of the least attractive Operational Risk profiles across Eaton’s footprint, but it is the smallest of Eaton’s businesses.

For the most part, Labour Market risks are acceptable, linked to the relatively high rates of population urbanisation in Eaton’s five markets, and this in part aids the countries’ Logistics profiles as employment in road, rail and port infrastructure is high, suggesting good access to both urban and rural plant for maintenance and expansionary needs.

Helios has 6,501 towers under its control, spread across four markets (Congo-Brazzaville, Democratic Republic of Congo, Ghana and Tanzania). However, its Operational Risk profile is less attractive than that of Eaton, mostly because of its exposure to the politically volatile, infrastructurally-weak and generally unstable DRC.

The DRC has an overall Operational Risk score of 25.6 for 2017, compared with an average of 37.8 out of 100 for the other markets in Helios’ footprint. Significantly, it has a score of just 4.4 out of 100 for the business cost of crime, highlighting the considerable challenges Helios faces in one of its largest markets.

Helios covers markets with relatively high urbanisation rates, this means it has few incentives to expand into rural areas and it must therefore invest more on local backhauling, increasing tenancy ratios, lowering power utilisation costs and attempting densification. This will be difficult to justify, given that its markets are forecast to record annual total mobile and 3G/4G subscription growth rates of just 3.4% and 22.3%, respectively, real GDP growth is expected to be much weaker in markets controlled by rivals. Eaton Towers faces more attractive prospects in this regard.

IHS is the most attractive of the three tower companies we survey, owing in no small part to its presence in some of the largest addressable markets in the region. Nigeria is its key market, having acquired towers from MTN and Etisalat and having bought rival HTN Towers. It has further solidified its presence in Nigeria through its acquisition of the broadband infraco licence for the North Central Zone, for which it is rolling out wholesale fibre-optic networks in the region around capital city Abuja.

Ordinarily, Nigeria’s huge population would make it the most enticing market in the continent, with the 3G/4G subscriber base expected to more than triple to 124mn between 2016 and 2021. However, record fines imposed on MTN (even after being reduced) and the withdrawal of Etisalat Nigeria’s shareholders after cash-starved local banks pressured the company for loan repayments mean that investors will be more wary of investing in a market that has suddenly become much less predictable.

While IHS currently has no footprint in South Africa, the company has cultivated a deep partnership with MTN in other markets, which would make it a strong contender should MTN’s South African assets come to market.

IHS also benefits from being the sole tower operator in countries with rapidly growing telecoms markets and bright economic prospects. The BMI country risk team forecasts Cote d’Ivoire to be the fastest growing economy in Sub-Saharan Africa over the five years to 2021, which we expect to have positive knock-on effects in demand for more advanced telecoms services from consumers and enterprises alike.

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Tower companies present: Eaton Towers

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Orange’s acquisition of Airtel Burkina Faso in March 2017 will provide a welcome boost to the mobile market as the newcomer is more focused on value-added services as a revenue growth driver than its predecessor. Orange Money and similar services are likely to be used as tools to attract and retain customers and we expect incumbent Onatel to respond with innovative new services of its own. Third operator Telecel is likely to remain a minor player, given its relatively limited resources.

Although Airtel accounted for 39.4% of the country’s 16.387mn mobile subscribers as of March 2017 (latest available data from regulator ARCEP), it accounted for 41% of industry revenues and 7% of capex in the first quarter of the year, only a little behind market leader Onatel. We expect revenue and capex contributions to increase under Orange’s ownership. Airtel had already sold its local towers to Eaton under a leaseback arrangement struck in October 2015, so there is limited scope for Orange to pursue further asset rationalisation to achieve operating efficiencies, so a focus on differentiated mass-appeal services is inevitable.

After mobile money, video content seems the next likeliest avenue for diversification, although we do not expect a rapid movement in this direction while disposable incomes remain subdued. In the longer term, however, tower operators will need to consider whether to pursue densification strategies or augment backhauling resources in order to respond to higher data traffic requirements.

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Tower companies present: IHS Towers

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Cameroon’s telecoms market is benefiting from increased competition in the mobile voice and broadband sector aided by greater availability of cheaper bandwidth, courtesy of new international cables. The market shed 1.24mn mobile subscribers in 2016, the result of mandatory SIM registrations that began in 2015. A return to growth was seen in H117 and we expect this trend to continue now the bulk of the SIM registrations/deactivations have taken place.

Healthy 3G/4G uptake momentum will be seen over the five years to 2021 given that there is still room for organic growth. Operators will need to innovate and invest in higher-value offerings to offset aggressive pricing, and the growth of messaging and over-the-top services which are driving down voice revenues. A new MVNO (YouMee Mobile), which launched in August 2017, the introduction of mobile number portability (MNP) and the anticipated launch of 4G services from Viettel-owned Nexttel will increase competition, although it will likely drive down revenues further.

Vodafone’s data-only LTE service it operates in partnership with Afrimax was suspended until further notice in September 2017. Vodafone’s service is aimed at the high end of the market and whatever the outcome of the suspension, does not have an impact on our top-level subscription growth forecasts. MTN will continue to account for around 50% of mobile subscriptions, with Nexttel working hard to erode Orange’s one-third market share.

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Tower companies present: Helios Towers

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Volatile mobile market growth is apparent in Congo-Brazzaville, arising from operators’ concerted efforts to shed inactive accounts. Modest uptake in rural areas will contribute to organic subscriber growth but, overall, the market has few inherent expansion prospects over the medium to long term. However, 3G migration continues and MTN has launched 4G services so we now anticipate faster adoption rates of advanced services.

There are three mobile network operators, all of which are backed by regional players. MTN Congo and Airtel Congo compete with the much smaller Bintel-owned Equateur Télécom (trading as Azur Congo). Airtel had a 3G monopoly for nearly two years until MTN launched its own 3G service in August 2013 and 4G in December 2016.

Azur continues to struggle to compete with its larger rivals. At the end of June 2017, Azur’s 331,000 subscribers gave it a market share of 7%, up slightly q-o-q. Nonetheless, we believe Azur’s performance will continue to be overshadowed by its larger rivals (MTN: 50%, Airtel: 43%) for the foreseeable future, with some reports questioning its viability.

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Tower companies present: IHS Towers

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Côte d’Ivoire’s mobile market will benefit from recent consolidation and the launch of new technologies. 4G services have been launched and the revocation of the licences of minor players leaves Orange, MTN and Moov free to create a more rational competitive landscape. The strong macroeconomic outlook, as well as clear demand for advanced services such as mobile money, makes the country a bright spot in the region for telecoms operators.

The telecoms market in Côte d’Ivoire is in a state of flux. The success of 3G and mobile data services led the regulator to award the first licences for LTE, so that operators can take advantage of the demand for advanced data services; Orange and MTN launched 4G services in June and August 2016 respectively. The government altered the structure of the market, revoking the licences of the smaller players Comium, GreenN and Café Mobile. Whilst the government subsequently awarded a license to LPTIC (GreenN’s backer), that too has since been revoked. Whilst smaller MNOs have struggled to compete with the more dominant players, the introduction of mobile number portability, which the regulator aims to have introduced by December 2017, would help any future new operator.

Out of 31.3mn subscribers at the end of June 2017, Orange served 13.2mn and held 42.2% of the market. MTN’s 11.0mn gave it 35.2% and Moov’s 7.1mn gave it 22.7%.

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Tower companies present: Helios Towers

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Since Orange completed the acquisition of Tigo in April 2016, there are five active mobile network operators in the DRC: Vodacom, Airtel, Orange, Supercell and Africell. South African operator Smile plans to launch 4G services by the end of 2017, though 2G licensee Yozma (Timeturn), which had started testing its network at end-2014, appears to have defaulted on its licence and is not active. Despite the excessive number of operators, the DRC remains underserved in terms of coverage and service quality.

A mandatory SIM registration process which began in December 2015 means operators have to disconnect further inactive SIMs with each passing quarter. Further disconnections are likely, but volumes will be lower as most customers would have completed SIM registration by the end of 2016.

We believe Vodacom led in terms of market share at the end of June 2017, having completed the bulk of its SIM deactivations by Q116. With 10.79mn subscribers, it accounted for 30.41% of the market at that time. Its main rival is Airtel: with 10.1mn subscribers, its share stood at 28.5% of the market at the end of June.

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Tower companies present: Helios Towers, Eaton Towers (plus American Tower)

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Ghana’s mobile market is among the most competitive in Sub-Saharan Africa (SSA) with six mobile operators and a mobile penetration rate of 126.1% in June 2017. As the opportunities to acquire new subscribers organically dwindle over the next five years, we expect operators to increase their focus on migrating customers to more advanced mobile data services in order to offset declining revenue growth from traditional voice services. Ghana’s 3G penetration skyrocketed throughout 2015 and showed stable signs in 2016. However, intense competition between the mobile operators and the depreciation of the currency have eroded ARPU levels, with take-up of data services and digital content not yet strong enough to offset falling voice revenues.

MTN dominates the market and its share of 47.6% in Q217 puts it in a very strong position. Smaller players Globacom (Glo) and Expresso, with a combined market share of less than 3%, are likely operating at a loss and will not be able to compete with the regional giants indefinitely. With Ghana’s new licensing framework enabling MVNOs to enter the market, in theory there is little risk of consolidation down to four players - which would reduce consumer choice - though no MVNO launch appeared imminent by mid-2017. Meanwhile, the Tigo-Airtel merger that concluded in November 2017 creates a new carrier with a subscriber base of around 10.0mn and a market share of nearly 27%, which has displaced Vodafone from its second-ranked position.

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Tower companies present: Eaton Towers (plus new players including SEAL Towers emerging)

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Kenya’s mobile market is fiercely competitive, with the country’s two smaller operators, Airtel Kenya and Telkom Kenya (previously Orange Kenya), and new MVNO entrants Equitel, Mobile Pay Limited and Sema Mobile looking to erode market leader Safaricom’s dominance. Such is the level of competition that it forced the third operator, YU, to exit the market in 2014, dividing its assets between Airtel and Safaricom. The former took over YU’s subscriber base and Safaricom acquired its network infrastructure and employee base.

YU’s exit left the Kenyan mobile market with three active operators - Safaricom, Airtel and Orange. Safaricom remains the dominant operator, with Airtel’s boost from the acquisition of YU’s subscribers proving short-lived. Ultimately, Airtel’s market share has been declining, from 20.2% in Q115 to 16.4% in Q217. Much of that outcome has been the result of intensifying services and price competition from new MVNOs active in the market.

Safaricom launched 4G services in December 2014 and Airtel has moved to follow suit, although it only began testing its 4G network in January 2017. Backed by new owner Helios Investment Partners, Telkom Kenya began rolling out its 4G services in June 2017. Their delayed entry means that Safaricom will dominate the 4G market, particularly if it leverages the technology to offer more complex M-PESA-branded mobile money services, MFS being key to encouraging greater non-voice usage.

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Tower companies present: Eaton Towers

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There are four mobile network operators in Niger, serving 7.56mn subscribers in total at the end of 2016 (latest data from the regulator, ARTP). The largest is Celtel; with 3.9mn subscribers, it commands a market share of 51.6%, well ahead of Orange (22.9%) and Moov (18.8%). Niger Telecom is the smallest player in the market; it was established in 2016 through the merger of mobile operator Sahelcom and fibre backbone operator Sonitel.

Niger’s telecoms market is characterised by a high degree of market competition and the presence of three international, well-established groups. Nevertheless, chronic poverty, low spending powers and weak incomes continue to constrain robust growth in the market. Furthermore, with the majority of consumers based in rural areas, investing in mobile infrastructure is a challenging affair. Significant economic and social headwinds will continue to weigh on market growth through to 2021 and beyond. Nevertheless, the market has significant growth potential, as highlighted by the low degree of penetration and the regulator and the government remain actively committed towards boosting competition and equitable telecoms access in the country.

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Tower companies present: IHS Towers (plus American Tower, BCTEk Engineering, Communication Towers Nigeria, Pan African Towers, Hotspot Network and various other small players)

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Nigerian mobile subscriptions totalled 142.87mn at the end of June 2017, down by 4.9% y-o-y, with penetration reaching 74.9%. Globacom continued to see positive customer growth in the second quarter, but this was not enough to offset losses from Airtel, MTN and 9mobile (formerly Etisalat). The first quarter of 2017 had seen the market shed 2.715mn subscribers, which implies a high rate of inactive SIM ownership.

The country has four active GSM operators - MTN, Globacom (Glo), Airtel and 9mobile - and two active mobile CDMA operators - Visafone and Multi-Links. In 2015 MTN acquired Visafone, with the aim of repurposing its 800MHz spectrum for 4G services; however, the regulator is yet to allow this to happen.

Creditors currently control 9mobile after Etisalat and Mubadala pulled out over their failure to repay a USD1.2bn loan that had been called in by a group of 13 local banks, anxious to reduce their exposure to the devalued Naira. A new lead investor is being sought. However, intense competition and a regulator that seems intent on inflicting harsh financial penalties for violations of service quality and SIM registration - MTN was hit by an industry-record USD5.2bn fine in 2015, a reduced version of which it is struggling to repay - will deter most investors.

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Tower companies present: IHS Towers

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Mobile subscriber growth in Rwanda is expected to remain robust, owing to the healthy competition that exists between the country’s three network operators - MTN, Tigo and Airtel - as well as the long-term potential for the government to increasingly implement policies which are conducive for operators expanding in the market. With a penetration rate of 68.5% at the end of June 2017, Rwanda’s mobile market has strong growth potential. This potential will be accentuated by the current focus on MFS and advanced data networks.

In Q217 the mobile market contracted by 6.3% y-o-y, reaching 8.37mn subscriptions. We believe this was the result of a combination of decelerating economic growth (real GDP declined from 8.9% in 2015 to 5.9% in 2016 and to 3.7% in 2017) as well as saturation in operators’ core urban markets as players focused more on value growth through services rather than subscriber growth via the expansion of networks to underserved areas.

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Tower companies present: Helios Towers

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There were 40.23mn mobile subscriptions in Tanzania at the end of June 2017. The market has been growing robustly since late 2014, driven by falling prices in anticipation of the arrival of Viettel-owned Halotel in 2016. We believe the market harbours numerous inactive SIMs that could be disconnected at any time. Airtel and Vodacom lost large numbers of SIMs in 2016, but this was most likely due to customers switching to Smart and to the new 4G service provided by incumbent TTCL. The periodic discounting continued into H117 when the market shed another 317,000 subscribers.

The market, which has long been served by six operators (Vodacom, Airtel, Tigo, Zantel, TTCL and Smart), has most recently been expanded by MVNO Amotel. We believe growth in Tanzania’s mobile market will be driven by competition as well as increased investment in network expansion by operators. As such, Amotel has an important role to play in market development. Given the high level of competition in the market and the high cost of rolling out infrastructure to underserved rural areas, we believe the market would benefit most if Airtel were to withdraw, as it has threatened to do.

There is room for growth in mobile services in Tanzania, especially in rural areas, which represent around two-thirds of the country’s population: Tanzania had a mobile penetration rate of 72.2% at the end of June 2017. We forecast mobile subscriptions to grow to 47.4mn in 2021, reaching a penetration rate of 73.3%, with the main driver for that growth being 3G/4G upgrades, which by then will represent 31.65mn subscribers.

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Tower companies present: Eaton Towers (plus American Tower)

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We hold a positive medium-term view for the Ugandan mobile market. Sector growth will stem from low penetration rates and falling tariffs. Although operators continue to make modest investments in advanced data networks, MFS is likely to remain the primary key VAS in the mobile market as traction in the uptake of advanced mobile data services remains slow. Low spending power, poor urbanisation rates and chronic poverty all constrain premium service upselling. Limited access to devices will also keep a lid on the market’s true potential.

There were 23.43mn mobile customers at the end of Q217. The market is highly competitive, with seven operators present. Operators focus on basic services, as opposed to more premium offers, with the exception of mobile money. MTN’s nationwide 4G coverage, Vodafone’s 4G-only services and Smile Telecom’s VoLTE offerings are only attractive to a small proportion of the population. However, as operators have not put as much effort into rolling out to rural areas, because of its costs, this is a way they can differentiate themselves, even if uptake remains limited for services that are expensive.

The mandatory SIM registration that came into effect in 2015 resulted in significant losses, but the market seems to be recovering as well as organic growth prospects. Nevertheless, the regulator has been pushing for a second re-registration drive, mandating that each SIM card be linked to a government issued national ID card number, backed by the national ID card registration database. An initial sweep in September 2017 suggested that 4.2mn SIM cards could not be tracked to a national ID card number. Consequently, a significant number of SIMs may be deactivated in late-2017 and early 2018 as a result of the stringent regulator criterion. The government and the regulator have both taken opposite stances on the matter with the government proposing a higher degree of leniency whereas the regulator has been insistent on a stronger re-registration effort.

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Tower companies present: IHS Towers

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Zambia had 12.40mn mobile subscriptions at the end of June 2017, a y-o-y increase of just 1%. We forecast annual growth to remain positive, but far from stellar, throughout our forecast period to 2021. Operators will continue investing in rural network expansion to unserved and underserved areas, and address quality of service problems across all networks, including 2G. An increased focus on migrating customers to 3G/4G and encouraging steady growth in data usage patterns will also aid subscriber and revenue growth. Moreover, we maintain that there is significant room for growth over the medium- and long term as the market grows toward maturity and new technologies are adopted. Our view is underpinned by the fact that penetration in the market had yet to surpass 75% as of June 2017.

There are three operators in Zambia, with the market dominated by MTN (45.0%) and Airtel (40.5%). Incumbent Zamtel remains a minor player, with 14.5% of subscribers. However, it has been making impressive gains relative to its larger rivals, almost doubling its market share y-o-y. We believe its improved performance stems from expansion of its network, leveraging new regulator-funded infrastructure, competitive pricing and service innovation.

Advanced mobile data services provide a useful opportunity for Zambian operators to diversify their revenue stream away from traditional voice services. We expect the operators to take advantage of the strong demand for data services and the increasing availability of affordable data-enabled devices to expand their data offerings and next generation data networks. In addition to mobile data services, operators are also rolling out a wide range of non-voice services, including MFS, mobile health and other entertainment- and information-based value-added services.