TowerXchange’s updated Pakistan tower market study 2017

With two recently announced acquisitions, edotco will own 38.2% of Pakistan’s 34,300 towers. To put these deals in context, TowerXchange has updated our Pakistan tower market study to include a deep dive into the details of who is buying what and for how much, and what this means for Pakistan’s fast-growing mobile market.

While towercos have been licensed in Pakistan since 2006, towers were initially seen as a source of competitive advantage by fiercely competitive MNOs. Attitudes toward infrastructure sharing have thawed since 2011, with over 10,000 co-locations now on Pakistan’s towers. That culture of infrastructure sharing has now crystalised with the market’s first major tower transactions, heralding the rise of edotco, which whose tower portfolio will be the largest and most pervasive in the country.

One of the main drivers for edotco’s acquisition of Tanzanite Towers in Pakistan is now clear, with the subsequent announcement that edotco has reached agreement to acquire ~13,000 towers from VEON’s Pakistan market leading opco Jazz.

Jazz (then Mobilink) had carved out their towers to subsidiary Deodar, consolidated towers acquired from Warid, and has now reached agreement to sell Deodar to edotco. The transaction was reported reported by VEON as including “almost 13,000 towers”, and by edotco as including “over 13,000 towers.” As readers familiar with tower transactions will appreciate, the final tower count will be confirmed once due diligence is complete and the transaction closed.

edotco is acquiring a 55% controlling stake, while the Dawood Hercules Corporation (DH Corp), will acquire a 45% stake in edotco Pakistan. DH Corp, a listed investment conglomerate in Pakistan with a US$600mn market cap, brings both capital and substantial local market knowledge.

The total proposed deal value is US$940mn, funded by US$600mn of local debt and equity splits of US$174mn from edotco and US$166mn from DH Corp.

Hussain Dawood, Chairman of Dawood Hercules Corporation said: “Our group has a history of, and passion for, bringing FDI (Foreign Direct Investment) to Pakistan through joint ventures. We work tirelessly in developing the capacity and capability of industries that are critical to addressing key societal challenges. We believe this strategic collaboration with edotco adds significant value to our commitment.”

Jean-Yves Charlier, CEO of VEON (formerly VimpelCom) told his staff “The proceeds generated from this transaction, valued at over US$900mn, will be reinvested in Pakistan, bringing further improvements to our technology and services. The transaction will help us to strengthen our position as the number one telecommunications and digital service provider in Pakistan, with over 52 million customers.” As to the specifics of how the proceeds will be reinvested, much will doubtless be used to pay down debt built up in the 2016 acquisition of Pakistan’s fourth ranked operator Warid, and the US$295mn spent on two 10MHz blocks of 1,800MHz 4G spectrum, acquired in June 2017.

Following a previous sale of towers by their opco in Italy, the agreement to sell towers to edotco represents the latest phase of VEON’s quest to become “an asset light and customer obsessed company”. Bangladesh may be the next market where VEON monetises its towers; with the regulatory regime surrounding towercos finally clarifying, VEON are likely to restart the process to sell Banglalink’s towers before the end of 2017, and may find edotco again interested in the assets.

TowerXchange sources suggest that VEON’s process to sell their Pakistani towers became a three horse race, a dynamic made interesting when the leading horse was acquired! edotco acquired Tanzanite Towers for US$88.9mn, consolidating Tanzanite’s existing 700 towers while buying out a rival who had been rumoured to have entered exclusive negotiations to acquire the Jazz towers. 70% of Tanzanite’s towers are in urban locations, jand 40% are ground based towers. The tenancy ratio was 1.6, and Tanzanite reportedly had a pipeline of 200+ new build towers, derived from contracts with all four of the country’s MNOs. Prior to the acquisition of Tanzanite, edotco’s footprint in Pakistan consisted of around 20 towers, plus 13,000km of fibre, acquired when they entered the country in 2014.

Suresh Sidhu, CEO of edotco Group and member of the TowerXchange advisory board, said: “We are pleased to be able to consolidate our expansion into Pakistan with this acquisition. The acquisition of Deodar is a critical part of our growth strategy and ambition to position edotco as the leading independent telecommunications infrastructure services provider in Asia. With Dawood Hercules as our partner, we are confident in the potential of the market in Pakistan and will continue to demonstrate our long-term commitment to supporting the development and enhancement of the country’s telecommunications infrastructure.”

The deal remains subject to the customary and regulatory conditions precedent being fulfilled, and the target completion date is the end of November / beginning of December 2017.

VEON was advised by Allen & Overy and by Lazard, edotco was advised by Delta Partners and Herbert Smith Freehills.

One of Asia’s fastest growing mobile markets, The Pakistan Telecommunications Authority reports that mobile teledensity is currently 70.85% in a country with a population over 200mn. There is ample room for growth in mobile broadband penetration, currently around 24%. ARPUs are low, reportedly around US$2, but GDP is growing, disposable income is increasing, and the macro economic indicators are good for MNO and towerco growth in Pakistan.

3G was launched as recently as the end of 2014, but adoption has been swift, aided by sub-US$30 3G handsets coming on the market. 4G launches commenced in 2015, with compatible devices increasingly available. 3G and 4G rollouts are both continuing, with the current focus being overlaying existing sites, while future densification may prompt some limited new build of infill sites.

Following the aforementioned acquisition of Warid, VEON rebranded their Pakistan opco from Mobilink to Jazz, consolidating their market leadership – they currently have 52.3mn, or 37.4% of the country’s subscribers. In 12 years Telenor and China Mobile’s Zong have acquired 40.7mn and 28.4mn subscribers respectively, while Etisalat’s Ufone has 18.3mn subscribers.

While Pakistan’s tower network is extensive, and population coverage in Pakistan is believed to be in excess of 90%, population per tower is ~6,000 compared to ~1,500 in Malaysia.

Pakistan has a Universal Service Fund which actively awards capital to deploy towers in remote locations.

As Pakistan’s oldest and market leading MNO, Jazz has Pakistan’s largest network, and is often the sole service provider in rural areas, implying the torch will be passed to edotco to take responsibility for much of Pakistan’s rural network management .

After initial reticence to share infrastructure, in the last five to six years a culture of tower sharing has blossomed in Pakistan. In particular market leader Jazz, then Mobilink, grasped the opportunity to lease out the country’s largest and most pervasive tower portfolio on a commercial basis since 2011-12, adding significant co-locations and value to the assets.

edotco is acquiring both the original Mobilink towers and 4-5,000 towers formerly owned by recent acquisition Warid, and in doing so has inherited an estimated 2-3,000 sites in overlapping locations (within 250m of each other). While many towers will be retained for densification, there are significant opportunities to create efficiencies by decommissioning adjacent sites, saving land costs, and increasing the tenancy ratio of the remaining tower.

While the initial cost per tower valuation of around US$72,300 is near the mid-point for recent Southern Asia comps, excluding zero tenant and duplicate sites the price rises closer to US$90,000 per site.

edotco’s acquisitions of Tanzanite and the VEON/Jazz towers positions the business as the largest independent tower company in Pakistan, with a tenancy ratio above 1.3, and with the country’s leading MNO as anchor tenant.

With around 40,000 towers in six countries upon completion of the Pakistan deals, according to the TowerXchange League Table, the Pakistan acquisition will elevate edotco to become the world’s sixth largest towerco by tower count. TowerXchange wouldn’t be surprised to see edotco overtake Crown Castle (40,085 towers) and Towercom (formerly Reliance Infratel, 45,000 towers) within the next year.

edotco describes Pakistan as having “a mature and clear regulatory and licensing framework for towers and telecom infrastructure.” A towerco licensing regime has been in place since 2006, and the Pakistan Telecommunications Authority (PTA) has set unofficial targets to increase the infrastructure sharing ratio in the country. That said, the usual local site permitting challenges persist, with differing policies from region to region, and multiple layers of taxation.

While edotco has consolidated Pakistan’s previous number one towerco Tanzanite Towers, since 2006 several local entities have been licensed as towercos, although only AWAL Telecom appears to be actively trading as such.

Telenor has leveraged infrastructure sharing to accelerate time to market since entering Pakistan 12 years ago. Telenor Pakistan is a strong promoter of all forms of network sharing; towers (sharing primarily with Jazz), fibre (sharing with Zong), and has taken a lead role in exploring active infrastructure sharing. Telenor and Zong undertook Pakistan’s first RANsharing trials across around 30 sites, while the Norwegian-owned MNO has also shared IBS, both under the MORAN model where spectrum is not shared.

While Telenor has been mentioned on the grapevine as potentially interested in the sale and leaseback of their Pakistani towers, the company has little history of tower monetisation, and no need to release capital; their partnerships with towercos are likely to remain focused on co-location and BTS. Telenor are believed to have a ~7,400 of their own towers, but may prefer to leverage co-location for future rollout: they already have over 2,000 co-locations in Pakistan.

Ufone has been exploring the potential sale and leaseback of their towers in Pakistan for some time. The process was stalled by the de facto merger of PTCL and Ufone, and associated management changes, but Ufone could yet contribute over 6,000 further assets to the pool of commercially shared towers.

China Mobile’s Pakistan opco, which trades under the brand name Zong, has around 9,100 sites, of which around 2,000 are co-locations.

TowerXchange estimate the prevailing tenancy ratio (the average number of tenants across all towers in the country) to be around 1.25 in Pakistan, with a clear pathway to 1.5. Of around 10,000 co-locations in the country, most originate from barter arrangements, with some application of commercial lease rates, but often offset against one another so no cash changes hands. These agreements will continue to be converted to commercial leases as towercos continue to become more prevalent.

Tenancy ratios on commercially leased towers are reportedly rising at a respectable 0.06 per year in Pakistan, but that could accelerate with the rollout of 4G.

Non-traditional MNOs may represent potential upside on tenancy ratio growth in Pakistan, exemplified by LTE service provider Qubee and Wi-Fi Broadband provider BurQ.

Tower lease rates in Pakistan are believed to be in the US$800-1,000 range.

Pakistan’s MNOs cite power as the number one operational challenge in the market, followed by security and landlord issues.

While Pakistan’s electricity grid remains unstable, and outages can last eight or more hours, the situation has improved notably in recent years. Backup diesel genset (DG) runtime is being reduced at sites on the country’s better grid connections, with DGs increasingly being removed from such sites.

edotco will offer a full tower+power service in Pakistan, meaning they will lease tower and ground space as well as providing DC energy.

Less than 5% of the portfolio of sites being assembled by edotco in Pakistan are off grid.

“The majority of Jazz (soon to be edotco) towers have only a small 9KVA DG and out-dated batteries,” said the representative of a Pakistani MNO at the TowerXchange Meetup Asia 2016. “Backup power was not provided for most of our co-locations, so we have to install our own DGs and high capacity batteries.”

“In recent years we have invested US$30-40mn every year into power infrastructure to ensure high availability,” continued the same MNO. “It will be interesting to see if the towercos are open to making that magnitude of investment.”

The range of operational challenges in Pakistan is huge. “We understand Pakistan – we know it is not an easy country in which to operate a tower network,” said one towerco. “But there are commercial implications of this; for example the lease rate for a tower in Karachi and a tower in the FATA have to be different.”

There is a new landmark milestone in Pakistan’s fast growing mobile market. When edotco’s deal to acquire Jazz’s ~13,000 towers closes, edotco will own, and share, the largest and most pervasive tower portfolio in Pakistan, whilst at the same time Pakistan will become edotco’s largest market (in terms of tower count).

The edotco-Jazz deal is transformational; it is not just one of the largest transactions in Pakistan’s corporate history, and one of the largest deals in the history of the Asian tower industry, but it also inaugurates a new era of shared infrastructure, and a new win-win partnership between the country’s MNOs and towercos, accelerating 4G rollout, enabling enhanced QoS indoors and outdoors, and unlocking operational efficiencies.

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A significant portion of the addressable market for in-building solutions (IBS) in Pakistan remains unserved, according MNOs at the Pakistan round table, who called for towercos to consolidate demand for IBS under a neutral host model. “There are a significant number of upcoming new mega building projects in Pakistan which need capex for active DAS and IBS. I’d like to see towercos being aggressive in this area so that MNOs don’t each have to deploy their own solutions at malls, airports and five star hotels,” said one MNO’s representative.

“The IBS market in Pakistan is highly fragmented,” responded a towerco. “There are different solutions, different models, and different systems integrators from one building to the next. It’s difficult for us to size the market: is there enough scale for a sustainable business model? It can take 18 months to negotiate one contract, but we’re interested in scale, not in deploying one IBS at a time.”

“I have half a dozen buildings on my radar in Karachi, Lahore and Islamabad, with more in the pipeline,” responded another MNO. “We wanted an opex model on a neutral host basis, but couldn’t find an interested towerco, so partnered with a vendor. IBS represented a potentially secure revenue stream with smooth cash flow and low risk.”

“There are still less than 50 IBS in Pakistan now,” said the first MNO (note that the roundtable took place in December 2016). “There could be immediate demand for seven or eight solutions, with another 50-100 in the pipeline.”

The main reason towercos cited for their lack of management bandwidth to address IBS in Pakistan was their focus on sale and leasebacks. With the acquisition of the Jazz towers now agreed, perhaps more attention can be devoted to IBS.

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Meet edotco, and several other key stakeholders in Pakistan’s tower market, at the 4th Annual TowerXchange Meetup Asia, taking place on December 12 and 13. Click here for more information.

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