Helios Towers Africa’s 2016 performance and 2017 investment plans

Helios Towers Africa are the third largest towerco on the African continent, owning a portfolio of 6,447 towers across four countries and generating revenues of $282.5mn in FY16. Having recently released their 2016 annual report, TowerXchange take a deep dive into the company’s performance in 2016 and examine what is on the agenda for the coming years.

For those familiar with the African tower industry, Helios Towers require no introduction. Founded in 2009, the company completed its first major tower transaction in 2010, acquiring 750 towers from Tigo in Ghana and have since completed five further major tower transactions establishing a footprint in Congo Brazzaville, the DRC and Tanzania (figure one). Having been the first towerco to enter each country, the company remains the sole towerco in the latter three markets and possesses a strong urban presence in Ghana where it competes with American Tower and Eaton Towers. The company now owns a total of 6,447 towers across the four countries (figure two), having added build-to-suit towers and smaller bolt-on acquisitions to its portfolio (the two of which together account for 24% of Helios’ total portfolio).

Revenue, portfolio and co-location growth

Helios’ generated revenues of US$283mn and posted an adjusted EBITDA of US$85mn; 44% and 143% increases on 2015 figures. Their portfolio grew by 1,053 sites and they added a further 2,267 tenancies, pushing their tenancy ratio up to 1.90x (vs 1.85x in 2015).

The growth was primarily driven by Helios’s acquisition of 967 sites from Airtel in the DRC. The deal, with a value of $165mn, closed in July of 2016 and whilst the acquisition had a dampening effect on the opco’s tenancy ratio, revenues in the market increased by 67% with EBITDA improving by 71% (Read TowerXchange’s interview with Helios Tower’s Alex Leigh on the acquisition in the DRC.) Further growth was achieved from the addition of new co-locations to existing sites and also a modest amount of build-to-suit and small-scale acquisitions. Whilst tower counts stayed relatively constant in Congo Brazzaville and Ghana, and increased by 37 sites in Tanzania, all markets saw significant uplift in tenancies, revenue and EBITDA (see figure 3).

2016 capital expenditure

Total capital expenditure in 2016 was $280.8mn, with 59% attributable to acquisitions, primarily the acquisition of Airtel’s towers in the DRC. Excluding the cost of acquisitions, 30% ($34.7mn) was spent on build-to-suit activities, 42% ($48.8mn) was spent on site upgrade and 25% ($29.6mn) was spent on maintenance, with the balance on corporate capital expenditure (figure four).

Upgrade capex typically consists of three key elements; structural, refurbishment and consolidation activities carried out on acquired sites; the addition of new tenants (typically between $7,000 and $11,000 per co-location); and investments in power solutions. Maintenance capex is spent on periodic refurbishments as well as the the replacement of parts and equipment required to keep sites operational (typically ranging from $3,000 to $5,000 per tower per year). In terms of build-to-suit activities, the typical cost required to construct a new site generally ranges from $110,000 to $140,000.

Cost of sales

The cost of sales increased by 37% year or year, largely attributed to the increased power and site depreciation costs as a result of the portfolio expansion in the DRC. Excluding site depreciation, diesel and electricity accounted for 35% and 19% of the cost of sales respectively. Diesel increase was most pronounced in the DRC ($15mn increase) due to the increased site count, whilst Congo Brazzaville saw $1m increase in diesel costs with 2016 being the first full year that Helios had operated assets in the country. In Ghana, diesel costs decreased by 47% due to better grid availability and the deployment of power management solutions. This did however constitute an increase in electricity costs, a difference compounded by an increase in local electricity tariffs (although much of this was mitigated through power escalation contract provisions, which enable the increase to passed on to the tenant).

Maintenance and security costs in the DRC and Congo Brazzaville also increased as a result of the increased site count whilst they stayed relatively flat in Tanzania and Ghana, thanks in large part to centralising and embedding maintenance contractors with the local management teams to provide improved support.

Ground lease costs increased by 11% year on year whilst liquidated damage payments to operators decreased due to the implementation of the company’s Operational Excellence Program (see following section).

Costs related to aborted transactions

2015 saw $17.8mn spent evaluating investments that were ultimately aborted - Helios pursued a number of acquisitions across multiple markets which were not successful. In 2016, the costs associated with aborted investments decreased to $386,000, with expertise in site acquisition in jurisdictions in which Helios operate further helping to control these costs.

Operational performance and HTA’s Operational Excellence Programme

In addition to an improvement in financial performance, Helios reported an operationally successful year in 2016. Estimated average weekly downtime on sites has been reduced by 53.6% from 2015 figures which has translated to not only improvements in customer satisfaction but also a reduction in liquidated damages for failure to meet SLAs. For example, in 2015 Helios paid $9.9mn in net liquidated damages to one operator in Tanzania; in 2016, following correction of operational failures this decreased to $0.7mn.

Such improvements can be attributed, in large part, to Helios’ Operational Excellence Programme, with 2016 marking the first full calendar year it has been up and running. Based on the six sigma methodology developed in the manufacturing industry, the programme looks to drive continuous improvement through the design and implementation of structured processes. 2016 saw Helios move into the second phase of the program which focusses on opex-saving improvements including the optimisation of operational headcount. One of the key changes was the centralisation of Helios’ procurement function, a move to ensure that all major purchases are stringently reviewed prior to approval. In Tanzania, a zonal structure was introduced which was a major contributor to the 93% decrease in net liquidated damages previously mentioned.

Renewable energy trials

With poor grid infrastructure across much of Helios’ jurisdictions, the cost of diesel is the towerco’s largest single operating expense. Fluctuations in oil prices and forex rates affect the diesel costs and whilst 93% of Helios’ site agreements (as of December 2016) permit them to pass-through any change in diesel and electricity costs to their tenants, there are strong motivations for towercos to reduce fuel and electricity usage. With variations in the volume of fuel consumed on site not passed on to the tenant, any reduction in fuel usage will present a cost saving directly to Helios which will be reflected in their EBITDA.

Helios initiated a number of solar and hybrid trials in 2016 to examine strategies to reduce fuel usage. In the DRC, the towerco deployed solar at 51 sites at an average cost of $33,900 per site; whilst in Tanzania, Helios set up four pilot sites for hybrid technologies at an average cost of $12,500 per site.

Ancillary agreements with Airtel

In addition to acquiring 967 towers, Helios Towers Africa paid Airtel $20mn for the right of first refusal to carry out all of its build-to-suit activity for the next five years. Helios also entered into a non-compete agreement with Airtel in both the DRC and Congo Brazzaville whereby the operator cannot compete with Helios for 12 months following the closing of their portfolio acquisition on 7 July 2016. Helios issued shares with a fair value of $30mn for the agreement.

Financial restructuring and HTA’s $600mn bond issuance

On 8 March 2017, Helios Towers Africa announced its maiden corporate bond. The $600mn bond, paying a 9.125% coupon with a 2022 maturity date, was three times oversubscribed and was assigned a B2 rating by Moody’s. At the same time, Moody’s assigned a B2 Corporate Family Rating to Helios Towers Africa Ltd, the towerco’s first credit rating.

The majority of the proceeds will be used to refinance existing debt, with US$31mn being used to fund the acquisition of remaining sites not yet closed in the DRC, Congo Brazzaville and Tanzania. $110mn will be used for planned capital expenditures and $23mn will be required for estimated fees and expenses. $62mn will be used to finance the buyout of Vodacom Tanzania’s 23.7% stake and remaining shareholder loans in Helios Towers Tanzania after HTA Holdings and Vodacom Tanzania reached an agreement on the matter. The acquisition of the shares and loan amounts is expected to be completed in 2017, following Fair Competition Commission approval.

In addition to Vodacom Tanzania monetising its stake in Helios, Millicom announced that it was seeking a buyer for its 22.83% stake in Helios. There are certain restrictions on who may purchase the equity, with entities having a significant presence in the tower industry being excluded from potential acquirers. The existing shareholding of Helios Towers Africa can be seen in figure nine.

In Tanzania, amendments to the Electronic and Postal Communications Act of 2010 made it a legal requirement for anyone holding a license to provide Network Facilities in Tanzania to float 25% of their shares on the Dar Es Salaam Stock Exchange. With the ruling applying to Helios Towers Tanzania, the infraco provided a draft prospectus to the Capital Markets and Securities Authority in Tanzania (CSMA) on 29 December 2016, proposing an IPO of the required 25% stake on the local stock exchange. HTT has since entered discussions with the CMSA and the Tanzania Communications Regulatory Authority (TRCA) to discuss the challenges in meeting the timelines, with a capital reorganisation of HTT infraco required first in order to be able to conclude a successful IPO.

After seven years of geographical expansion through large scale acquisition, Helios’ focus turns to optimising their tower portfolios in existing jurisdictions, primarily through the addition of new co-locations but also through carefully considered acquisitions and strategic build-to-suit opportunities.

Co-location growth 

The company already has $3.1bn in contracted revenues under agreement with existing customers up until the end of 2020 (without taking into account escalation of fees). Over 80% of such revenues are attributable to five of the largest MNOs in sub-Saharan Africa, with fast growing new market entrant, Viettel owned Halotel accounting for 12% (figure ten). The $3.1bn in contracted revenues equates to 1,042 additional co-locations scheduled to begin tenancies from early 2017 through 2022. In 2017, Helios forecasts a spend of $17.1mn for installation of co-location tenants; equating to somewhere between 1,500 and 2,500 new co-locations during the course of the year.

Build to suit activity

In terms of build to suit activity, 2016 saw Helios secure the right of first refusal to carry out all of its build-to-suit activity for Airtel in the DRC for the next five years. In their forecasts, Helios project a spend of $17.7mn in build-to-suit capital expenditures in 2017; taking the average build-to-suit cost of $110k - $140k per tower and one can expect Helios to build somewhere in the region of 120 - 160 towers in the coming year across all jurisdictions.

Acquisitions

Whilst just $30.6mn in acquisition capital expenditures has been projected by Helios for 2017 (in order to cover costs for remaining sites not yet closed in the DRC, Congo Brazzaville and Tanzania), should an attractive opportunity present itself Helios possess the flexibility to increase such spend through a combination of cash in hand, debt and equity issuances. With the cost of aborted or unsuccessful transactions high both financially (2015 saw Helios post $17.8mn of cost associated with abandoned transactions) and in terms of distraction of management focus, the merits and risks of such transactions remain under careful scrutiny. Whilst no acquisition targets have been publicly identified, the expiry of the longstop date on the Airtel-American Tower deal in Tanzania in March of this year could put one portfolio firmly in Helios’ viewfinder. With 1,350 towers in Helios’ largest market potentially coming available, one could expect acquisition capital being mobilised should the opportunity present itself.

Investment in power systems

Excluding depreciation costs, power accounted for 54% of the cost of sales in 2016, with diesel costs up 68% year on year and electricity costs up 36% year on year (figure eleven). As Helios’ single most expensive operating cost, the company is putting significant focus into power management systems.

In 2016 the company initiated investment in batteries and solar systems and expects a greater rollout in 2017, with plans to invest $28.2mn in power management systems during the course of the year. After having deployed solar at 51 sites in the DRC in 2016, Helios have identified a further 400 sites in the country which they think a suitable candidates for the technology and play to deploy systems at 150 sites during 2017. In addition, Helios believe a further 1,200 sites in Tanzania, Congo Brazzaville and the DRC are candidates for hybrid technologies and plan to deploy such technologies at 380 sites during 2017.

Additional 2017 capital expenditure forecast

Helios expect to spend $47.9mn on structural, refurbishment and consolidation activities across selected sites in 2017, with a further $20.7mn forecast to be deployed on maintenance. A further $3.7mn in corporate capital expenditures takes their total forecast for 2017 to $166mn (figure twelve).

Currency risk

57% of Helios’ revenue is either dollar-based or in currencies pegged to the Euro and the company has in place escalation provisions linked to the local currency Consumer Price Index (CPI) and diesel and electricity costs which helps to further mitigate the impact of exchange rate fluctuations. Helios also implement a policy of matching, whereby revenues generated in local currency are largely used to pay local costs and the company also looks to borrow in local currency where possible.

In spite of these measures, currency risks do exist for Helios. In Ghana, Helios have contracts denoted in local currency and as such, the devaluation of the cedi hit the company hard, although with an improving economic climate this is expected to stabilise. In Congo Brazzaville, Helios’ contracts with operators are primarily denominated in the Central African franc which is pegged to the Euro;  whilst this exposes Helios to Dollar-Euro fluctuations, should the government look to de-peg this would bring increased volatility and as such, increased risk to the company. Plus there are concerns on the horizon in the DRC; whilst the country has a predominantly dollarised economy, the government has begun to implement steps to reintroduce the Congolese franc and as such, may de-dollarise the economy in the not too distant future which would introduce a significant level of currency risk.

Counterparty risk

81% of Helios’ total contracted revenue is attributable to the local opcos of five of the largest MNOs in Sub-Saharan Africa which have credit ratings of Ba1 and above (Moody’s). Whilst the local opcos tend to have lower credit ratings than their parent company, given the fact that four MNOs have contracts in place with Helios in two or more markets, the likelihood of default on contractual payments in low.

MNOs in sub-Saharan Africa are, however, under significant financial strain and should they fail to raise significant capital or should there be an economic downturn in their home market, this will only intensify. Increased financial pressure amidst decreasing ARPUs may lead to MNOs wishing to renegotiate or failing to renew contracts and may constrain any new rollout which had been planned.

Consolidation amongst operators further presents a risk, decreasing the number of potential tenants on a given site. In Ghana, Tigo and Airtel are in discussions to form a joint venture, a move which is subject to approval by the regulators. In addition to consolidation, the potential for operators to enter into active sharing agreements as they look to leverage deeper infrastructure sharing would also present a threat to Helios’ revenues.

Ground lease payments

85% of Helios’ towers are on leased land and 14% of Helios’ ground lease payments are due for renewal in the next 18 months.

Helios’ focus has turned very much to maximising the value of their existing portfolio, integrating assets from their most recent acquisitions, driving co-locations on their portfolio of 6,447 towers, driving cost savings and improved uptime through their Operational Excellence Programme and commencing significant investment in renewable energy to reduce diesel usage. This will be complemented with a modest amount of build to suit and bolt-on acquisitions and, whilst Helios have not expressed a strong desire to enter new markets, should an attractive portfolio become available in one of their existing jurisdictions, one could expect strong interest from the towerco (with Airtel’s Tanzanian towers potentially being at the top of the shopping list).

With contracted revenues in place of $3.1bn, the company has strong foundations in place to continue its growth and having added an average of 900 co-locations per year (excluding acquired co-locations) for the past three years one can expect significant upside to this. The three times oversubscription of Helios’ $600mn bond demonstrates the interest in the African tower asset class and it will be interesting to see the parties who will have an appetite for Millicom’s 22.83% stake which the operator is looking to monetise. Helios’ recent results paint a positive future and with it being widely thought that the towerco’s other investors could be looking for an exit in the next 18 months, one can assume there will be no shortage of parties analysing the figures presented.