IPOs on the horizon for Africa’s towercos

Africa’s three largest privately owned towercos, Eaton Towers, Helios Towers and IHS Towers, have commenced proceedings for a public listing, with each targeting the first half of 2018 for their IPOs. With tower stocks on the rise, TowerXchange examine the details starting to emerge around their IPO processes and examine potential listing destinations, time frames and valuations that could be achieved.

Eaton Towers, Helios Towers and IHS Towers represent three of sub-Saharan Africa’s four largest towercos. With portfolios ranging from 6,000 to 23,282 towers (figure one), the three towercos collectively own 29% of sub-Saharan Africa’s 124,428 towers.

Their portfolios have largely been acquired through a series of sale and leaseback transactions with the region’s tier one MNOs (figures 2a-c) and have been supplemented by organic portfolio growth through build to suit activities for the various operators in their respective markets. Revenue growth has further been driven by the addition of co-locations on built and acquired sites, with amendment revenues as MNOs move to upgrade equipment contributing to an increasingly large proportion of revenue growth.

Each of the towercos offer power as a service and have deployed significant investment into the repair, maintenance and upgrade of power infrastructure. IHS have now directly installed solar hybrid systems at well over 2,300 of their sites in Cameroon, Cote d’Ivoire and Zambia, with a further 12,000 systems being installed through their big five initiative in Nigeria; Helios have commenced hybrid system rollout with $28.2mn having been earmarked for investment in power systems in 2017 (read “Energy strategies and priorities for Africa’s big four towercos” for further information). Each of the towercos report that they are starting to see the effect of their upgrades filtering through to their financial results.

Along with power investments, the towercos have embarked on operational excellence programmes, supply chain optimisation and training initiatives which have further improved site uptime and decreased operating costs. Since 2015, Helios’ application of Lean Six Sigma processes has enabled the towerco to realise capex savings of $28m; streamline its suppliers down from 147 to 32; take employees per tower from 8.6 to 5.9; and achieve an 82% reduction in downtime.

With private equity comprising the majority of the respective shareholdings of the three towercos (figures 3a-c) and the investors having held their investments for a long time, IPOs will give the towercos the opportunity to expand their shareholder base, with it likely that each towerco will seek to list approximately 50% of their share capital.

With towerco stock market indices at a record high, the towercos are aiming to take advantage of such favourable conditions and push for a listing in the first half of 2018. A quick view of the performance of the world’s 20 publicly listed towercos shows impressive growth over the past year; Europe’s Cellnex is up 56.5% YoY and US public towercos American Tower and SBA Communications show an increase of 44.5% and 70.5% respectively (Source: Reuters, 14 November 2017). Should the markets stay favourable, early 2018 represents an ideal time to bring a towerco to market.

As well as a high demand for towerco assets there is similarly strong investor appetite for emerging market telecom businesses. With few sound investment opportunities, the towercos stand out as attractive enterprises, alongside fibre company Liquid Telecom, which is similarly gearing up for an IPO.

Each of the towercos are understood to have appointed banks to run their IPO processes. Eaton have appointed JP Morgan, UBS, Barclays and Societe Generale; Helios are understood to have appointed Standard Bank, Credit Suisse and BAML; whilst IHS have reportedly hired Goldman Sachs, Citi and Morgan Stanley. Advisors have also been appointed with both Moelis and Hardiman Telecommunications both rumoured to be involved.

Early look roadshows have also commenced, with Helios having already completed their first roadshow and Eaton understood to be embarking on theirs at present. Each of the towercos are thought to be aiming for the H1 2018 window to take advantage of the current positive market conditions.

Both Eaton and Helios are understood to be targeting a listing on the Main Market of the London Stock Exchange (LSE), with a potential secondary listing on the Johannesburg Stock Exchange (JSE) under consideration. With both towercos headquartered in London and the LSE serving as a popular listing destination for many African firms, the LSE makes a natural choice, whilst the JSE has high levels of liquidity at present. IHS are thought to be aiming for the New York Stock Exchange. With both American Tower and Crown Castle currently listed on the NYSE, there is familiarity of the towerco business model and, given American Tower’s footprint in Africa, some exposure to the towerco model on the continent.

Telecom infrastructure stocks are in high demand as they continue to outperform other stocks (figure 4a and 4b). Speaking on the rise, Fraser Hughes, CEO of the Global Listed Infrastructure Association said “The continued growth and development of the telecom infrastructure sector is critical to global economic prosperity. Subsequently, this offers investors an extremely attractive investment case. The impressive outperformance of the sector over the short, mid and long term is a result of the central role companies like American Tower, Crown Castle, and SBA play in how the global population does business and socialises. GLIO views global telecom infrastructure a fundamental part of any allocation to a global core infrastructure allocation.”

With no pure play African towercos currently listed, there is a lack of an obvious comp from which to derive a valuation for Helios, Eaton and IHS. Whilst American Tower has an African footprint, their African portfolio represents less than 10% of their total tower portfolio thus precluding direct comparisons. The US public towercos, American Tower, Crown Castle and SBA Communications are enjoying multiples substantially north of 20x (see figure five), a valuation that would be highly unlikely given the different risk profiles and site revenues achievable in Africa. A 15x multiple has been proposed as a likely target valuation although some of the towercos are understood to be setting their ambitions higher.

Helios posted an EBITDA of US$85mn in 2016 (Source: Helios Towers 2016 Financial Results) but looks on track to significantly improve on this in 2017 with YoY comparisons for H1 showing a 72% increase on 2016 figures, posting a H1 2017 EBITDA of US$56.3mn. If such growth is maintained, and with Helios believed to be targeting an EBITDA multiple around 20, one could assume that Helios would be targeting a valuation north of US$2bn.

Eaton Towers are also understood to be targeting a valuation above $2bn. Whilst Eaton’s earnings are not in the public domain, one source suggests that they are on target for a 2017 EBITDA over $130mn, which, with a valuation multiple in excess of 15x, appears to correlate with the suggested target.

With IHS having a portfolio 3-4x larger than either Eaton or Helios, the company is targeting a higher valuation. In MTN’s 2017 interim results they report the fair value of their 29% stake in the towerco (at June 30, 2017) as ZAR24,859mn; a figure which puts IHS’ total estimated valuation at US$6.5bn. With MTN seeking a significant increase on their book value, and with IHS since having reached an agreement to acquire Zain’s 1,600 Kuwaiti towers and understood to be in the final stages of agreeing the purchase of 8,000 towers from the operator in Saudi Arabia, this figure is likely to escalate with observers suggesting a target valuation of US$10bn.

Helios’ and IHS’ bond issuances have done much to pave the way for the listings, introducing African towercos to institutional investors who may ultimately invest equity on the other side of the house. The high degree of appetite for the bonds (Helios’ $600mn bond attracted over $1.9bn of orders; one of highest ever orders for an issue of that type from Africa) serves as testament to the confidence in the towerco business model as well as comfort in the specific risks posed by the portfolios.

Investors have become increasingly comfortable with the towerco asset class, buoyed by the proven performance of listed towerco stocks, plus (with the exception of Ghana, Nigeria and Uganda) each of the towercos are the only towerco in their respective markets, in many cases owning over 50% of the total tower stock in such countries, thus warding them against the entrance of a competitor.

Geopolitical and regulatory risk present a potential concern in several jurisdictions, although the fact that telecommunications is seen as part of critical national infrastructure in such economies affords some degree of protection during times of civil unrest and against dramatic regulatory change. The civil unrest being witnessed in the DRC along with the Tanzanian government’s mandate for telecommunications companies to list a 25% on the Dar Es Salaam stock exchange did not appear to deter investors during Helios’ bond issuance, with many of the investors involved in the bond expected to invest equity in the IPOs.

In markets where currencies are not pegged to the Dollar or Euro, currency risk presents a concern, especially when issues surrounding repatriation of capital are brought into question. In the case of IHS, approximately 60% of their contracts are beleived to be hard currency linked with 40% in local currency (with both USD and local currency contracts indexed each year for US and local inflation respectively). In response to the devaluation of the Nigerian Naira, IHS moved to more regular resetting of conversion rates, whilst hedging in the market also helped to offset some of the impact of forex fluctuations thus reducing currency risk.

Geographical diversity in their portfolios further helps offset the aforementioned risks, with each of the towercos having a presence in at least four markets. Eaton, in particular, has a very balanced portfolio and, whilst revenue figures are not available, tower counts as a proxy show Eaton as having no more than 22% of its business concentrated in any one particular market. Whilst IHS had a heavy Nigerian bias with two thirds of its towers in the country, the towerco is in the process of expanding its geographical footprint, extending into the Middle East with the addition of Zain’s Kuwaiti and potentially Saudi sites. As investment grade countries, the addition of the Middle Eastern markets will balance some of the developing market country risk.

With targeted listings on the NYSE and Main Market of the LSE, high standards of corporate governance will need to be displayed by each of the towercos, with each having put in place processes to prevent bribery and corruption whilst implementing a robust workplace code of conduct. Major steps have also been made by the towercos to achieve high levels of operational governance and operational excellence, delivering effective cost control measures to protect profits.

Eaton is known for running a tight, lean ship with a low cost, challenger culture embedded in the organisation focussed on keeping overheads and operating costs low. Helios’ implementation of Lean Six Sigma processes has helped the company reduce their operational headcount by over 30% per tower, improve power uptime by over 80% and save over $20mn in supply chain costs. At IHS, major investment has been put into the installation of solar hybrid systems in a bid to reduce power costs. With power accounting for close to 50% of African towercos’ cost of sales, reducing power costs has a significant impact on company operating margins, whilst reducing diesel reliance helps mitigate the risks associated with fuel price fluctuations and delivery challenges.

When assessing counterparty risk, the vast majority of each towercos’ contracts are signed with the opcos of investment grade operators. This, coupled with the fact the towercos have agreements in place with each of the operators in at least two different countries (for the most part), means that the likelihood of a default on payment is low. Should the MNO lapse on one contract it would put them at risk of the towerco pulling the contract in the other country and as such, the parent company would most likely step in. Whilst Etisalat’s woes in the Nigerian market had a knock on effect on IHS with delayed payments, IHS is making good progress with retrieving payments from the company’s creditors who have taken over the opco which now trades under the 9mobile brand.

Whilst some investors in the European and US publicly listed towercos may shy away from the unique risks that are associated with developing market towercos, others with a remit to invest in emerging markets will see Helios, IHS and Eaton’s IPOs as sound investment opportunities given the proven performance of the towerco asset class; a proven asset class with a total global valuation of $300bn.

Whilst all three towercos appear to be heading towards an IPO, speculation still exists as to whether a strategic acquirer could step in. Whilst the world’s largest independent towerco, American Tower, with over 10,000 African towers amongst their global portfolio, may be thought by many to be the most obvious party, CEO James Taiclet’s lukewarm response to a question on the subject during a recent investor call suggests otherwise.

Whilst not ruling out further African M&A appetite in the future, Taiclet commented that American Tower didn’t “necessarily see an opportunity to consolidate with any of the others [towercos] on the immediate time horizon” adding that they didn’t think that Africa would be their biggest investment market in the near future.

Whilst American Tower’s appetite for upcoming African towerco M&A opportunities may be somewhat lacking (if Taiclet isn’t just showing a poker face!), SBA Communications have hinted at more interest. Historically the towerco has shied away from portfolios where power as a service would be required, with the company used to the “steel and grass” towerco model of the Americas. However, commenting on upcoming African opportunities during an investor call, SBA Communications’ CEO Jeff Stoops observed that the currency risk and power concerns posed by the African portfolios could be mitigated with the “right financial transaction”. Stoops added that Africa was a good fit for the kind of growth markets which SBA look at and that it would fit well into their levered capital appreciation strategy. When pushed on whether they would look to enter the region from the ground up on a build-to-suit strategy as they had done in Canada or rather make a significant acquisition, Stoops commented they “would always want to go in with some size and some scale if you can do it for the right financial terms”.

Whilst no further names have been linked with a potential acquisition, the growing interest in the tower asset class could see appetite from a financial investor with an appetite for the annuity-like returns delivered by the towerco business model.

Significant growth is forecast for the African telecommunications sector, and towercos are positioned to be an important part of that growth. Ericsson’s Mobility report projects that mobile subscriptions in sub-Saharan Africa will grow at a CAGR of 6% between 2017 and 2023, from 700 million mobile subscriptions to 990 million; whilst LTE subscriptions will expand at a CAGR of 47% from 30 million to 310 million in the same period. Such growth requires new towers and more equipment on towers.

Simultaneously, towercos, with their annuity like returns, contracted with investment grade parties are becoming an increasingly popular asset class globally. Stock market indices for the world’s 20 publicly listed towercos are at an all time high and, whilst there are no African towercos with which to directly benchmark valuations, general consensus indicates a 15x multiple, or even higher, could be achieved.  With each of the towercos having demonstrated robust EBITDA growth year on year, current estimates suggest both Eaton and Helios will achieve valuations north of US$2bn and should IHS’ expansion plans beyond the African market go as hoped, a suggested valuation of close to US$10bn could be achievable.

With roadshows underway and banks and advisors appointed, all three towercos appear to be aiming for that H1 2018 window, with the jury out as to whether all three will make it within such an aggressive timescale. Whilst an IPO looks the most likely route for all three parties, an offer by a strategic acquirer is not to be ruled out, a move which could introduce a change in market dynamics in the African tower industry.

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