The shape of the Kenyan tower industry following the American Tower-Telkom Kenya deal

In April 2018, American Tower announced that it had reached an agreement to acquire up to 723 towers from Telkom Kenya. The transaction, expected to close in the second half of 2018, adds a fifth country to the towerco’s African footprint and marks the second tower transaction of scale in Kenya. TowerXchange examine the transaction and dynamics in the Kenyan mobile market.

There are 42.8mn mobile subscriptions in the Kenyan market with mobile penetration sitting at 94% (source Kenya Communications Authority). Subscriber growth continues apace in the country with the total number of subscribers up 10% year on year as of December 2017 (figure one). Data continues to experience strong growth over successive quarters, increasing by 8% in the final quarter of 2017 alone, with such growth attributed to the increased rollout of 3G and 4G networks across the country. 

Kenya is the world leader in mobile money transfer services through M-PESA, a service launched by Safaricom back in 2007. Initially introduced as a means to provide banking services to citizens without access to traditional banks, uptake of the service has grown exponentially with Safaricom reporting 20.5mn registered users which have contributed 28% of the MNO’s revenue for 2018 to date (Safaricom H1 2018 results).   

There are three MNOs in the Kenyan market and three MVNOs. Safaricom (in which Vodacom has a 34.9% after Vodafone transferred a significant portion of its 40% stake to the former) leads the market with 69.1% market share, followed by Airtel and Telkom Kenya with 17.2% and 9.0% share respectively. Of the three MVNOs, Finserve Africa has made the biggest progress in securing market share, now accounting for 4.5% of subscribers, whilst Sema Mobile and Mobile Pay account for less than 1% between them (figure two).

In May 2016, the Communications Authority commissioned a study by Analysys Mason to examine competition in the mobile market. The report suggested that Safaricom was dominant across several segments and proposed a breakup of the market leader, in spite of findings that the operator had not engaged in any anti-competitive actions. The government was forced to issue a statement that no operator would be broken up in the country. 

In April 2018, it was reported that Airtel and TKL were considering a merger in order to create a sizeable competitor to Safaricom; a merger of TKL and Airtel would have resulted in a new company with 77MHz of spectrum, compared with just 47MHz for Safaricom. Whilst the two operators initiative discussions with the Communications Authority, plans for a merger have since been shelved.

The Kenyan Communications Authority is also in the process of licensing new players for LTE/4G services through the assignment of 700MHz spectrum freed up by the country’s migration from analogue to digital TV. Two blocks of 700MHz spectrum are available, with a third already allocated to Jamii Telecommunications, which launched its 4G at the end of 2017. In March 2018, the Communications Authority revealed that two consortia, each comprising five companies, have applied for licences to offer 4G LTE mobile services. The applications are under review but if approved, will receive a one year trial before being eligible to pay the US$25mn spectrum fee if successful.

Market leaders, Safaricom, report that network coverage for 2G, 3G and 4G stands at 95%, 85% and 25% respectively. The company was the first to launch 4G back in December 2014 and currently has 72.8% of the mobile data market share (figure three) covering all 47 counties. In 2017, the MNO spent Shs38bn (US$380mn) in rolling out their network, including the deployment of 395 new sites (of which 306 were greenfield or rooftop towers and 89 were small cell sites) and over 1,100 4G base stations; the most rapid rollout in the company’s history. Safaricom remains committed to further expansion plans to maintain its market leading position. 

Airtel Kenya secured its 4G license in February 2018 after testing the network since April 2018. As of May 2018, coverage is currently available in Nairobi and Mombasa but the network will be rolled out to other areas throughout the course of 2018. In December 2017, the company announced that it would be investing heavily in all technologies (2G, 3G and 4G) and putting up over 300 sites in early 2018 to improve coverage even further.

Following a change in ownership at the end of 2015 (with Helios Investment Partners taking over majority shareholder Orange’s stake), Telkom Kenya pledged Shs5bn (US$500mn) toward network modernisation. The first phase involved the upgrade of backbone and metropolitan transmission networks as well as the launch of the company’s 4G network which is currently available in 32 towns across the country. The company also doubled its coverage and capacity on its 3G network. The second phase of the project is well underway. Telkom announced that its five-year strategy involved the investment of Shs15.2bn (US$150mn) in 3G and 4G networks as well as mobile financial services and customer experience. 

There are an estimated 6,629 towers in the Kenyan market. Safaricom possesses the largest tower portfolio with an estimated 4,406 sites, of which around 80% are ground based towers and the rest are alternative site topologies. Telkom Kenya are understood to own 723 sites in the country with Telkom Kenya’s CTO John Barorot having announced in June 2017 that the company had recently added 350 sites with a further 150 to be added before the end of the year. Eaton Towers owns 1,200 towers in the country, most which were acquired from Airtel (more below). A further 300 sites are understood to be held by other parties.

Around 60% of Kenya’s sites are on good grid connections, 25% on bad grid, and 15% off grid. The majority of Safaricom’s sites use diesel generators plus battery hybrids, with some solar in the mix. A little under 150 sites still run on dual diesel generators 24/7, and a handful run on renewables only or on powercubes. Safaricom has committed to becoming a net zero carbon emitting company by 2050 and are rolling out renewable energy across their network, phasing out diesel generators wherever possible and have started to prioritise the use of solar at smaller capacity sites, with 90 solar sites planned for 2018. The MNO is also looking at partnerships in remote areas to enable local communities to purchase excess power. In Q3’18 it was announced that managed service provider, Adrian Kenya will be installing fuel cells on 800 base stations across the country.

Whilst macrosites remain the mainstay site topology, around 500 buildings have been identified as being suitable for DAS with a hundred or so covered already; Safaricom is currently operating shared DAS networks.

Since its creation the Communications Authority has actively promoted infrastructure sharing, with clear requirements in the Communications Regulations Act. The first tower sharing in Kenya was agreed in April 2009, providing for Airtel to share around 300 sites with YuMobile over the next 15 years. YuMobile was then acquired by Airtel in 2015.

In June 2011, Safaricom and Orange (now Telkom Kenya) announced their plans to form a jointly owned, independently managed infrastructure company, but little information came out regarding this agreement, and the discussions did not reach fruition.

In June 2013, Eaton Towers became the first tower operator in Kenya signing a 15-year agreement with Telecom Kenya (Orange) to manage a portfolio of 1,000 towers with a license to lease to third parties. Telkom retained ownership of the sites whilst Eaton invested in passive infrastructure upgrades and new site build, building an initial 39 sites in the early months. The contract was however cancelled nine months later due to the financial uncertainties around Telkom Kenya’s future and the recall of Orange’s Kenyan management team.

A few months later, Eaton announced that it had reached a deal to acquire Airtel’s towers in five markets, namely Ghana, Burkina Faso, Uganda, Niger and Kenya. The total number of towers acquired surpassed 3,200 with Eaton paying around US$540mn for the assets (excluding the Niger towers which closed later).

Eaton has successfully secured co-locations across their portfolio and whilst tenancy ratio figures are not in the public domain, Safaricom reports that in addition to their own towers they use an additional 1,000 sites and Telkom Kenya are understood to use over 350 sites in addition to their own. One can assume Eaton’s portfolio to take a healthy percentage of those figures, suggesting Eaton’s tenancy ratio is likely to be around two

Safaricom themselves has actively pursued co-locations on their tower portfolio in a bid to improve operating efficiencies. The MNO leases space on around 800 of their towers and has recently begun offering power as a service to their tenants.

TowerXchange have also been made aware of a new towerco, SEALTowers, a start-up focused on low cost, compact tower site solutions and hybrid power innovations. SEALTowers have said they expect to have 500 sites built by Q3 2018.

On 3 April 2018, American Tower announced that it had reached a deal (through its recently formed Kenyan subsidiary, AT Kenya C.V) with Telkom Kenya to acquire up to 723 sites.

The transaction marks American Tower’s sixth deal in Sub-Saharan Africa (figure five) and adds a fifth country to the towerco’s African footprint (figure six) and a 17th market globally.

Speaking on the transaction, Telkom Kenya’s Chairman, Eddy Njoroge commented “The Board of TKL has made it clear that our objective is to transform Telkom into a business which has a reputation for excellence in terms of the quality and reliability of its network. This agreement, in which we will be partnering with a leading global tower company, will enhance the quality and reliability of our network to the benefit of our customers.”

Telkom Kenya CEO, Aldo Mareuse added “The network availability and service levels we have agreed with ATC are world class and this agreement represents another important step towards the transformation of this business and the service levels we deliver to our customers. Telkom will now focus on its core function – the provision of quality telecommunications services to our customers. In addition, the sale will release capital for further investment in our 4G network and a number of state of the art IT platforms, all of which will further enhance services for our customers as they demand higher quality and speed from our mobile data networks as well as a richer range of services.”

Hal Hess, President of EMEA and Latin America for American Tower added, “We are excited to announce the launch of operations in Kenya through our agreement to acquire TKL’s towers.  This represents American Tower’s 17th market globally, and our fifth in Africa, and we look forward to helping expand the reach of mobile broadband throughout the country. Kenya is a very attractive market, and we have high expectations for its long-term growth potential.” 

Elaborating on the deal, Robin Weber, Vice President of Business Development for EMEA commented “Kenya is considered the East African hub for investment and American Tower has been actively pursuing opportunities in the market for some time. Kenya is an important market for us, and the Telkom Kenya deal has given us the opportunity to enter the market at scale.”

Speaking on American Tower’s investment thesis, Robin Weber explained “There are three main criteria taken into consideration when American Tower examines entry into a new market. First, we look at a country´s macro-economic fundamentals and the general business, political and legal environments; second, we look for a competitive wireless market where there are three strong MNOs capable of making long term investments; and third, we look for the potential to scale and build our portfolio. Based on these criteria, Kenya is attractive and we are excited to be entering the market”

The transaction is expected to close in the second half of 2018, subject to customary closing conditions and regulatory approval.

American Tower’s entry into the Kenyan market introduces a sizeable competitor to Eaton Towers, with the two towercos already competing in both Uganda and Ghana. With much new build still required in Kenya and plenty of co-locations and amendments up for grabs with the rollout of 4G and potential entrance of new LTE players, significant opportunities exist for organic growth for both players. 

In terms of inorganic growth, the only sizeable tower portfolio in MNO hands is that of Safaricom. Part of the Vodacom Group and through them, the broader Vodafone Group, the parent company has been less willing to do tower deals than some of its competitors. In Africa, Vodacom Tanzania sold its towers to Helios Towers back in 2013, whilst Vodafone Ghana entered into a management with license to lease contract with Eaton Towers back in 2010. The group still, however, retains its towers in the DRC, Egypt, Mozambique, South Africa and Lesotho. Looking further afield, Vodafone pooled its towers in Indus Towers in India and has in Europe entered into a passive infrastructure joint venture company, CTIL with O2 in the UK, but has not completed any sale and leaseback transactions. Safaricom has been proactively securing co-locations on its towers from its competitors in the market and their move to also offer power as a service signifies their increasing interest in acting in a towerco-like manner. 

TowerXchange has been made aware of rumours circulating that Safaricom’s attitude to a tower sale may be however changing. If some or all of Safaricom’s tower portfolio were come to market it would represent an extremely attractive acquisition target for both Eaton and American Tower.

In terms of further M&A activity, one can also not rule out a potential acquisition of Eaton Towers by American Tower in the long run. Eaton Towers recently postponed its IPO plans and so a potential acquisition would make an alternative exit strategy for Eaton’s investors. 

With the two towercos having three of each of their five markets in common, an acquisition of Eaton Towers by American Tower would provide further scale to some of American Tower’s existing operations. American Tower and Eaton Towers have a history of tower deals, with the former having acquired Eaton’s South African portfolio back in 2016.

For now, however, the two towercos remain competitors in the Kenyan tower space and that competition may not remain restricted to macro towers. Kenya represents one of Africa’s more developed telecommunications markets and opportunities for independent infrastructure providers exist in both DAS and fibre. American Tower have a proven appetite for fibre in the African market, recently signing a partnership with Frogfoot in South Africa and have deployed 23 DAS sites in Ghana (as of December 2017). Eaton are known to be keenly studying the fibre space with an appetite to diversify their service offering, the company has already explored shared DAS. On a global front there is a trend towards converged ‘infracos’ (infrastructure companies that consolidate a broader set of communications infrastructure typologies, perhaps including towers, DAS, fibre, data centres and/or small cells). The sub-Saharan African markets, Kenya with its strong economy and growth potential, could well lead the way when it comes to sharing a more diverse portfolio of communications infrastructure assets.