Major new build forecast in the Egyptian tower market

Egypt represents one of MENA’s largest mobile markets. With one of the highest number of SIMs per tower in the region, the entrance of a fourth operator and the awarding of 4G license in the past 12 months, significant opportunity exists for new build, co-locations and tenancy amendments. Such opportunities have piqued the interest of international tower companies. TowerXchange examines the tower landscape and growth opportunities putting Egypt in the spotlight.

In 2017, the number of subscribers in the Egyptian market passed the 100 million mark, only the second country across the whole of Africa and the Middle East to hit the figure (with Nigeria having been the first). Subscriber growth is expected to continue at a rate above 3% annually, further cementing the country as one of the most important mobile markets in the region. Mobile broadband subscriptions continue to show strong growth in parallel, currently sitting at 32.1% (up from just 11% in 2012) and ARPU in the market is also increasing, with market leaders Vodafone reporting a 10% YoY increase at Q4 2017. 

Whilst this speaks to a positive story for the country’s MNOs, devaluation of the Egyptian Pound has hit international operators hard. In March 2016, the Central Bank of Egypt devalued the Egyptian Pound by almost 13% as they shifted their exchange rate policy in a bid to boost foreign reserves and increase competitiveness.  By December 2017, the exchange rate had fallen to an all time low of EGP18.4 (versus EGP7.8:USD before March’s devaluation), and has hovered between 17.5 and 18 EGP:USD since. Whilst in local currency, MNOs report 2017 revenues significantly up on 2016 figures, foreign currency reported revenues have declined significantly; Etisalat reported a 17% revenue growth in EGP FY16 to FY17, in AED their revenue declined by 38% (Etisalat 2017 financial results).

There are four mobile network operators in the market, with state owned fixed telecommunications operator Telecom Egypt being the newest market entrant, having launched commercial mobile services in September 2017. Telecom Egypt, which operates under the brand “We” joins established operators Vodafone, Etisalat and Orange in the country. 

The award of a mobile license to Telecom Egypt was given as part of a new regulatory framework approved in 2016 by the National Telecommunications Regulatory Authority (NTRA). According to this regulatory framework, the existing mobile operators Orange, Vodafone and Etisalat were allowed to introduce 4G service beside their 2G and 3G services, and the incumbent operator Telecom Egypt (TE) was allowed to provide 4G services and provide 2G and 3G services through national roaming with the existing mobile licensees. In addition, the regulatory framework allows Orange, Vodafone and Etisalat to provide virtual fixed-line services using TE’s network.

Telecom Egypt currently holds a 45% stake in competitors, Vodafone and whilst certain onlookers have advised they look to monetise their stake to free up capital to extend their own network, investor relations director Sarah Shabayek, told press “Vodafone Egypt is a very good investment. A sale would only be considered if we reach critical mass in the mobile market to the extent that we start cannibalising on such investment.”

With their mobile business having only been in commercial operations for just over a year, Telecom Egypt have a way to go to reach that critical mass. The MNO currently has a 2% market share but hopes to increase this to 15% by 2022. Vodafone is the market leader in Egypt with 42.3mn subscribers (42%) at Q4 2017 (up from 40.9mn in Q4 2016).  Orange (which operated under the Mobinil brand until 2016) has 34% and Etisalat, which has been steadily losing market share, has 22%.

Commercial launch of 4G networks by all four MNOs was achieved in 2017, although 4G coverage is primarily available in Cairo. With high demand for 4G services expected to keep increasing exponentially all four MNOs have requested additional spectrum from the regulator. Whilst it builds out its 2G, 3G and 4G network, Telecom Egypt has wholesale agreements in place to utilise the networks of the other MNOs in the market, agreements which will come to an end by 2022. In March 2018, Huawei assisted Telecom Egypt in securing a US$200mn loan from various Chinese financial institutions including Bank of China and China Export & Credit Insurance Corporation.

There are around 23,000 sitesin Egypt with a roughly even split between Vodafone, Orange and Etisalat, with Telecom Egypt having around 2,000 towers. Approximately two thirds of sites are ground based towers, with one third being rooftop sites, primarily in major urban areas. In 2010 and 2011, five Egyptian companies were awarded licenses to lease space on towers. The five companies were EEC, Alkan, ECMTS, Mobiserve’s Mobitower and HOI MEA, with each being awarded a license for a 15 year period. As of June 2018, only HOI MEA has built and leased space on towers but the company is reportedly looking to sell its portfolio of 38 sites. 

There has been some bilateral sharing between operators in the market. For example, of the 6,166 towers that Orange owns, they share 20% (1,208) with other MNOs. They also lease space on 1,071 towers owned by other operators in the market. Most of the towers built in Egypt are thought to be relatively robust structures and so capable of carrying two or three tenants and so additional co-locations are thought to require only minor structural modifications. Rooftop sites are prevalent in the major cities, with over 90% of Cairo’s sites being rooftop structures. These structures are inherently less suited for co-location and so the much of the opportunity for increasing tenancy ratios is outside of the major metropolises.

There have been no tower transactions of scale completed in the Egyptian market although Orange had previously agreed the sale of a portion of their sites to Eaton Towers in a deal which was subsequently cancelled. In April of 2015, the operator (then trading as Mobinil) announced the sale of their stake in the company’s tower subsidiary, Egyptian Company for Mobile Tower Services (ECMTS) to Eaton Towers for 1 billion Egyptian pounds (US$131.15 million). The agreement encompassed the purchase of approximately 2,000 towers (around one third of Orange’s total tower count in the country) with a 15-year leaseback contract for the operation and maintenance and also for the additional build-out of new sites. The towers to be purchased by Eaton were in three geographic areas: Delta, Upper Egypt and Red Sea and excluded Orange’s rooftop sites in Cairo.

Eaton subsequently entered negotiations to acquire a second tranche of Orange towers, although no deal was announced. Following the agreement, Eaton Towers and Orange worked on the technical handover of the towers, with Eaton beginning to shadow operations from January 2016. 13 staff were recruited from Orange into Eaton’s Egyptian team whilst Karim El Azzawy (formerly of Egyptian managed service provider, Mobiserve) was appointed as the country manager with Moustafa Sobh appointed as Key Account Manager and his second in command.

In March 2016, the Central Bank of Egypt devalued the Egyptian Pound by almost 13% as they shifted their exchange rate policy in a bid to boost foreign reserves and increase competitiveness. As per the signed agreement between Orange and Eaton, the devaluation meant a revision to the commercial terms of the deal, with further devaluation and revisions expected. 

On the 21 July, the longstop date laid out for completion of the transaction, Orange Egypt was still awaiting certain regulatory approvals relating to the change of control of ECMTS, the separate company into which they had transferred the 2,000 towers for Eaton to acquire.

With the prerequisites and conditions necessary for completion of the deal not met, the Orange Egypt board made the decision to not extend the deadline and as such terminated the agreement

It does not look likely that Orange’s towers will return to the deal table, with the operator preferring to focus on outsourcing power management to ESCOs than completing any further tower deals. Rumours had circulated that Etisalat may consider a tower deal but nothing concrete ever appeared. 

Whilst a major tower transaction is usually required to entice most major towercos to enter a new market, the Egyptian market seems to be attracting the attention of a number of towerco suitors without a significant SLB. With one of the highest number of SIMs per tower in the world, a growing subscriber base, rollout of 4G just beginning and a new operator in need of establishing its network, the potential for new build in the market is high. In order to increase capacity, collectively Vodafone, Orange and Etisalat are expected to be planning to add 300-500 new towers per year. Whilst Telecom Egypt was granted a period of five years to roam using other MNO networks, the operator must roll out its own sites ahead of the 2022 cutoff and so their new build is considerably higher. The operator currently has around 2,000 towers and has recently entered its second phase of network rollout with plans to deploy an additional 1,000 sites (a mix of new towers, co-locations and in-building solutions).

With devaluation of the Egyptian Pound, a need to invest in 4G equipment and potentially buy additional spectrum to keep up with 4G demand, Egypt’s MNOs are looking at how to best manage their capex: giving towercos build to suit contracts instead of investing in new site build themselves represents one such strategy.

For a towerco, this presents an exciting proposition; 300-500 new sites per year from Vodafone, Orange and Etisalat plus further upside from Telecom Egypt as they look to build up their network from almost scratch. There is a healthy co-location potential on sites with four major operators and opportunities for decommissioning also exist with significant parallel infrastructure in the country.

Several towercos have been rumoured to be looking at entering the market, with meetings already having been held with the regulator as well as each of the four MNOs. American Tower are reportedly very interested in the Egyptian market and are understood to have had representation on the ground in recent months. Digital Bridge has been linked with the Egyptian market as has TASC Towers, both of which are known to want to further establish their footprint in EMEA. One can also expect interest in the Egyptian market from Eaton Towers, having struck a deal (that was subsequently cancelled) with Orange, the towerco knows the market well. Speaking to TowerXchange at the time of their cancelled deal, Eaton’s CEO, Terry Rhodes said “The imminent rollout of 4G, together with the economic and political changes which have made US dollars very scarce mean the operators will be under financial and operational pressure to expand their networks. It would be enormously beneficial for this expansion to share infrastructure. Eaton Towers shareholders believe in Egypt, indeed DPI, Eaton’s original institutional shareholder closed its first deal in Egypt only last month, with a US$35m investment in appliance retailer B.Tech. Therefore we will continue our endeavours to enter the Egyptian market.”

The NTRA has voiced their commitment to further develop Egypt’s communications infrastructure. Within the country’s coverage plan of the strategic roads network for sustainable development, around 2,250 km of new roads in the national roads network were covered by mobile services in 2017 and work is underway to cover 5,700 km with mobile services. The NTRA is also currently developing telecom infrastructure in several smart cities within the framework of announced national strategic projects. Plus in 2017, Egypt announced plans for 5G trials, further underscoring the importance of digital transformation in their future. 

Whilst the power grid infrastructure in Egypt is extensive, grid interconnection processes are extremely slow. With such long timelines to get a license to secure power from the authorities, a surprisingly high proportion of sites in Egypt are off-grid. Many sites in the country are reliant on diesel generators, with the high load on some sites resulting in as many as three generators being required per site. Due to generous fuel subsidies in Egypt, diesel prices are significantly lower than in other markets and as such the business case for hybrid solutions is reduced. With different skill sets required to service hybrid solutions, stakeholders in the market observe that the maintenance costs are higher than that of diesel generators and as such this further impacts the TCO.

Orange Egypt has issued an RFP for an ESCO in a bid to rid themselves of the complexity and inefficiencies of managing power at cell sites. The MNO is understood to have entered late stage discussions with an ESCO with a contract due to have been signed imminently, although at the time of going to press no news has emerged of this. A towerco entering the market would likely also need to offer power as a service, something the African (and some of the Asian) towercos have more experience in.

Whilst healthy BTS work is likely to come from Telecom Egypt, there have been a number of management changes at the operator since it launched mobile services in 2017 and so there are likely to be a number of stop-start discussions in contract negotiations until some stability is achieved.

The opportunities, howeverm in the Egyptian market look to be highly enticing to a number of players and TowerXchange awaits eagerly the announcement of a towerco’s entrance into the country.