On 10 October 2017, Zain Kuwait announced that it had reached a deal with IHS Towers for the sale and leaseback of its tower portfolio in the country. The deal, which is expected to close imminently, will mark the Middle East’s first tower transaction of scale. TowerXchange take a closer look at the Kuwaiti market and the Zain transaction.
Kuwait’s economy and geography
With a landmass of 17,820km2 and a population of just 2.9mn (Source CIA World Factbook) Kuwait is one of the smallest countries in MENA, but is also one of the wealthiest, posting one of the highest levels of GDP per capita in the region. Unemployment is low (less than 1%) with around 75% of the population employed by the public sector. The economy has a heavy dependence on oil but after it shrank in 2017 (linked to falling oil prices), the IMF forecasts a growth of 2.33% in 2018, followed by a growth of 4.06% in 2019. Kuwait planned to introduce 5% VAT in 2018 in a bid to improve the country’s finances but in May announced that VAT introduction would be postponed until 2021, whilst still pushing ahead on plans to introduce excise tax on selected products. 100% of the population lives in urban areas
The Kuwaiti mobile market
Kuwait is a developed mobile market with a mobile penetration rate of 173% and mobile broadband penetration sitting at 91% (Source: GSMA Intelligence, 2018). ARPU is one of the highest in the region with Zain Kuwait posting a figure of US$25 in Q3 2018, although in line with other countries ARPU has been steadily been decreasing. LTE coverage is almost complete and the country is very much positioning itself to be a frontrunner in 5G, with operators investing in their networks, in preparation for spectrum allocation and handset readiness.
Zain Group, which launched operations in the country in 1983, is Kuwait’s leading operator with 37% market share. Omantel acquired a 21.9% stake in Zain in 2017, making it the single largest shareholder after the Kuwait Investment Authority (which owns a 24.6% stake; 5.05% is owned by Nohoudh Development Trading & Contracting with the remaining shareholding listed on the Tadawul stock exchange).
Having acquired Wataniya Telecom in 2007 (Wataniya Telecom having launched operations in Kuwait back in 1999), Qatari-headquartered Ooredoo is Kuwait’s second largest mobile network operator with 32% market share. Saudi Telecom Company-owned VIVA launched commercial operations in the country in 2008 and currently sits just behind Ooredoo in terms of market share with 31%.
Figure one: Mobile market share in Kuwait
The tower landscape
There are approximately 4,100 towers in the Kuwaiti market (figure two) and whilst there has been limited infrastructure sharing between the operators, Zain report that, as of Q3 2018, they use 2,360 “sites” whilst their tower portfolio is known to be closer to 1,700 thus suggesting that some degree of infrastructure sharing or use of alternative site typologies is at play.
The deployment and operation of cell towers is regulated by CITRA, Kuwait’s Communication and Information Technology Regulatory Authority, which sets and monitors technical standards and electromagnetic radiation and ensures that environmental concerns are addressed. Around 10% of towers in Kuwait are understood to lack all necessary permits that are required with one of the biggest knock-on effects of this being that they are unable to connect to the electricity grid. As such, in spite of Kuwait’s extensive and robust grid infrastructure, approximately 10% of the country’s total tower stock (technically classed as temporary sites) are reliant on diesel generators 24/7 as their primary source of power (due to low fuel prices in the country, hybrid solutions have not been widely explored).
New site build in Kuwait is relatively modest. In their 2017 annual report, Ooredoo Kuwait reported that they had added 160 new sites for the calendar year, whilst Zain Kuwait’s tower portfolio is understood to have grown by around 100 sites in the past 12 months. To date, no towercos have been active in the Kuwaiti market, with operators and their supply chain partners responsible for deploying, operating and owning the country’s full complement of towers. On 10 October 2017, however, Zain Kuwait announced that it had reached a deal with IHS Towers for the sale and leaseback of its tower portfolio in the country.
Figure two: Tower ownership in Kuwait
Zain’s tower deal with IHS
News of Zain’s interest in divesting their Kuwaiti towers emerged back in 2015 when they appointed Citigroup to examine a potential tower sale in two Gulf countries. Later in 2015, then CEO, Scott Gegenheimer confirmed the company was opening a process for a sale of both their Saudi and Kuwaiti towers and in March 2016 it was announced that they were narrowing down potential bidders.
In Kuwait, it is understood that interest was received from 15 parties, with Zain Group undergoing a rigorous processes to narrow this down to five shortlisted bidders before finally settling the deal with IHS Towers and Towershare. IHS are understood to have fronted and bought the assets with Towershare acting as a regional partner (with Towershare having since been absorbed into IHS) and Zain retaining equity in the new entity. The division of equity between the parties was not disclosed. With Zain’s retention of residual equity reducing the capital requirement to purchase the towers, and IHS having significant liquidity on their balance sheet, IHS did not have to raise new capital to finance the transaction. Zain’s retention of equity is for financial upside exposure only, with no access to strategic or competitive information, thus guaranteeing the independence of the new towerco entity.
The deal is understood to involve a build-to-suit commitment over the next three to five years and whilst no details of decommissioning plans have emerged, consolidation is expected in a bid to bring efficiencies to the portfolio. Whilst there has been no discussions of the towerco entity expanding beyond the ownership and operation of macro-sites, Kuwait’s plans to become a leader in the rollout of 5G could create a potential role for the towerco entity in small cells and DAS rollout to meet densification requirements.
IHS will take over power as a service and whilst the vast majority of sites are on-grid, Zain had previously been investing in energy efficiency initiatives in a bid to control energy costs and reduce carbon emissions.
Speaking at the time of the transaction, Bader Al-Kharafi, Vice-Chairman and Group CEO of Zain said “This transaction is set to support Zain’s transformational strategy in becoming a digital lifestyle provider as it will optimise operational efficiencies, enhance customer experience, and deliver greater value for its shareholders. This deal will unlock value that can be more efficiently deployed in new technologies and higher yielding investments for Zain, and at the same time pave the way for further network expansion and tower infrastructure sharing in Kuwait. I’m very proud of Zain team for its professionalism in completing the first agreement of its kind in the MENA region. We are confident we have chosen the right partner in IHS, a company that possesses high caliber expertise with sound operational experience in diverse markets. The company has an ambitious team that is focused on expanding their operations across the Middle East and Africa.”
Sam Darwish, Executive Vice Chairman and CEO of IHS commented “We are delighted to partner with Zain on this agreement which will expand our operating footprint into the Middle East. We look forward to a long-term partnership with Zain, where we can demonstrate our strong operating capabilities and service offering in support of their customers. We expect significant growth in wireless phone and data usage in a number of emerging markets over the next few years and we believe, given the significant experience we have gained in our African operations, we are well positioned to meet the growing needs of wireless network operators in these countries.”
The deal is expected to close imminently with just final closing conditions to be determined.
Could we see further tower transactions in Kuwait?
In Saudi Arabia, Saudi Telecom Company has explored various strategies for its tower portfolio, proposing the formation of a joint venture with number two operator, Mobily, hinting at their interest in potentially selling their tower portfolio, and more recently creating a dedicated towerco subsidiary - Communication Towers, for which they have looked into securing a towerco partner.
STC’s Communication Towers plans look to be moving ahead, with insiders suggesting that the towerco could commence commercial operations in Saudi Arabia as early as January 2019 (although a change in STC management, coupled with ongoing discussions with regulators has stalled some of the progress). Saudi Telecom Company have remained close lipped as to whether their towerco strategy could be rolled out across their other markets, however TowerXchange consider it unlikely that STC’s VIVA would look at selling their Kuwaiti towers before a decision regarding tower strategy is reached in Saudi Arabia.
Ooredoo have experience working with towercos, having completed a tower transaction in Indonesia, selling 2,500 towers to Tower Bersama and working closely with a number of towercos in Myanmar. The operator has not announced further plans for their towers but is known to be exploring strategies to reduce its opex and capex spend across its different operations.
Who could have an appetite for towers in Kuwait?
As a relatively small market, the scope for multiple towercos to operate in Kuwait is limited and one could expect IHS to be the most likely acquirer of any subsequent tower portfolios that should come to market, driving value through decommissioning. Multiple towercos have however been linked to tower transactions in MENA, primarily in the Saudi Arabian market, and so competition for towers could ensue. Should Saudi Telecom Company’s Communication Towers commence commercial operations in Saudi Arabia, one can imagine that the the towerco would cross the border into Kuwait in a bid to better commercialise VIVA’s tower portfolio.
Whilst a small market, the imminent closure of Zain’s sale and leaseback transaction to IHS Towers in Kuwait is a landmark moment for the Middle Eastern tower market. Whilst several tower transactions have been agreed previously in the region, the Kuwaiti deal looks set to be the first to cross the finish line, setting an important precedent and benchmark for future tower activity in MENA. TowerXchange remain optimistic that the deal could close ahead of our first Meetup MENA, being held on 29-30 January in Dubai which will welcome speakers from Zain, and IHS amongst other key players. For further information, please click here
