At the fourth annual TowerXchange Meetup Asia, a panel of leading towerco executives and industry analysts from edotco, American Tower, J.P. Morgan Asset Management, New Street Capital Asia and IHS Towers, which is currently eyeing Asian opportunities, took the stage to discuss capital markets, towerco value proposition, valuations and diversification, the impact of MNO consolidation and more. With its mix of mature and new markets, Asia offers unique opportunities for towercos and investors alike. This panel was particularly timely as while American Tower is already a listed entity, IHS is in the process of an anticipated listing in 2018, and edotco is widely expected to do so down the road.
Towers and investors
Relatively speaking, the tower asset class is small, housing approximately 40 towercos with market cap in excess to US$1trn (Infratel at $20bn). However, the appeal is there for investors since telcos have the concept of locked-in revenue that not many industries have and there is also more visibility on the financial profiles of the players when it comes to regulations, taxation, spectrum, et cetera.
For institutional investors with an appetite for five to ten years holdings, towers may be a fit. With longer term markets, the cash flow is relatively stable, less volatile and the ROE/dividend can be very attractive. However, the industry needs to think about the correct debt levels. In particular, the under-geared tower assets can be a challenge for investors focused on equity, since the returns are not as attractive.
Tower investors right now have an increased level of clarity on the business model and focus on a few metrics that are stable, such as tenancy ratios, value per tower, the different types of structures and fibre.
Towerco acquisitions
Shifting from the capital market perspective of the industry, the panel discussion then focused on how market opportunities are evaluated, as listed and potentially soon-to-be-listed towercos seek to grow their portfolios, business and value.
American Tower looks at all the markets openly but applies a three-gate process as it considers its entry into a country. The first being the rule of law, regulations, and macro economic drivers. Next is the attractiveness of the telecom wireless market based on the number of operators, data growth, et cetera. Lastly, the number of operators in the region that run businesses across a number of countries. Another factor is whether the towerco is already in a particular geography and additional opportunities are available. For example, if the talent pool created in one country can serve the surrounding countries and economies of scale can be achieved.
edotco takes a similar approach as American Tower, with the extra focus of entering markets where others might not be as comfortable; the company has thus far enjoyed success with this mindset in countries like Pakistan and Bangladesh.
Markets with at least three competing MNOs would be considered interesting and appealing, and even more so if the MNOs agree the tower sharing model makes sense.
Regional versus single-market strategy
IHS Towers, best known for its presence in Africa, is seeking to better understand the opportunities in Asia, especially with operators that want to execute a broader tower strategy (beyond single market). IHS has seen the importance of expanding beyond the home market as it has grown over the years, and looks for synergies that may benefit its existing customers. This approach with MTN in Africa allowed the towerco to support the operator to execute and accelerate on its broader strategy in Nigeria, Cameroon, Rwanda and beyond. IHS is now doing the same in the Middle East, undertaking multiple portfolios to share the benefits not just for the anchor tenant, but the market in general.
As carriers in Asia are looking to offload their assets in multiple markets, IHS believes a towerco that comes in with the capital, resources, experience and skill-sets for multi-country operations would be a key partner for the MNOs. A multi-country towerco can benefit from centralised procurement, diversification, NOC, and/or contractual conversations on revenue and co-locations.
Valuation benchmarks: multi-country premium?
The counter perspective on cross-market synergies is that evidence and proof of success stories are currently limited. Towercos that have discussions with investors need to be clear on the synergies and provide examples on how to operate with the right cost of capital across different countries and regulations. If the likes of Vodafone and Singtel try to list their assets, they need to have benchmark prices for each, even if they are illiquid. The idea of cost synergies across multiple markets has not generally played out in the telecom industry.
Carriers trade at single digits compared to towercos that do so at 12 to 20x. With ARPUs being so different across different countries, there are various factors at play. The cost of capital to build a tower for Vodafone in India versus Australia will not be the same. However, a multi-country towerco portfolio makes sense, as staff can be transferred from one place to another, in a way that telecom service operators can’t benefit as similarly. The main issue is that historical data on the successes of multi-country operations aren’t available in emerging markets and towercos should not assume investors will pay a multi-country premium.
Valuation benchmark: captive vs. independents
For captive towercos, those listed in India compared to true independents on a regional and/or global basis, valuation discounts do come into play. Big difference is whether it is investible. It’s hard to find examples of larger group towercos that have the right leverage profile.
There are limited publicly listed towercos so MNOs look at Crown Castle and American Tower, and may want to hold onto assets since the idea is they could be worth more later. This creates issues on leverage and willingness to share. In addition, there is generally not a big investor base in Asia for yields (dividends). As pension and retirement funds develop in the region, a bigger investor base for it could follow. For now, the capital level discipline is lower in Asia, so the return to shareholders is not as high.
In theory, independent towerco multiples should be high, whereas captive towercos have MNO-owner pressure to keep prices down. But there is currently no consistency across the various markets.
At the end of the day, the US towercos are players in a mature market, where investors have been educated since the early 2000s. For IHS and edotco, which could be the next towercos going public, their listing will require an education process, whether the listing takes place in Hong Kong, London or New York.
Evolution path of towercos
Towercos seeking to remain competitive generally need to explore and/or expand beyond the traditional grass+steel model. Part of the panel discussion explored how different skill sets (i.e. small cell) or new capabilities (i.e. fibre) or moving capital from build-to-suit programmes to acquisitions are becoming part of the business. Towercos in the region need to explore what can be done in emerging markets compared to say what Crown Castle has done in the U.S. with its diversification projects into small cells and beyond. What would a towerco build and invest in and what might operators bolt on?
IHS does have fibre and small cell as part of its catalogue but the towerco also applies very careful consideration with regards to which markets could be attracted to new solutions. In a city such as Lagos in Nigeria with 17mn people in a dense area, a fibre or tower-to-tower fibre strategy could make sense.
American Tower evaluates all options available, market-by-market and has seen different needs and adopted tailored strategies in each individual market from Latin America to Asia.
From edotco’s perspective, for additional offerings such as in-building or small cells, the towerco will assess its capability to deploy in-house versus the possibility to partner with technology providers. The key for the towerco is to look at all the different ways to approach the issue. Anything beyond traditional towers does change the skill-sets and requirements and an investment in fibre or small cells is very different to building incremental tower revenue.
About IHS Towers
Founded in 2001, IHS Towers provides services across the full tower value chain – colocation on owned towers, deployment and managed services. IHS continues to grow and develop its business with leading market positions in Cameroon, Côte d’Ivoire, Nigeria, Rwanda and Zambia. IHS also led inmarket consolidation in Africa through its acquisition of Helios Towers Nigeria in 2016, and announced an agreement in October 2017 to acquire Zain’s towers in Kuwait, subject to certain regulatory and statutory approvals. Its portfolio include over 23,300 towers.
