Helios Towers: their history and growth trajectory

On 2 March, Helios Towers announced their intent to IPO with a joint listing on the main market of the London Stock Exchange and main board of the Johannesburg Stock Exchange. On 15 March, Helios announced that whilst they had received considerable institutional investor interest, the shareholders had decided to not proceed with an IPO at the current time. TowerXchange examine Helios Towers’ story and performance in the African tower industry and speak to Helios Towers’ CEO, Kash Pandya,

The tower industry as we know it today started back in the mid-nineties in the United States where almost simultaneously, Steve Bernstein Associates (now SBA Communications; NASDAQ SBAC), Castle Towers (now Crown Castle; NYSE CCI) and American Radio (now American Tower; NYSE AMT) all came up with the idea of unlocking the value of towers by selling space to multiple tenants. Crown Castle announced the first large tower transaction in 1998, acquiring 1400 towers from Bell Atlantic and four other tower transactions followed. Today, over 80% of US towers are owned by towercos, the majority consolidated into the portfolios of Crown Castle, American Tower and SBA Communications, with a handful of mid-tier consolidators led by Vertical Bridge, and a long tail of over 100 independent developers.

The independent towerco model expanded out of the US, across the border into CALA (where today approximately half the region’s towers sit in towerco hands) whilst a handful of pioneers took to evangelising the towerco business model in Sub-Saharan Africa, with Helios Towers at the forefront of the movement.

The first wave of tower transactions in Sub-Saharan Africa were announced in 2010 with Helios Towers reaching an agreement to acquire 831 sites from Tigo in Ghana (with Millicom retaining a 40% stake in the new towerco venture). In 2011 Helios closed two further transactions with Tigo, acquiring a total of 1,721 sites across Tanzania and the DRC. In 2012, Helios commenced its first build-to-suit operations, building 259 towers in Tanzania before in 2014 closing their second tower transaction in the country, purchasing 1,149 towers from Vodacom Tanzania (with Vodacom securing a 24.5% stake in Helios Towers Tanzania). 2015 saw Helios add a fourth country to its portfolio, acquiring 393 sites from Airtel in Congo Brazzaville; whilst in 2016, Helios completed their largest tower transaction to date, acquiring 967 Airtel sites in the DRC. In 2017, Helios announced their seventh and most recent transaction, acquiring Zantel’s 185 mainland towers in Tanzania (101 of which are currently closed as of 31 December 2017), further bolstering the Helios’s operations in the country.

In the past seven years, Helios has completed seven large scale acquisitions (figure one) and added over 1600 build to suit towers to its portfolio, whilst undertaking strategic decommissioning of over 400 sites to better optimise their cost base (figure two).

In addition to purchasing and building towers, Helios have continued to add long-term colocation and amendment contracts from new and existing tenants (figure three). At Q218 Helios had a total of 12,996 tenancies across their portfolio of 6,533 towers, equating to an average tenancy ratio of 1.99x.

87.7% of Helios Towers’ 2017 revenue came from the local opcos of five of the largest MNOs in Sub-Saharan Africa (namely Airtel, Millicom, MTN, Orange and Vodacom), each of which operate in multiple African markets and have an investment grade, or near investment grade credit rating. A further 10.9% of Helios’ revenues is attributable to Viettel and Africell, two of the continents fastest growing operators, with the balance made up of over 20 other tenants.

In addition to driving top line growth through the addition of further sites and tenancies, Helios has further improved operating margins through their business excellence programme and power initiatives.

Introduced in 2015, the programme has reduced the number of primary suppliers from 60 to 12, delivered $36mn in capital expenditure savings, and reduced site down time from 23 minutes per tower per week in Q4 2015 to 3 minutes 25 seconds per tower per week in Q4 2017 (an 85% reduction). In 2017, Helios installed solar solutions at 249 sites, made 375 connections to grids and installed 331 hybrid solutions, collectively delivering over US$3.3mn in fuel cost savings

For further insights into the initiatives read “How Helios Towers continues to raise the bar in operational excellence”

Top line growth and operational efficiencies have led to improvements in adjusted EBITDA and adjusted EBITDA margins from US$53.8mn and 27.3% in 2015 to US$146.0mn and 42.3% in 2017. In the medium term Helios is targeting EBITDA margins of 55-60%.

Helios’ major shareholders are shown in figure five. In 2017, Helios simplified its capital structure, purchasing Vodacom’s minority stake in Helios Towers Tanzania for $58.5mn. 2017 also marked a significant year for Helios, with the towerco issuing its maiden corporate bond in the March. The $600mn bond, listed on the Irish Stock Exchange and paying a 9.125% coupon with a 2022 maturity date, was three times oversubscribed. Until the bond, Helios had financed their operations with operation-specific loans which were separate for each market. The bond issuance was an important step in enabling Helios to support operations with one finance team, reducing work from a treasury point of view.

On 2 March, Helios Towers announced their intent to IPO with a joint listing on the main market of the London Stock Exchange and main board of the Johannesburg Stock Exchange. On 15 March, Helios announced that whilst they had received considerable institutional investor interest, the shareholders had decided to not proceed with an IPO at the current time.

Helios’ announcement of their intent to list led observers to speculate as to how their valuation could match that of other listed towercos, given the fact that there are no pureplay African towercos currently listed. Whilst American Tower (NYSE: AMT) has an African footprint, their sub-Saharan African towers account for less than 10% of their total portfolio. Looking at the asset class as a whole however and one can see that towerco stocks have had a stellar performance, outperforming other equities and infrastructure stocks (figure seven). Their predictable annuity like returns have proven attractive to investors and with strong growth in telecommunications infrastructure forecast as we move towards an increasingly digital economy, the long term outlook is positive.

There is a large degree of variation between the trading multiples of listed towercos across the globe, from the 8-11x multiples of the Indian towercos, Bharti Infratel and GTL Infrastructure to the >20x multiples of the heavily US-centric American Tower, SBA Communications and Crown Castle (figure eight).

In TowerXchange’s article “IPOs on the horizon for Africa’s towercos” we examined some of the factors coming into play in the different valuations and what this would mean for the sorts of valuations we could expect for African towercos.

Prior to the postponement of Helios’ IPO, sources observing the process had suggested that the towerco would likely be targeting a valuation multiple of around 15-17x. Given the continued growth of the company, if one were to have taken Helios’ annualised Q4 2017 EBITDA of $164mn, this would have equated to an enterprise value of US$2.4-2.8bn.

In 2018, both Eaton Towers and IHS Towers also announced that plans to IPO were on hold. Whilst not in the public domain, Eaton’s EBITDA has been estimated to be around US$120-130mn with the company thought to have been targeting a valuation north of US$2bn. At over 23,000 sites, IHS’ portfolio is significantly larger than its two peers and the towerco was rumoured to have been targeting US$10bn in their since postponed IPO proceedings.

The exact reason behind Helios’ IPO postponement has not been publicised. Some sources suggest that the markets wanted too much of a valuation discount for the risks associated with the DRC and Tanzania; whilst other rumours suggest that a potential merger with Eaton Towers or acquisition by American Tower could be in the offing. As Africa’s towercos continue to scale, public listings mark a natural step for the primarily private equity backed companies, although an acquisition by a strategic can never be ruled out.

---

TowerXchange: Please can you provide some insight into the growth forecasts of the telecom markets in which Helios operate and what level of business this will translate into for Helios?

The combined population of the four markets in which we operate is expected to grow by 33mn in the next five years, taking it from a population of 173mn today to over 200mn. Additionally, we have a very young population – over 70% being below the age of 30 – and there is a huge rate of urbanisation.

Mobile penetration in each of our markets is low with phenomenal growth forecast. If you look at the DRC, which has a population of 85mn and a landmass a quarter the size of the US (or ten times the size of the UK), only one in four people has a mobile phone and only 50% of the population live in an area with mobile coverage; in our largest market, Tanzania, that figure is still only 40%.

Helios commissioned independent research by Hardiman Telecommunications which forecast that there would be a 38% increase in the number of subscribers across our four markets by 2023; this equates to an additional 47mn subscribers. This growth in the subscriber base necessitates an additional 12,000 points of service being added in the same time period.

In three of our four markets (Tanzania, DRC and Congo Brazzaville) we are the only towerco present and collectively across all of our markets we own 57% of the total tower stock. If one were to conservatively assume a flat market share over the next five years, and Helios were to take 57% of that 12,000 points of service, that would equate to almost an additional 7,000 PoS being added to our portfolio by 2023. The 12,000 additional points of service doesn’t include new technologies and so as 3G and 4G are rolled out, additional technology tenancies will create additional revenue.

TowerXchange: Is Helios’ tower portfolio ready for this sort of growth?

The tenancy ratio on our sites currently sits at 1.99x. Over the past five years we have been investing heavily in getting our assets ready for additional tenancies, spending over US$160mn in capex upgrades in preparation for the growth that is forecast. 78% of our towers are now co-location ready with the capacity to be leased up to 3.6x. Helios have been proactive in investing in our networks - something that other towercos haven’t necessarily approached in the same manner – meaning that future investors won’t need to foot the bill to take advantage of the growth forecast.

TowerXchange: We have spoken about organic growth, but do you foresee any large scale tower acquisitions on the horizon for Helios?

Helios have completed seven major sale and leaseback tower transactions over the past seven years, the largest of which being our acquisition of Airtel’s sites in the DRC. As such, we are confident of our ability to execute such transactions and remain alert to any opportunities. In each of the four markets in which we currently have a presence, M&A opportunities exist, but we are patient and disciplined in our approach. We only want to do a transaction where the value proposition and timing makes sense for both ourselves and the seller. Our business thesis and growth plan is based upon organic growth opportunities, although M&A activity could present additional upside.

TowerXchange: Helios’ core business is focussed on macrosites but do you see growth opportunities outside of this in complimentary telecom infrastructure such as small cells, datacentres and fibre?

Helios have already started to evaluate small cells closely and are doing a pilot in Ghana, installing small cells on 40 sites. Our plan is to carefully assess the model and then, in time, replicate this in other markets. Similarly when it comes to fibre backhauling, we again see plenty of opportunities and are currently evaluating the space and learning the ropes, focussing on a two to four year timescale.

In terms of the data centre market, we see that our power infrastructure and property management expertise lends itself well to transitioning into the space. Whilst we wouldn’t look to get involved in the active side of the datacentres, we are well positioned to take on property management, power and cooling. Some of the Helios team, including myself, hail from Aggreko and so we already have the expertise in house for providing cooling solutions which could be easily transferred to the sector.

TowerXchange: How does the business model, growth plan and potential valuation of Helios Towers compare to that of towercos active outside of the African market?

Whilst the high valuations of the US public towercos reflect, in part, the risk profile of the countries in which they operate, one of the key factors that contributes towards their high valuation relative to other towercos is their contract structure.

In Europe, lease contracts have the downside of an “all you can eat” type approach; whereas in the US, any existing tenants who want to add new equipment to sites incur further charges in the form of amendment revenues. Helios Towers’ contract structure follows that of the US counterparts and amendment revenue is starting to feature more prominently in Helios’ growth; as Africa’s MNOs start to rollout 3G and 4G on top of their 2G networks, Helios benefits from amendment revenues.

The other feature which Helios’ contracts have in common with US towercos is their duration. Typically we sign long term 10-15 year contracts which gives certainty to our investors. As of 31 December 2017, the average remaining life of tenant leases was 8.3 years, excluding renewal provisions; as of 28 February 2018 this figure has increased to 8.8 years following the signing of a 15 year contract with AirtelTigo in Ghana. We currently have $3.3bn in committed revenue with investment grade, or near investment grade, customers which provides us with a strong and predictable growth story.

Unlike other listed towercos, Helios are the only towerco in the majority of their markets giving them a unique opportunity to capitalise on the growth forecast in the region. Whilst in Ghana we do have competitors, we have a strong portfolio with over 75% of sites in urban areas and our recent securing of a 15 year contract with the AirtelTigo joint venture demonstrates how competitive we are not only on a pricing front but also on the services that we offer. With phenomenal growth forecast in the African market – higher than in markets in which other listed towercos operate - Helios expects to demonstrate strong double digit growth.

We are an infrastructure business with highly visible and growing revenues, margins and profit streams in markets with compelling long term growth dynamics. And it is a business we have sought to de-risk based on management’s huge experience in managing growth in developing and frontier markets backed by long term customer contracts that give us protection from fuel and currency volatility.

_

Further reading:

BMI Industry Trend Analysis: Analysing the risk profile of Africa’s towercos ahead of their prospective IPOs

IPOs on the horizon for Africa’s towercos