How did the industry get to where it is today, what lessons has it learned and where is it heading? TowerXchange examines the tower industry’s history and emerging trends, exploring key discussion points from the 2017 Meetup Africa & Middle East.
The status of the tower ownership in SSA and MENA
Towercos now own 2.966mn of the world’s 4.4mn telecom towers (67.4%), although this figure is somewhat distorted by the behemoth that is China Tower Company, which, with 1.9mn towers, accounts for almost two thirds of the world’s towerco owned towers. In sub-Saharan Africa, 36.2% of towers are now owned by independent towercos (with a further 4.6% by operator led towercos) representing perhaps two thirds of the addressable market, with limited appetite amongst towercos to acquire portfolfios from tier two MNOs or those in tier two markets. By contrast, MENA remains almost a blank slate for towercos, with just a handful of towers in independent towerco hands, although things are starting to show signs of changing (see figure one).
In Sub-Saharan Africa, the vast majority of the region’s towerco-owned towers are owned by four major players; IHS Towers, American Tower, Helios Towers and Eaton towers (figure two). The majority of their towers have been acquired through sale and leaseback transactions with the region’s tier one MNOs (figure four), although acquisitions of other towerco portfolios (such as IHS’ acquisition of HTN Towers and American Tower’s acquisition of Eaton’s South African business), coupled with build to suit activity, has further bolstered their portfolios.
Figure 2: Tower ownership by SSA’s four largest towercos
Figure 3: Ownership of Ghana’s ~6,000 towers
Figure 4: MEA’s biggest tower transactions to date
Joining the big four in the sub-Saharan tower industry are a handful of smaller towercos (figure five), the vast majority of which have grown organically as build to suit players with a handful of notable exceptions; for example, in Madagascar, Towerco of Madagascar was carved out of TELMA, whilst in Senegal, Al Karama Towers is in the process of acquiring Expresso’s tower portfolio. Some of the region’s other BTS players have acquisitive ambitions, eyeing up portfolios and markets that their bigger peers have shied away from.
In MENA, the tower industry is in a much more nascent stage but momentum is building. In Iran, number one and number three MNOs MCI and Rightel have joined forces with domestic towerco Fanasia to create the towerco Iranian Towers; in Egypt, where Orange’s tower sale to Eaton was cancelled, towerco licenses are held by four players, although only HOI-MEA have built and retained towers to date; whilst in Kuwait, Zain have agreed the sale of their tower portfolio to IHS Towers (and have entered into exclusive negotiations with the towerco in Saudi Arabia), deals which, when closed, will move the needle significantly in terms of towerco owned sites in MENA. Add to this new legislation surrounding infrastructure sharing in Bahrain and rumours of a tower deal in Tunisia and the market is very much beginning to heat up.
Figure 5: MEA towerco footprints
Dynamics affecting tower markets across the region
Whilst a full blow by blow account of individual tower markets can be read in “TowerXchange’s analysis of the tower market in Africa” and “TowerXchange’s analysis of the tower market in the Middle East & North Africa” (which are updated on a quarterly basis), exploration of three key markets can illustrate some of the dynamics that have influenced the development of the sector in recent years.
Ghana: Towerco competition, high tenancy ratios, lessons in contingency planning and MNO consolidation
Ghana marks the site of Sub-Saharan Africa’s first major tower deal, with a total of four tower transactions having been completed in the country and 74% of towers now owned by independent towercos. The MNO market is highly fragmented, whilst the towerco landscape is unique in that three of the region’s four largest players are present. The highly fragmented nature of the MNO landscape, coupled with the strict restrictions on new site build by a regulator highly supportive of infrastructure sharing has driven high tenancy ratios; whilst the presence of three large towercos has kept competition healthy.
Whilst a large number of MNOs in a country can present positives in terms of potential tenants, 2017’s news that Airtel and Tigo were to merge illustrates the risks and the importance of structuring contracts to withstand such events, something Ghana’s three towercos have done. Further MNO M&A is inevitable across the African continent and less experienced towercos need to exercise the same discipline in preparing for this.
The way in which Ghana’s towercos handled 2014’s economic challenges and power crisis also serves as further learnings for the sector. In 2014, the Cedi became the world’s worst performing currency. Maintenance contractors being paid in cedi needed to buy many consumables in dollars, forcing them to buy cheap, lower quality parts and spares which put pressure on uptime and SLA performance. With fuel shortages, grid availability slid from 22 hours to 14 hours then deregulation of the fuel price in 2015 led to bulk suppliers holding stock as the price went up 25% in a matter of days. Ghana’s towercos learned hard lessons about the need to have dynamic processes to get ahead of fuel shortages, whilst the importance of indexation and escalation clauses in contracts became increasingly apparent. Whilst the grid situation has improved, power costs in Ghana continue to escalate showing that alternative sources of power generation can be important even in countries with comparably good grid.
Nigeria: SSA’s largest mobile and towerco market but poor grid infrastructure and challenging macroeconomic conditions
With a population of 190mn and 147mn mobile connections, Nigeria represents Africa’s largest mobile market. Plus with a young and growing population, significant investment in telecoms infrastructure is required, with an estimated 30,000 additional towers needed. 77% of towers in the country are owned by independent towercos, with top tier towercos IHS and American Tower joined by a number of smaller Nigerian players.
One of the major characteristics of the Nigerian market is the country’s poor electricity grid, with less than four hours of grid availability for on-grid sites and no sign of any major grid improvements on the horizon. This makes Nigeria a very interesting market from a power perspective, with many proof of concept power initiatives having been carried out in the country. IHS’ “Big Five” initiative, replacing diesel generators with hybrid solutions on the vast majority of their ~15,000 sites in the country through a network of five partners is the largest energy upgrade initiative of its kind and will provide a benchmark and many lessons learned for those looking to kick off major energy upgrade projects elsewhere in the region.
As with Ghana, Nigeria has seen its fair share of economic challenges, with the country entering a deep recession in 2016 which lasted for five successive quarters. The sharp drop in the Naira, dollar scarcity and reduced consumer spending was felt acutely by all in the market, with dramatic effects on the telecoms sector. Unable to meet loan repayments EMTS (trading as Etisalat Nigeria) was taken over by its creditors, with Mubadala and Etisalat exiting the market and the company rebranded as 9mobile. Meanwhile, other MNOs struggled to make payments to towercos of their dollar-linked contracts. Such extreme conditions have caused frictions in the market but have led to deep conversations between MNOs and towercos in order to find a solution to break the impasse.
Figure 6: MEA tower transaction heatmap
South Africa: MNOs commercialise sites, towercos compete for BTS, frictions over lease rates
Dynamics in the South African tower industry are distinctly different from much of Sub-Saharan Africa. With a robust electricity grid, towercos tend to adopt the “steel and grass” business model, more akin to European and American markets, and with lower barriers to entry, a long tail of smaller independent build to suit towercos has emerged.
MNOs have also followed in towerco footsteps, adopting a more proactive approach to securing co-locations. Vodacom has developed a strong in house team to proactively pursue co-locations from ICASA spectrum holders in a bid to maximise the value of their infrastructure; whilst Telkom has gone one step further, carving out their towers into a dedicated business unit, Gyro Towers (with early rumours having suggested that they may look to list the entity on the local stock exchange). Cell C are the only operator to have sold their towers, agreeing the sale and leaseback of 1500 sites to American Tower back in 2010. The high lease rate agreed at the time of the transaction (albeit in return for a large upfront sum of capital) has led to discontent between the operator and American Tower, prompting Cell C to rebuild its tower portfolio and serving as a cautionary tale in future tower transactions.
Figure seven: Tower ownership in Nigeria
Figure eight: South Africa’s independent towercos
The search for a win-win solution
Given the aforementioned frictions, TowerXchange set a theme for the 2017 Meetup of “the search for a win-win relationship between MNOs and towercos”. Ultimately in a time of decreasing ARPU, infrastructure sharing is fundamental to controlling both opex and capex and protecting the margins of all concerned, critical to the health of both MNOs and towercos.
Taking a quick glance at the world’s largest towerco, 1.9mn site China Tower Company (CTC) which was created with a co-build, co-share philosophy which was designed to share the benefits of infrasharing and increase the value of MNOs and one can see the marked impact that the venture has had. China Tower is a joint venture between MNOs China Mobile, China Unicom and China Telecom, established in 2014 and in the process of gearing up for an IPO in 2018. Centralised planning by the operators has led to 658,000 fewer towers being built, generating savings of CNYY100bn whilst the implementation of standardised tower designs has helped to reduce build costs by 16-19%. Like the Indian towercos, CTC offers discounts for both the anchor and additional tenants and currently offers the lowest lease rates in the world, with the company receiving just over $22,000 per tower. In India, the going rate is $76,000 per tower, and publicly listed Bharti Infratel trades at almost a 50% valuation discount compared to the US publics and so it remains to be seen whether CTC can achieve a valuation per tower as high as 10% of that of American Tower when it IPOs. Whilst CTC has demonstrated the enormous savings possible by infrastructure sharing, a towerco built by MNOs, for MNOs, is a very different entity from Africa’s pureplay towercos; so how can MNOs and towercos better work together?
Figure 9: Efficiencies at China Tower
Working with towercos can lead to the more efficient use of land, whilst decommissioning of parallel infrastructure can generate further savings. Europe’s largest towerco, Cellnex has identified 14,500 overlapping sites in Spain and Italy, targeting the rationalisation of 2,000 sites between 2016 and 2019. The decommissioning programme is forecast to create $185mn in annual savings. Decommissioning programmes aren’t just confined to developed markets in Europe, in Tanzania following their recent acquisition of 185 Zantel sites, Helios Towers has plans in place to decommission 380 sites, the largest initiative on the African continent. The key to success when it comes to decommissioning is negotiating the liquidation of the lease under the decommissioned tower, something that an independent party such as a towerco may be more successful in achieving.
Ultimately however, the search for a win-win solution between MNOs and towercos will be headlined by one issue; lease rates. MNOs and towercos must discontinue the practice of agreeing a deal structure that maximises cash release, saddling the MNO with unsustainable lease rates. What looks like a sustainable lease rate today may not be tomorrow, given the impact of escalators and, more importantly, macro-economics. Dollar linked lease rates have as much as trebled in Nigeria, prompting an impasse that is as bad news for the towercos as it is for the MNOs. Extreme scenarios like Nigeria notwithstanding, MNOs are going to have a hard time renegotiating lease rates with landlord towercos; rates were agreed and cash paid in good faith. You’re effectively not negotiating with towercos, you’re negotiating with the investors, banks and pension funds who ultimately own them.
Towercos and MNOs need to come together to look at areas where they can work together to improve efficiencies and lower costs; removing redundant equipment from towers and the enclosures around towers or perhaps agreeing terms for gain sharing and moving indoor equipment outside, using lower energy antenna and investing in hybridisation to reduce energy opex. To examine the subject further, we held a roundtable on the subject of creating win-win relationships between MNOs and towercos at this year’s Meetup; the summary of which will be available soon.
Figure ten: Signed telecom ESCO agreements on the African continent
Infrastructure sharing beyond tower transactions
Whilst divesting towers to a towerco is one strategy that an operator can explore to control costs, there are a host of other solutions in their tool box from barter arrangements and co-location sales to other MNOs (as we have seen with South Africa’s towercos), to towerco joint ventures (as is the case with Iranian Towers) through to active sharing which has proven more challenging to get off the ground but is something that some MNOs are very much aiming towards.
Perhaps one of the hottest topics of discussion at the 2017 Meetup was the emergence of the ESCO model in the African tower industry. At the time of the 2016 Meetup, discussions centred heavily around whether the ESCO model would take off in the African market, whilst by the time of the 2017 event several ESCO projects were announced (figure ten) with numerous other RFPs in the pipeline.
For more on 2017’s discussions about the African ESCO market read “Towards proof of concept of the ESCO model in sub-Saharan Africa”
Investment in energy systems
Whether it be through ESCO arrangements or through MNO or towerco led capex spend, investment in hybrid systems is now well underway in sub-Saharan Africa. With diesel prices continuing to escalate, and fuel theft presenting a major challenge, investments in new and improved energy systems is seen as a key strategy to control costs.
A host of roundtable discussions and our energy working group (the report from which will be available shortly) delved deep into energy efficiency and cost saving measures, whilst our first series of buyer briefings centred heavily around the solutions for which towercos and MNOs were searching.
Driving further operational efficiency measures
Beyond energy, discussion at the Meetup examined other measures which tower owners are taking to reduce costs, improve margins and deliver win-win solutions for all concerned. Fewer and more comprehensive site visits, supply chain upskilling, longer and deeper partnerships and the application of lean six sigma methodologies were just some of the strategies discussed over the course of the two days. Key take homes from a dedicated roundtable on the topic, hosted by Helios Towers’ Colin Gaston, will be available shortly.
The role for alternative site typologies
Whilst much of the discussion at the Meetup remained about macrosites, talk of alternative site typologies started to appear as densification concerns increase in the region’s more developed markets and hard to reach rural areas continue to remain a concern.
An increasing proportion of the world’s new build urban sites are not 30m+ three legged towers, but are rather microcells, city poles or lamp posts often combined with parking, traffic and CCTV sensors. Whilst the region lags behind European and American markets in this regard, it is important that MNOs and towercos, particularly those in Africa’s most progressive markets continue to look ahead. The first green shoots have started to emerge, exemplified by Eaton, Helios and American Tower’s indoor DAS deployments and we are starting to see new companies like Boniswa pioneering the rollout of lamp posts and small cells. MNOs are looking for an asset-light business model where neutral hosts will play a critical role in deploying a heterogeneous network layer for both indoor, and, over a longer horizon, outdoor connectivity.
To meet this goal, owning fibre will be important for future neutral hosts (American Tower recently acquired a fibreco in South Africa and IHS have a fibre license in Nigeria) and for both urban and rural networks satellite backhaul will also play a key role (we were pleased to welcome key satellite players to Johannesburg) whilst new business models (such as X’s Project Loon represented at the Meetup) will emerge. Whilst there is still a lot more life in rolling out and optimising macro-infrastructure across the region, complementary site typologies will start to play an increasingly important role in urban markets as data consumption grows and business models need to adapt.
For further insights into discussions at the 2017 TowerXchange Meetup Africa & Middle East, download the post event report
