SBA Communications to enter South Africa with planned Atlas Towers SA acquisition

In August this year, SBA Communications announced it intended to exercise and close its option to acquire all but 6% of Atlas Towers SA, co-founded by Nate Foster and Randi Clendennen. SBA Communication has made a total investment of US$140mn to acquire 94% of the South African towerco. Atlas SA is expected to generate annual revenues of US$31mn and adjusted EBITDA of US$21mn during its first full year of operation after closing. Through this investment, SBA Communications take control of approximately 900 sites throughout South Africa and a substantial new tower development backlog that should take the total beyond 1,000 by the start of 2020. TowerXchange speaks to Nate Foster and Kurt Bagwell about the deal. 

TowerXchange: First of all, congratulations on the deal, SBA has been a minority investor in Atlas Towers for four years, can you tell us a little bit about the nature of the partnership over the last four years?

We did a roadshow, talked to several potential partners seriously in late-2014 into early-2015. SBA had the most attractive benefits for us. We needed money and debt secured for the future, and they offered that. We offered them an option to enter a new market sometime in the future. They were able to participate in the operational education we both gained over the years, and we had the ability to make and implement decisions that allowed us to become the fastest developer of new tower infrastructure in the country.

TowerXchange: What can you tell our readers about how the US$140mn total invested by SBA Communications over the last four years and in the acquisition of 94% of Atlas Towers SA reflects the culmination of the partnership and value for both sides?

Well, I can’t comment on their money invested, but I can on ours. Randi and I not only brought our model and methodology from the U.S. to Africa, but also spent more of our capital in South Africa than I ever imagined. We funded the business in its early days all by ourselves; up rooted the family and really took a giant leap into an unknown market. The help we received from SBA allowed for some necessary breathing room. We could focus on growth strategies, proper geographic resource allocation, and most importantly hustling over the competition with the best contracts in the country.

TowerXchange: Nate, you have had a 20+ year relationship with SBA Communications, can you tell us a bit more about how that relationship has developed and contributed to the deal announced this quarter?

I worked with SBA from 1995 for almost nine years. I helped them in the early days of their new tower business. Since then the relationship has been primarily as buyer and seller of our U.S. tower assets since Atlas Tower was founded in 2007. I have known Jeff Stoops for a while and that may have helped their risk calculation a bit, but at the end of the day, they are probably the towerco that is as rigid with respect to the fundamentals that drive value as Atlas Tower is. Therefore, the key drivers of the business, and how you nourish them, never needed alignment between our two companies.

TowerXchange: For our readers more familiar with SBA’s Western Hemisphere footprint, can you give us some context of the South African market and what makes it an attractive investment?

Anyone researching the continent like we started doing in 2012 will quickly see why South Africa grades well against the others. I think the word attractive investment has a lifespan. What is true yesterday is not necessarily true today. Thus timing is the critical challenge of making any Africa based investment. The reason why Randi and I invested so aggressively in South Africa in the beginning was the ability to protect your assets and contracts with a rule of law. It’s not a very litigious country, but there are many remedies if your property or your contracts on property are being challenged or threatened. If you do not have good land use or property law back-up by precedent or regulatory policing it’s very difficult to growth new wireless infrastructure that has value.

TowerXchange: American Tower is the currently the largest independent towerco in South Africa, how have Atlas carved out a competitive proposition?

Since I have been attending TowerXchange there was a concern that South Africa was too mature a market, but I said at the time that the Atlas model never has a bad time to start…it just might take a long time. Turns out we have been able to put enough capital together at the right time to build a skyrocketing portfolio. American Tower bought into the market, we built into the market. We have different skills to American Tower.

TowerXchange: TowerXchange has recognised Atlas Towers as Africa’s fastest growing towerco, without giving away any secret sauce, can you tell us how you have managed to achieve these build volumes and reach near 900 sites?

We have a catch-phrase in our offices….Cheetah Speed! Not just speed, but lightning fast speed at efficiently timed intervals. When your model doesn’t include big M&A transactions but instead leasing, permitting and construction management you must hone that skill. All our operational staff and our vendors are picked because of the ability to go fast and hard to develop the site. Our speed skills have really been our moniker since Atlas started in the US and we were able to bring that theme into our South African staff. We are very proud that our clients speak about our speed, our quality and our professionalism.

TowerXchange: SBA reports Atlas will approximately generate EBITDA of US$21mn on US$31mn of revenue, good for an EBITDA margin close to 68%, and tenancy ratio of 2.2, to what do you attribute these great results?

EBITDA is always higher on a build as you go model than a sale and leaseback. We spend less capital and look at every tower as its own business unit. That kind of microscopic effort on margin means you not only have great success, but you are able to plan accordingly for the future.

TowerXchange: Now that Atlas Tower’s partnership with SBA is out in the open, what can you say about your appetite for buy and leasebacks, should any of the remaining operator-captive tower portfolios come to market in South Africa?

We have had and will continue to have a good appetite for sale and leasebacks, but of course as the continent has already seen, sometimes the portfolio value post-closing is lower than the hype suggested. The right kind of revenue, good contract protections and proper term length will always be value-adds.

TowerXchange: There is a long tail of some 25+ small towercos in South Africa and Atlas Tower has consolidated some of these small portfolios in the past. Do you see yourself continuing in this role as a consolidator in the market?

In the U.S. in the early 2000s small towercos were squashed by the pressure of debt, overpromising, and generating the wrong revenue type – I think the same will occur in South Africa. The wireless ecosystem will be a bit constrained and that will mean those who have been getting easy lease-up will see more costly obstacles to overcome.

TowerXchange: How do you see the opportunities for 5G adding to the potential market in South Africa? South Africa’s ICASA recently reaffirmed its plans to create a Wholesale Open Access Network, how does this play into SBA Communications plans in the country?

Towers are getting smaller and providing network value in a smaller geographic area. Whether 5G or no 5G, this trend will continue. We have for years been investing in smaller assets that fit into smaller, confined spaces. This trend will continue but there is still a large portion of South Africa which does not have good quality 2G service. This is also our focus.

The Wholesale Open Access Network proposed by the government to create a wholesale 5G network is an unfortunate design that I think moves a valuable resource, spectrum, from the private to the public sphere. Generally this is not a good idea. In South Africa, with major financial bailouts of PRASA (South Africa’s railway), SSA (South Africa’s airline), ESKOM (South Africa’s integrated power utility) and other State Owner Enterprises its seems like a strange time to be suggesting more major enterprises could be state owned and effective.

TowerXchange: In South Africa, as in Latin America, the norm is for towercos to offer a “grass and steel” service, will Atlas Towers continue with this model under SBA Communications ownership or will you begin to offer power-as-a-service?

We will be entering into power service agreements in South Africa, it is part of the future. ESKOM can’t do it effectively so others will have to. We are already providing power solutions in urban Kenya and will be using some of what we learned to help us develop in South Africa. SBA is committed to this change and we look forward to rolling it out in South Africa next year.

TowerXchange: Kurt, for the last decade SBA Communications has held back from investing in Africa, what about South Africa and Atlas Towers caused the change of heart? Why is now the right time to go from minority to majority shareholder?

That’s correct, we have been researching the African markets for some time now. We have looked at sale and leaseback opportunities, purchasing existing towercos, and entering through build to suit.

Our goal at SBA has always been to make good, long term decisions for our shareholders. Not to just be the biggest, or in more and more places, but to make good investments that grow over time. We were in the U.S. market for our first 20 years of existence, then expanded into Canada and LatAm ten years ago, adding twelve countries and over 13,000 sites to our portfolio. We did not enter some markets in LatAm for very specific reasons. So as we researched the African opportunities, we reviewed each with the same lens, looking for good countries with good opportunities where we think there will be growth and stability for the long term.

In all of our research, South Africa always stood out as the gold standard compared to others based on a variety of factors – political, economic, carrier mix, wireless infrastructure maturity level, currency and several other factors. That’s when we also hooked up with Nate and Randi to help and learn from their venture. We have known them for many years, we have similar styles and goals for quality, and everything has worked out well. Their teams have really performed well. We are thrilled to exercise our option and join with them full time. We think there is much runway left in the country.

TowerXchange: With regard to investing in the rest of Africa Jeff Stoops told analysts that SBA had “nothing on the horizon today, but stay tuned.” What would whet SBA’s appetite for expansion into other African markets?

As a public company focused on continued growth, both inorganic and especially organic, we are always looking at what is next.  We have a lot left to do in the fourteen markets we serve worldwide.  But there could be others in our future.  But only if they meet our criteria.  The South African investment through Atlas can stand on its own given its size and scale.  We don’t have to be in any other African markets to gain efficiencies here. But as we continue to look at other markets and the opportunities available or possible, we will continue to consider them. We have always been very selective, and have turned down many opportunities to grow for the sake of growth, and plan in the future to do the same – only grow where we see good, long term prospects.

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ESKOM is the South African integrated power utility, responsible for generation, transmission and distribution of power in South Africa. Established in 1923, it generates 45% of the electricity generated in Africa and since 2007 has been unable to consistently meet the power requirements of South African consumers and businesses, including at cell sites. Aging power stations, poorly maintained networks, outdated working practices and an internal resistance to change has meant occasional rolling blackouts (referred to as load-shedding) which have made maintaining cell site power much harder, in a market where back-up requirements were typically measured in hours and only occasional used. Having not been exposed to the challenges of managing power in a complex operational environment more typical of the rest of Africa, mobile operators in South Africa are looking to towercos and ESCOs to take these headaches off their hands. Hence the rumoured RFPs from MTN and Vodacom for ESCOs, and both Helios Towers South Africa and now Atlas Towers moving beyond a grass and steel model to offer power-as-a-service.

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