Our opening towerco panel at the TowerXchange Meetup Africa 2019 was chaired by Chuck Green, late of Crown Castle, formerly CEO of Helios Towers Africa and now CEO of the International Digital Infrastructure Alliance (IDIA). He was joined by Terry Rhodes, CEO of Eaton Towers, Nate Foster, CEO of Atlas Tower and Steve Howden, Deputy CFO of IHS Towers. Our Meetup proved timely, taking place a week before Helios Towers’ IPO. Even as the industry enters a new phase, our panellists foresee continued investment in macro towers dominating, with space to diversify and new opportunities in new markets ahead.
Winds of change?
With Helios Towers to IPO a week after TowerXchange Meetup Africa, American Tower in the midst of purchasing Eaton Towers, IHS Towers raising US$1.3bn of new debt, and SBA taking control of Atlas Tower SA, the panel naturally began by asking: how will these transactions affect Africa’s towerco market? “It will affect things less than you might think” came the reply from Eaton Towers CEO Terry Rhodes, and industry and regulators should be reassured by that.
The terms managing towerco contracts survive changes of ownership, so any agreements to rent space on a tower survive MNO consolidation, or in-market towerco acquisitions. That means that for those renting space on towers very little will change on the assumption of Eaton’s reins by American Tower. Similarly, Eaton’s SLB deals included the right to first refusal on new build in their markets, and that means the process of building new towers will remain largely the same. Consolidation can be worrying to regulators, so the long-term contractual protections for both parties in towerco contracts will be key in allowing American Tower to secure all necessary approvals to complete the purchase.
Some towerco markets are easier than others, in Burkina Faso the transfer of the towerco licence from Eaton Towers to American Tower is very straightforward. In other markets a change in control has been signalled as an opportunity to look again at how towercos operate. So the message that these long-term contracts are here to stay and remain as fair as they were the day they were signed is an important one. Regulators can look at pricing in markets like India and feel towercos leases are too high, even while ignoring that costs can be 4x higher in Africa than India.
For Africa’s remaining towercos, Steve Howden of IHS Towers didn’t see the liquidity events as marking key changes in strategy or outlook, more as natural phases of the lifecycle of towercos. The land grab up to 2016 is over and investors are right to either seek consolidation or raise more capital to seek new opportunities. Those new opportunities might be buy and leasebacks, or they might be found in fibre or data centres, or they might be outside of Africa altogether.
One area where the towerco dynamic may change is at the smaller end of the sector. Nate Foster of Atlas Tower says that they have shown the viability of the build-to-suit model in South Africa, and they are taking it to Botswana, Kenya and beyond. SBA Communications aren’t going to acquire towercos in the most frontier of markets in Africa, but there are opportunities for smaller towercos to stake out on their own. Atlas Tower certainly aren’t going to change strategies. The SBA Communications transaction has repaid some of their initial investment, and that means Atlas Tower are able to reinvest and expand into other African and international markets.
The breakeven scale for a towerco has come down substantially over the last few years; the barriers to entry for an infrastructure company are low; and the headcount required to start a towerco is also small. The question is: why aren’t there more entrepreneurial towercos replicating what Atlas Tower have done? Mobile operators are looking for more alternatives for tower management besides the big four (soon to be three) towercos. ESCOs are finding new opportunities - middle market towercos could also benefit from this desire to diversify.
The breakeven scale for a towerco has come down substantially over the last few years; the barriers to entry for an infrastructure company are low; and the headcount required to start a towerco is also small. The question is: why aren’t there more entrepreneurial towercos replicating what Atlas Tower have done?
MNO consolidation
MNO consolidation is continuing in many markets and our panel agree that four healthy customers are better than three. Although, three healthy customers – or even two healthy customers – were seen as better than an anaemic market of low ARPUs, low margins and low investment. Long-term contracts protect towercos from consolidation wiping out future revenue, but rigidly sticking to contracts can damage long-term towerco/MNO relationships so some negotiation and flexibility often results in some contracts being swapped or changed.
Towercos want to see mobile operators in a healthy condition, but even mobile operator exits can lead to positive outcomes because of Africa’s significant growth potential. Etisalat exited Nigeria in 2017 due to financial difficulty, but its successor brand 9mobile continues to raise money and slowly invest and will likely return to health again – it has 16mn customers, small by Nigerian standards, but equivalent to the population of Zambia.
Eaton Towers have sold for US$1.85bn and operate in markets which have seen substantial consolidation. The short-term disruption makes life uncomfortable for towercos, but healthy counterparties invest more, and that means more building and more technology upgrades. For Atlas Tower, their build-to-suit model leaves them with less exposure to consolidation, their towers are built in locations ideal for sharing, and they are able to pull back from taking new contracts with mobile operators likely to exit the market.
Holistic digital infracos?
As Africa firmly enters the 4G-era, fibre connections are being requested more and more often with new build-to-suit contracts. However, while it is now difficult and expensive to permit and build a second tower next to an existing sharable site, it remains easy and cheap to run a second or third or fourth fibre cable to a tower site. So the revenue for fibre-to-the-tower and margin potential are modest compared to towerco norms. There was a muted reception to entering the enterprise fibre market, but with denser networks and small cell roll-outs requiring fibre connections, there remained an appetite to see where the market leads them.
While fibre is an important adjacent market for towercos, rooftops and in-building solutions are already firmly established in the towerco playbook in Africa, and will consume more and more capex in the future as African cities develop. Macro towers will continue to receive the bulk of capex in the industry for some years to come, although the average height of towers has decreased, as has the distance between sites. This pushes up opex too, but this is more than compensated for by tenancy growth and increased revenues.
While fibre is an important adjacent market for towercos, rooftops and in-building solutions are already firmly established in the towerco playbook in Africa, and will consume more and more capex in the future as African cities develop
Other options for diversification in Africa received a cooler reception. While towercos are power experts in Africa, the uptime requirements of a data centres remains an order of magnitude or more higher than a cell site, as well as being a very different business to operate in other ways. Towercos are faced with four major customers and can enjoy face-to-face meetings and deep relationships with people based in the same commercial centre; datacentre operators have an enormous number of potential customers based across the world, so the models differ significantly.
Our panel was lukewarm about moving into active network management, or becoming a NetCo, although towercos in Africa have been approached about taking over active management. Radio planning and other aspects of active management are very different from tower leasing and power-as-a-service, and so they have yet to make the leap.
Towercos do not currently own spectrum because taking ownership of spectrum would lead to increased regulation and reduced flexibility, but this would be a crucial step to becoming a NetCo, or taking over more active duties. As networks densify and become more capital-intensive (for both active and passive network infrastructure), we expect to see more and more opportunities arising for towercos to move into active management, whether opportunities are taken up is another question.
Next frontier markets
The appetite for new African frontier markets like Angola, Ethiopia, or Zimbabwe was varied on our panel. Atlas Tower would prefer to find the “next South Africa” rather than be one of the first entrants into a market like Zimbabwe or Angola. The stable legal system, strong contract law and stable operational environment still makes South Africa the most investable market in Africa. But while some panellists preferred more stable and mature markets, other panellists relished the opportunity to go where others fear to tread.
There will be a lack of cautious money going into Africa’s newest potential towerco markets, but there are big opportunities for investors with more risk appetite. Terry Rhodes ran a cellular business in Sierra Leone, and it was sold to Zain as a profitable business, despite the operational challenges. The same is possible in all of Africa’s markets, even the more developed ones. He discussed Eaton Towers’ experience of agreeing then losing a tower purchase and leaseback in Egypt. The change in Vodafone’s philosophy at group level may once again open up Egypt as a potential tower market for Africa’s towercos.
Ethiopia’s 100mn people and 8,000 towers were seen as a major prize in Africa. A sale and leaseback by Ethio Telecom is seen as a medium- or long-term opportunity, compared to the build-to-suit opportunity in the country. Last year, a liberalisation programme was announced which would see two new international mobile operators licenced and a boom in new sites required. All of Africa’s major towercos are interested in assisting mobile operators in capital deployment in telecom towers, and our panel would be surprised if some other smaller towerco entrepreneurs didn’t join them.
Angola currently only has two active mobile operators with nearly 3,000 sites and one independent towerco, with 18 sites. A new licence is due to be issued this year, and a state-owned operator is due to be privatised, creating ideal situations for a sale and leaseback, and extensive build-to-suit opportunities. Zimbabwe’s current economic difficulties have led to sharing agreements being agreed between the country’s three mobile operators and a squeeze on capex. Towercos can help ease investment constraints in the country as it recovers. Markets in North Africa are also attracting attention as mobile operators look to monetise their assets and governments look to ease investment restrictions which have so far prevented sale and leasebacks by operators.
Diversity, growth
The diversity of opportunities and approaches in the industry is one of the towerco model’s strengths; a proliferation of smaller towerco operations will allow capital to find the correct balance of risk and return, vertical diversification will help close Africa’s digital divide and expansion into new markets in Africa and beyond will allow mobile operators and subscribers to take advantage of the lessons learned elsewhere.
Those opportunities have to fit the investment criteria and investment thesis of whoever is going in. For IHS Towers they are diversifying into the Philippines and the Middle East, Atlas Tower have moved into more mature markets like Kenya and Botswana, Terry Rhodes is focused on closing the Eaton Towers acquisition. But the towercos retain an interest in other untested markets and new verticals.
Our panels concluded that towercos’ long-term investments and non-extractive nature make them natural partners for African development. With understanding regulators and governments and ongoing investment demand from mobile operators, towercos are happy to be raising new capital and investing in Africa.
