Reinventing the towerco for the Middle East

A keynote panel session at TowerXchange’s 2019 Middle East and North Africa Meetup brought together six towercos to discuss how best to serve the diverse markets of the region. Over the course of an information-packed hour we heard from Ted Manvitz, CSO of IHS Towers, Suresh Sidhu, CEO of edotco Group, Kash Pandya, CEO of Helios Towers, American Tower’s CCO for Africa Keith Boyd, Rajiv Jaitly, CEO of iSON Tower and Iyad Mazhar, the Founder of TASC Towers. The session was chaired by Gulfraz Qayyum, the Managing Director for TMT at Citi. 

To date there have been no tower transactions of scale in the region and fewer than 1% of the region’s 275,104 towers sit in independent towerco hands. That is due to change with the announced (but as yet un-closed) transfer of Zain’s 1,700 Kuwaiti sites and 8,100 Saudi sites to IHS Towers, represented on our panel by Ted Manvitz. This will bump independent towerco holdings towards 5% and fire the starting pistol on the nascent independent MENA tower industry. Divesture is not the only horse in town and in 2018 the Saudi Telecom Company created a captive towerco called Communication Towers Co with ambitions to create efficiencies and lease up its own towers. Omantel is expected to announce a tower sale process imminently in Oman.

Why has it taken so long to get here? And why the flurry of activity? Although it is tempting to blame the stop-start decade of the towerco industry in MENA on corporate politics or indecision, our panel agreed with Etisalat CTO Hatem Bamatraf who suggested in the preceding panel that the towerco model needed “tuning” to local conditions before it could be adopted. The IHS/Zain deals show that this tuning has now borne fruit and the STC carve out illustrates that local operators have understood the appeal of the towerco model. Throughout the discussion our panellists returned to this theme and the value add towercos create through efficient operations and enabling infrastructure sharing, downplaying the release of capital; capital many of the government-backed, well-capitalised, credit-worthy MNOs of the region do not need.

Citi’s Gulfraz Qayyum began by asking how to apply the fundamentals of the towerco model to the region when releasing capital is not a key concern. Each of the towercos on the panel agreed that the model as applied successfully in Africa or the US could not be cut and pasted into the region. Lessons from the US can be applied in the richer states, and Africa offered lessons for the region’s more difficult markets, but neither offered a straightforward blueprint for duplication.

edotco’s Sidhu raised the concern often expressed by MNO CFOs that a tower sale and leaseback would increase opex and decrease EBIDTA, even if it improves their balance sheet elsewhere. MNOs in wealthy areas like the Gulf Cooperation Council – the GCC comprises the regions wealthiest states; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – needed to be convinced of the tangible benefits before seriously considering a carve out.

Co-location discounts for anchor tenants can be an important sweetener for exploring tower deals, but this adjustment has not proven convincing alone. While there is no ‘standard’ lease pricing practice in the emerging MENA tower market, co-location discounts are widely applied in India and China, but less so in Africa, where there is more energy risk. Likewise, even in the wealthy states of the gulf there are significant pockets of off grid cell sites – in the KSA we have reported that up to 10% of sites are offgrid – so the towerco edge in power management is an important draw, but again, because alternatives now exist – like power management by ESCOs – that is not motivation enough to close a tower deal. Instead, our panellists agreed, what is now driving deals in the region is the promise of a symbiotic relationship between MNO and towerco in managing network planning, capital deployment and the management of passive assets.

In the same vein, both Manvitz from IHS and Helios’s Pandya agreed that valuations and associated leaseback rates should begin at an EBITDA-neutral level to reduce the level of capital released. Manvitz particularly emphasised the different approaches suitable for existing assets versus new assets. If the deal structure is correct up front, then existing assets can be EBITDA-neutral from the outset or after only a short time. But because towercos assume the burden of capex and the risk of finding a second tenant on new build assets a different contract structure is usually necessary. American Tower’s Keith Boyd highlighted the importance of going in at the right valuation to ensure the sustainability of the relationship, as cordial relations are so important to forming a partnership and cooperation.  On an ongoing basis this partnership allows risk sharing and new infrastructure development, especially important as Gulf States begin to roll-out 5G.

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IHS Towers is the largest independent towerco in Africa, with 22,833 towers in five countries, and hope to replicate that success in MENA following a deal to acquire Zain’s Kuwaiti and Saudi portfolios of towers. They have completed 14 acquisitions globally, with more pending and will focus on both sale and leaseback and new build in MENA.

edotco own 28,490 towers in six countries across Asia and believe their lessons are relevant to MENA. The towerco is one of the world’s most successful operator-led towercos, originally carved out of the Malaysian telecommunications conglomerate Axiata.

Helios Towers operate in five sub-Saharan markets, having recently entered South Africa. After eight transactions in eight years they own just under 7,000 towers of which 5,000 were acquired and 2000 built.

American Tower is the world’s largest independent towerco, with a market capitalisation of $76bn and is listed on the New York Stock Exchange. It owns 170,000 towers in North and South America, India, Europe and Africa.

iSON Tower, a subsidiary of iSON Group, a major IT company active across Asia and Africa, was recently licensed in Bangladesh and has ambitions across MENA and SSA.

TASC Towers are based in Jordan and have also been awarded a license in Bangladesh. They have previously been active in MENA deploying networks and were involved in a prior sale and leaseback process in the region which did not proceed to completion.

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Infrastructure sharing is already common in MENA despite the lack of independent towercos. Sharing in the dual-MNO market of the UAE sits at around 15% and increases to 30% in denser, less-developed Egypt. Likewise, significant capital has already been deployed building out networks, although some markets feature significant inefficiencies. Bahrain’s three MNOs own 1,500 towers and its regulator is in the process of promoting increasing sharing with the goal to reduce its tower count to 400. For these reasons our panellists saw significant opportunities for towercos to improve capex deployment by reducing investment in parallel infrastructure throughout the region. IHS’s Manvitz explained that one of the benefits of having acquired over 16,000 towers in Nigeria was the opportunity to remove overlapping sites: IHS Nigeria has decommissioned over 1,000 sites in the last two years alone. The programme requires working with multiple MNOs, incentivised by one time reduced use fees, and yields excellent return on capital invested, while also improving the environment.

iSON’s Jaitly expressed confidence for improved efficiency in network planning and build out, but said that it would be essential to see more cooperation between towercos and MNOs, something many panellists were far from convinced would be forthcoming in the region. edotco’s Sidhu spoke of their experience increasing rollout sped up by 25-30% over the last five years, but only after improving cooperation with their tenants. Similarly, Rajiz Jaitly described how towercos has “cut time to market in half” in Nigeria. TASC’s Mazhar also suggested greater cooperation would help improve tower design, important for the region’s more concentrated markets where the largest towers would be unnecessary.

Mazhar also highlighted another advantage of the towerco’s specialisation they can bring to the region. “Mission impossible” sites are not always the most popular for towercos – Helios Tower’s Alex Leigh was to later discuss a site halfway up a jungle covered mountain which made for some great photos, but which has proved complicated to build and maintain – but high cost/high rent sites could be a source of competitive advantage in a region with tough terrain and difficult operational conditions like the middle east.

edotco’s Sidhu was also optimistic about the opportunities for in-building solutions, small cells and semi-active network management in which the towerco manages everything up to, but excluding, the antennae. iSON’s Jaitly was also confident of the opportunity for toweco-led in-building solutions for the region, so long as cooperation was forthcoming from local MNOs. Perhaps because the Zain transaction was keeping Manvitz’s IHS Towers grounded in delivering for Zain today, he was less focused on as yet unrealised 5G infrastructure opportunities than some other panellists, and more focused on opportunities for passive infrastructure build out and efficiently executing their current capex plans.

On top of the strategic advantages from infrastructure sharing, our panellists agreed the operational benefits of tower sales and carve outs have now been proven in the region, and offered some examples of how operational efficiency has improved in some of the markets in which they already operate.

Pandya discussed Helios Towers’ Lean Six Sigma philosophy and shared the improvements in performance they have achieved in Africa. Helios SLAs call for downtime of between six to nine minutes per week, yet through process improvements 91% of Helios Towers were now achieving a six sigma compliant downtime of six seconds or less per week, with the other 9% averaging one minute. Likewise site visits have dropped to an average of one per month with a revised target of quarterly site visits. Over the same five year period their tenancy ratio has grown from 1.2x to over 2x. Models for sharing those benefits with operators, and specifying how in Master Lease Agreements (MLAs), makes all the difference to the appeal of a tower sale for operators who are following the trend toward leaner operating business models, enabling them to focus on selling minutes and megabytes.

In fact, one panellist suggested “the worse the power situation, the better the potential improvement” in terms of operational efficiency at towers that could be sold, as it offered all the more opportunities to drive down costs, and improve towerco EBITDA margins. Keith Boyd at American Tower shared their experience from Nigeria where they saw big improvements in reliability even though two thirds of their sites are off grid. He highlighted the contrast in approaches between MNOs and towercos: MNOs want to focus on their networks, customers and enterprise solutions, whereas towercos are happier to focus on the blue collar stuff like power, security and maintenance and it showed in the operational efficiencies towerco bring to passive infrastructure management.

Pandya said that, like American Tower, Helios also always delivered service levels beyond what the MNO was originally achieving, and that meeting and exceeding Service Level Agreements (SLAs) was not only good for the tenant, but also reduced their own costs and boosted their margin. edotco’s Sidhu discussed one market in which they operate where they have improved uptime from around 90% to 99.8% uptime despite grid reliability worsening across their estate.

Despite the fact Gulf States are amongst the most developed in the world, a small but significant proportion of their towers remain off grid, and this provides an opportunity for towercos to deploy lessons from elsewhere. Likewise renewables and hybrid solutions can offer a useful solution in a region with rising energy costs and many markets with unreliable or incomplete electricity grids.

Both American Tower’s Boyd and IHS Towers Manvitz highlighted their capex in Africa to improve reliability and how transferable that was to MENA. Manvitz discussed the $500mn they spent on hybrid power in 2018, this significantly improved uptime but also produced a 30% reduction in diesel usage on upgraded sites. 

The bulk of our panel’s time was spent discussing the developed markets of the gulf, but the Gulf States make up only a minority of the 16 markets TowerXchange are monitoring across the region. While Al-Khobar in Saudi Arabia has already trialled 5G, areas of Iraq have only recently had 2G services restored. Some markets, like Iraq and Afghanistan that were represented at the TowerXchange Meetup, are post-conflict states, and some areas are still conflict states, with highly complex operational challenges.

Just as the state of security and technology varies enormously across the region, so too does the skill level of the local workforce. The last mile skill-level across the region can be excellent, with some markets offering skilled workers, for example those trained in the oil & gas industry, while others have much lower skill levels.

Our panellists concluding remarks were optimistic about the region but cautious with respect to specific markets; for example, the UAE only has two MNOs which practically eliminates the potential for decent tenancy ratios, or North African markets with prohibitive limits on Foreign Direct Investment (FDI) which prevent an international towerco from consolidating results. As discussed above, our towerco panellists were still confident in the strength of the fundamental towerco business model, especially now it has been geared to the local needs of the market.

Looking to the future our panellists saw opportunities for 5G, small cells and DAS, as covered in a separate panel on the second day of the TowerXchange Meetup. Redesigning networks, consolidating and optimising tower placement was also high up the list for value add opportunities.

Three key elements for ongoing success need to be established in order for the fledgling MENA tower industry to thrive. Most importantly will be building trust between MNOs and towercos so that towercos can invest in the region with confidence and to create a deep and ongoing relationship to help drive down costs and plan networks. The second essential is building local knowledge, local supply chains and country by country understanding of how business is done. Once the above is in place, MENA increasingly looks like an area where towercos can establish a sustainable business. The third element is a regulatory environment (license conditions, taxation et cetera) conducive to investment by towercos.