TowerXchange Meetup MENA brought together some of the most senior and influential players from Middle Eastern MNOs and towercos together in Dubai for discussion about the future of the region’s towers. The opening panel gathered heavy hitters from the MNO community including Hatem Bamatraf, Chief Technology Officer at Etisalat International, Kamil Hilali, Chief Strategy Officer of Zain Group and Dimitris Lioulias, Vice President of Corporate Strategy at Saudi Telecom Company. Rehan Hassan of Enfrashare brought a wealth of regional experience to the panel as moderator and steered the conversation through topics from opex commitments to 5G rollout.
The panel opened with a discussion around how operators can misunderstand the towerco business model, often feeling they can do it themselves and that they’re paying too much margin for towercos. Equally, towercos themselves feel they’re paying for first mover advantage and are being held more accountable than their MNO customers while taking on all the risk. Rehan Hassan stated that getting the balance right comes down to more than how the contract is structured: by planning for every eventuality, you can end up ruining a relationship before it has even begun - the foundation of a good working relationship is trust, not a contract.
The panel was also keen to remind the audience that the MENA region is not one homogenous region. There are many languages, cultures and religions across MENA and even travel between some countries in the region is not easy. From outside there can be a perception that the MENA is corrupt but this is often not true and can stem from mistrust in the judicial system, which again undermines the point of an exhaustive contract as the foundation of a working relationship.
Why haven’t towercos entered MENA before now?
The panel discussed how a barrier to towercos entering the MENA region is a misalignment of needs. In other markets, MNOs have been driven to divest their towers due to high levels of debt, whereas in MENA, cash is not an issue for the majority of MNOs. Therefore, it is no surprise there hasn’t been a major tower deal so far, but deals will happen – there’s been a lot of education in the last eight years, as towercos have been attempting to enter the area, and everyone has begun to understand the business model better.
According to Rehan, the ‘old’ towerco business model won’t be sustainable for much longer, with exit multiples decreasing and IPOs being shelved. Towercos need a different type of investor, patient capital which is willing to invest for 10-20 years and help towercos to expand their offering across ESCO services, fibre and small cells. Towercos need to go into MENA wholeheartedly, accepting that MNOs are giving them the heart of their operations and developing a trusting relationship to work together. Rehan predicted that by the time the industry reconvenes at Meetup MENA 2020, tens of thousands of towers will have been sold and leased back.
Dimitris Lioulias of Saudi Telecom Company added that commitment was required to push through effective working with a towerco. There are a number of barriers the owner of a sale and leaseback or carveout project needs to overcome internally, with many colleagues from the infrastructure side of the business questioning why they would sell their assets. The first natural reaction for MNOs in MENA is that as there’s no need for cash, there’s no need to carve out or sell the towers, so the owner of the project must remain dedicated to the project or it will grind to a halt.
Is the time right now?
Kamil Hilali said that Zain feels this is the right time due to challenges operators are facing in their core business, that we are coming to a time where MNOs need to separate their core business from their infrastructure.. Zain is making the first move with this and selling towers in Saudi Arabia and Kuwait to IHS Towers has been a learning process for them. He feels that MNOs are more open to transactions now, driven in many ways by the need for infrastructure to change to enable them to make the most of opportunities in 5G and fibre.
We need to clarify the difference between sharing towers and the towerco model, according to Hatem Bamatraf, CTO at Etisalat. Sharing infrastructure is already prevalent in MENA, and many MNOs are already very committed to sharing. If you break down the number of shared sites in the region in some markets it’s already upwards of 30%. This infrastructure sharing model started several years ago, driven by pressure to cut costs and the need to divert capex to growth areas. Hatem Bamatraf was keen to emphasise that the towerco model is different, incorporating the divestment of assets and different operational models. In some markets this is driven by a stress situation, where MNOs can’t fund the expansion of towers needed for 5G rollout and will search for efficiency through partnership with a towerco, but in others the MNOs have invested heavily in their passive infrastructure and aren’t keen to let that investment be passed to a towerco through a sale and leaseback, raising funds at the cost of their margin.
In terms of the divestment of assets, much is dependent on the situation of the MNO, and the incumbents in the GCC don’t need to divest in order to raise funds. From a strategic point of view, they do need to share infrastructure and there’s a case to say that if towers aren’t strategic to the company, then investment should be limited, but many MNOs still want control of their assets. Hatem Bamatraf stated that it’s important that the P&L looks better after a tower deal, and that if the numbers are convincing the rest will follow.
MNOs’ views on the towerco model
From Zain’s point of view, added Kamil Hilali, the towerco process is a long one, and the process of convincing internal stakeholders can take time. In addition, as it’s a new concept in the region, people have to get up to speed on how it all works, putting in place the whole ecosystem including the right service providers and advisors. The main driver for change now is the fact that there’s no differentiation in terms of coverage, and the pressures of 5G and fibre rollout have created a new rationale for outsourcing infrastructure. In addition, governments and regulators are seeing this rationale as well, meaning the entire ecosystem is more ready for a deal.
When discussing why the region has resisted the towerco model for so long, Dimitris Lioulias from STC stated how they still view their towers as strategic and don’t want to sell them. In Saudi Arabia the conversations about selling towers began three years ago, when their strategic value was even higher, however due to experiences over the years, the main factor holding up many tower deals is a lack of trust. Cooperation between STC and Zain or other MNOs makes sense as it doesn’t create any tensions, but some operators were still wondering if they can trust the towercos. Having said that, MNOs are starting to see that the benefits outweigh the risks and general acceptance of the towerco model is more widespread.
Which towerco models will prevail?
Speaking about the importance of independence for neutral host operators, versus the trend for MNOs to carve out their towercos into a separate entity, STC has a five year growth strategy which requires both top line and bottom line growth in terms of a valuation perspective. STC has identified several classes of assets and businesses closer to the telco model, in areas adjacent to telecoms such as media and fintech, so investing in the tower space is a value driver for them. STC still believes that independence is important and their towerco will be kept at arm’s length, offering conditions to tenants which make it clear that their interests are protected. Dimitris stated that the STC towerco isn’t being created to squeeze anyone, and STC will welcome their competitors to become their partners in the tower space. They plan to put in place all the necessary measure to assure their independence will be preserved.
Towers as a class of asset remains attractive in terms of returns and risk profile. STC invest in high risk businesses and they see carving out their towers as taking a portfolio investment in the tower space. Hatem Bamatraf cautioned that the towerco business model is dependent on the number of tenants who will rent a space to, so where there are several towercos in one country competing for the same three or four tenants the business model can become more challenging. A model in which the market is more crowded won’t help the overall value in that market, as the number of tenants will be distributed across a larger number of towercos.
The impact of 5G
The MNOs said that if you look at their investments over the last few years and who has benefitted, the MNOs have come off badly. The beneficiaries have been Netflix, Amazon, Google and OTT players. At some point they need to address this imbalance. Being able to reduce costs by sharing infrastructure is key, and STC is already sharing parts of the network as 5G rolls out.
From a functional perspective, 5G is already a reality. It will start to roll out in 2019, and the challenge for MNOs is how to monetise this new technology. Kamil Hilali called it a ‘burden to invest with no clear monetisation’. Many MNOs feel that sharing infrastructure will remove that burden from telecoms.
When addressing the question of whether one towerco will dominate the region, or if there will be a proliferation of smaller, regional towercos, the MNO executives were undecided. Some felt that many markets are not yet mature enough to attract big international towercos, but that this is developing. On the other hand, we could see regional players springing up but their level of market penetration remains to be seen. One thing they agreed on was that there is a need for clearer regulations and a good picture of the investment appetite in the region.
Hatem Bamatraf of Etisalat said that the introduction of towercos to the region won’t only help speed up the rollout of new technologies, but will also bring value in terms of capital efficiency and saving capex for MNOs, particularly in the case of 5G. However, reaching agreements can be difficult between big MNOs who don’t have the financial drivers for collaboration in the short term. In the longer term it’s likely that once 5G rollout progresses the pressure on costs will be higher and they will become more open to collaboration.
The discussion still needs to centre on use cases, with MNOs still worried that they will invest heavily without the returns. 5G will be critical for the development of the ‘fourth industrial revolution’, bringing AI, virtual and augmented reality, connected vehicles, cloud computing, blockchain and more into use and MNOs are also worried that a lack of infrastructure will prevent them being ready to jump on the opportunity.
