The investability and investment case for towercos and infracos in MENA

TowerXchange Meetup MENA played host to some of the most expert investors from across the region on a panel to discuss how the investment case in MENA towers is developing. Chaired by Yiannis Mavridis of TAP Advisors, the panel brought together Abu Bakar Chowdhury, Managing Director and CFO of ASMA Capital, Eric Crabtree, Chief Investment Officer of the International Finance Corporation and Akshay Grover, Chief Investment Officer at iSON Towers. 

The panel started by stating that the industry needs patient capital. There is a tension between private equity investors seeking higher returns when measuring risk in certain markets versus an asset class,which doesn’t produce massive returns. Although the first movers in the market can generate those kind of returns, generally towers don’t meet private equity return profiles. An issue in the larger markets such as Pakistan, Egypt or Iraq is that sellers know the value of what they have and this often comes up against what private equity investors require. 

The panel saw the issues split into two parts: one being how the investor sees the investment - for more patient capital towers won’t give a private equity return, but they do offer a tried and tested model. Abu Bakar Chowdhury feels ASMA Capital has been good at doing things in MENA infrastructure in a private equity style, entering Pakistan and Egypt in power where they built assets and were able to get a return. With pension funds and well established capital behind them, they can get into assets, shake them up, take out the inefficiencies and hand them to long term patient capital within the same ‘family’. The second issue is that MNOs, in the GCC in particular, aren’t crying out for cash but increasingly they are considering models like edotco’s, which have worked well, and Abu Bakar Chowdhury sees opportunities for MNOs to go that way, with partners for governance and capital structures. 

Towers can be hard to categorise; they don’t fit neatly into the infrastructure vertical and yet also aren’t a traditional private equity play, particularly in more developed markets. Typically,infrastructure projects have returns which look flattish, with a good IRR and predictable returns. The panel agreed that what’s unique about towers is the equity bump you get when a tenancy ratio hits 1.5x, and when it hits 2x the payoff is impressive, meaning towers deliver the flat line of infrastructure but also additional equity kicks if you can deliver the tenancy. 

There are still pockets of activity within towercos where efficiency can be driven, in terms of design, tower build, replacement capex, air conditioning and batteries as all of these elements can drive down the cost for the operator. In addition, sharing in the MENA region hasn’t been where it could be, in a 5G world where small cell infrastructure will be more prevalent there will be a huge potential for a towerco to drive rollout. It’s much harder for operators to share networks belonging to each other than it is to share via a trusted independent party. 

Despite the fact that many operators don’t need cash, the region is undergoing a strategic shift. MNOs are still around 60% owned by governments, but governments are reluctant to keep funding capex and to be the financial investor in towers and digital infrastructure. Once towers are carved outand national security issues are addressed, the panel agreed that cautious investors will be more able to get involved, it’s just a matter of time. 

Eric Crabtree said that the IFC is keen to get involved in parts of the region. They are working closely with the Egyptian government on the Digital Africa programme and having discussions about national infrastructure. Egypt needs to deliver more fibre, including FTTT, which represents an opportunity for the IFC to get involved. In markets in this area all parties have to be comfortable with the process, including the government, and in countries like Pakistan and Egypt the governments are well aware of processes which didn’t result in a victory. 

The appetite of big investors like sovereign wealth funds depends very much on the strategic view. In markets like Saudi Arabia the government is debating a process to unlock the value in their towers rather than an outright sale, so much of this depends on if the Saudi government wants a strategic shift towards a towerco that would allow an investor to enter the market. 

For funds which have invested in the space before, they will want to look closely at the local management team, at what kind of infrastructure they’re inheriting, who their local partners will be and who will manage the towers. In terms of governance, they won’t want the shareholding to be too complicated, as when shareholders try to limit risk they can often end up creating a cumbersome and complicated shareholding structure. For many investors simplicity is key right now, and they will only choose to provide capital where there’s a clear structure and defined goals. 

MENA governments have a role to play in regulation, it can’t be left to market dynamics alone. Where the tower industry has emerged late, or behind the rest of the world (as is the case in MENA), governments have needed to play an active role in regulating and driving infrastructure sharing. In countries like Bangladesh or the Philippines this may have also started out with governments putting more pressure on using capital in an efficient manner, but this pressure is increasing in the Middle East due to falling oil prices. Logically, whatever their financial state governments should want more efficient use of capital and should be encouraging infrastructure sharing. 

Many of the larger markets have a gap between current infrastructure and what they will need as data consumption grows. In Egypt and Pakistan there are as many as 4,000 subscribers per tower already, with 4G not yet fully rolled out, and in Iraq and Egypt there is limited, if any, fibre coverage. In markets like these infrastructure sharing needs to filter down from government policy on digital economy, and regulators need to play their role. 

One of the critical elements raised by the panel was that all stakeholders must be aligned on exist strategy. Everyone needs to understand timeframes and constraints, along with a dose of realism about the likelihood of an IPO as an exit option – IPOs are a valid alternative but are also a timely and costly affair. Consolidation has occurred in other markets, which is probably the most profitable form of exit for a non-strategic towerco, but for strategic investors they need the ability to exit into the liquid instrument. 

There’s also a challenge presented if the mobile network operator holds a share of the business, as may well be the case in the first few deals taking place in the MENA region. Shared ownership with a MNO can make agreeing on a suitable exit more complicated, and towercos need to be prepared for that dynamic.