All change in South Africa

Despite being one of Africa’s leading telecom tower markets, there have been no transactions of scale in South Africa since 2010’s sale and leaseback between Cell C and American Tower. That will now change. MTN have announced plans to monetise their tower portfolio in South Africa, with 20 bidders expressing an interest. And in his latest Earnings Call, Vodacom CEO Shameel Joosub revealed that he plans to follow Vodafone’s strategy with Vantage Towers and carve out their towers into a separate entity. South Africa, now home to three global independent towercos, is set for significant market restructuring. In the below editorial TowerXchange looks at the state of the South African telecom tower market and then explores more how it may change over the coming year.

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TowerXchange estimates there are 25,767 towers in South Africa, serving 97mn SIMs, making it one of Africa’s best covered markets. South Africa is served by four MNOs and 5G fixed-wireless operator Rain. According to data from Statista, in 2019 Vodacom had a 42.6% market share, MTN held 29.4%, Cell C 16.9% and Telkom 9.5%, with the remainder held by MVNOs. Since then Cell C has been shutting down its active network and moving onto a roaming deal with MTN and Rain has been expanding its share of the fixed-wireless market.

In 2010 American Tower acquired 1,400 sites from Cell C for US$200mn, kicking off South Africa’s telecom tower industry. Since then a long tail of smaller towercos has formed serving the mobile operators; few of those smaller towercos reached scale, and those that did have since been acquired; SA Towers and Eagle Towers by Helios Towers since 2019, Blue Sky Towers by American Tower in early 2021; and 94% of Atlas Towers was acquired by its silent partners SBA Communications in 2019.

Telkom carved out their real estate and tower business into a separate unit, Gyro Group to better commercialise its 6,200 towers. Given the extent of parallel infrastructure Gyro Group’s total has been shrinking even as it has been building new sites in new locations. After spending some years correcting leases and auditing their structures Gyro is now in a position to monetise their towers or seek a strategic partner; no decisions have yet been made.

Over the last few years, Vodacom has developed a successful commercial towerco-lite business model in house, including a platform on which other frequency holders can view available space on Vodacom sites, but without formally carving out its towers. Towercos have long been eyeing up MTN’s portfolio of nearly 6,000 sites and the operator has now announced plans to monetise its towers some time in 2021. Vodacom’s decision to formally create a towerco should be seen in this context.

Population coverage for 3G and 4G is very good in South Africa. Since 2016 3G coverage has been above 99%, and 4G coverage reached 96.4% during 2020 (ICASA, 2021). However, no sooner has South Africa reached full coverage for 4G than the technology treadmill starts up again for the deployment of 5G. In 2020 5G sites covered 0.7% of the population, currently concentrated in the Cape and Gauteng, but with national expansions planned.

As mentioned above, Rain got the jump on the South Africa MNOs by launching fixed 5G first thanks to its lucky ownership of the relevant spectrum, but they have since been followed by credible mobile 5G plans by both MTN and Vodacom. Spectrum has been the major restraining factor in 5G rollout in South Africa, the regulator has yet to release the vital 3.5GHz spectrum to operators meaning rollouts will remain limited for the time being.

MTN SA launched 5G in June 2020 with 150 sites across several spectrum bands in Johannesburg, Cape Town, Pretoria, Durban, Bloemfontein, Centurion, Port Elizabeth and a few towns. MTN has revealed plans to scale up to more than 1000 sites upon allocation of 3.5GHz spectrum. To overcome its lack of suitable spectrum, Vodacom has partnered with Liquid Intelligent Technologies to launch 5G, but coverage also remains extremely limited.

Throttled potential

5G rollouts are being held back by a lack of spectrum. ICASA could remedy this by accelerating its latest round of spectrum auctions but this appears unlikely to happen given delays caused by legal challenges and unclear processes. Without going into excessive detail there are two main problems with the spectrum process in South Africa.

The first has been the splitting of the auction process into two tiers, the tier system has been created to exclude market leaders Vodacom and MTN from the first round of the auction, with a second tier of Telkom, Cell C, Rain, Liquid Telecom and others getting first dibs. Due to poor process design this categorisation may prove impossible to enforce without rewriting the rules; legal proceedings are ongoing.

The purpose of this tiering is to ensure fairness, and to give smaller operators easier access to better spectrum to challenge the 70%+ market share of the big two operators in South Africa. However, the actual process, MTN warns, may be to create an outcome where MTN (or Vodacom) would be unable to bid for any of the 3.5GHz spectrum, due to the bulk of the spectrum having been taken up by the Tier 2 operators in the initial round.

The other kink in the spectrum design by ICASA is the planned creation of a Wholesale Open Access Network (WOAN). The WOAN would be tasked with creating a wholesale 5G network across South Africa and then allow operators to roam on this network, again to reduce the market share of the larger operators and make market entry cheaper in the notoriously capital intensive telecom network sector. A potential opportunity for a nascent netco like ex Vodacom’s Andries Delport’s CIVH, but an obstacle for existing MNOs.

MTN and Vodacom are therefore seeing a thumb heavily placed on the scales against them just as they are facing a major round of capex to upgrade their networks to 5G in a difficult operational environment.

The launch of 5G is also threatened by the deteriorating power situation in South Africa, something no South African will fail to tell you about.

The power grid is robust and widespread in South Africa, with MTN reporting that all but 53 of their sites are on-grid, however the reliability has recently suffered because of failures at state energy monopoly ESKOM. Because of the age of its coal-powered plants and poor maintenance of its transmission and distribution networks ESKOM has had to rely on rolling blackouts, referred to as load-shedding, to prevent unplanned brownouts or blackouts on its network.

Battery theft has compounded the problem, prompting Vodacom to issue a 1,140 site ESCO RFP for a more secure solution. Unlike their sub-Saharan African counterparts, South Africa’s towercos tend to operate a steel and grass model more akin to the developed markets of Europe and the U.S. with power managed as a pass through. This is now changing, with all major towercos in the market developing power-as-a-service models to take this headache off the hands of the MNOs. Abbott Technologies has also been offering an ESCO-like service, providing diesel generators as a service to keep important sites running. Andrew Edmondson told TowerXchange "Insite Towers Ltd is a BBEEE Level 1 Company with MLA agreements with MTN and Vodacom. We started our construction phase in Quarter 1 this year and are already present in 4 provinces."

Looking at the situation “ a new round of capital spending to roll-out 5G, an uncooperative regulator worried about market access, a challenging operational environment, and three domestically-based but internationally-active towercos (and a desire to focus on Africa’s booming digital services market which falls outside the scope of this article) “ the question changes from why are MTN and Vodacom selling or carving out their towers, to why haven’t they done it sooner?

MTN has been following an asset realisation programme over the last year in which it is shedding assets to pay down debt and refocus on digital services. In 2020 MTN sold its shares in ATC Uganda and ATC Ghana to American Tower, it has sold its shares in Belgacom International Carrier Services and in the e-commerce brand Jumia. MTN has also been a prime mover in IHS Towers’ plans to IPO so that MTN can exit its investments in the Group. In this context, retaining its towers in South Africa would appear awkward. Please note, despite touting its “13,000” sites, MTN-owned towers number 5,700, with the remaining sites being co-locations on other towers (Similarly, Vodacom has 14,635 sites in South Africa according to their 2020 report, with around 6,000 being co-locations).

According to reports in Bloomberg, MTN Group is planning a sale and leaseback for the third quarter of this year. The initial request for proposals saw more than 20 responses from interested parties, including local investors and international towercos such as Helios Towers, IHS Towers, SBA Communications and American Tower and private equity groups and pension funds.

TowerXchange understands that local tower teams have been put on notice that a sale is imminent and that their working conditions may soon change, with some likely to be transferred to the owner of the new towers. The deal is said to involve 5-6,000 towers, but the deal may also be split into tranches, with more than one buyer involved. Although no confirmation of the process or site details have been seen by TowerXchange.

Vodacom’s parent company Vodafone made waves in 2020 with the launch of Vantage Towers after long eschewing tower sales. It is therefore unsurprising that Vodacom is following suit and starting with its most “European” market. Speaking to investors, Vodacom’s CEO Shameel Joosub said “we’ve taken a lot of the learnings from Vodafone, and we’re staying quite close to what’s happening at Vantage and drawing different lessons and so on from within the group… We’ll start in South Africa, move the towers into a separate vehicle. We will look at opportunities to partner.”

The pace of change is unlikely to be rapid, and Vodacom plan to first externalise the assets and to finally have them managed outside the Vodacom property team. Without indicating if Vodacom was looking to partner with a towerco or other MNO in the market, Mr Joosub pointed to the opportunity to combine Vodacom’s towers with another big player to increase tenancies.

Vodacom are not in the mindset of selling off their towers. They are not looking to raise cash as they are comfortable with their financial position. While MTN has a history of tower sales in its other African markets Vodacom retains its towers everywhere apart from Tanzania. The plan outside South Africa would be for Vodacom to create a joint towerco with another player in the market to increase efficiencies without relinquishing ownership to an independent towerco.  In Europe, Vantage Towers has formed JVs with INWIT in Italy and Cornerstone in the UK and there has been talking about them teaming up with an Orange or Deutsche Telekom towerco.

Could Vodacom’s offer of partnership turn the heads of MTN’s management and make them reconsider their sale and leaseback? It wouldn’t be the first time that a sale process was derailed, but TowerXchange expects the process to proceed. MTN are firmly focused on their asset realisation programme and may not want the additional commercial and regulatory headaches of a tie-up with their biggest competitor. But it does open the door to multiple different configurations for the future South African market.

At least four international independent towercos are targeting the South African market, as well as private equity, infrastructure and pension funds (and possibly other towercos of which TowerXchange is currently unaware). At the head of the queue for any tower sale by MTN or hybrid deal with Vodacom would be American Tower, IHS Towers, SBA Communications or Helios Towers:

• Helios Towers is a highly acquisitive towerco which has recently signed a series of deals seeing it expand to Senegal, Chad, Malawi, Madagascar, Gabon and Oman. None of the aforementioned deals have yet closed (Senegal is in final stages) and Helios Towers has indicated that it is reviewing 10,000s of other towers including in South Africa. Helios Towers has 236 sites in South Africa after some modest build to suit and some local acquisitions. Given its international reputation for operational excellence that shouldn’t hold it back from being a serious contender and its recent M&A push shows it knows how to get deals signed.

• SBA Communications has 1,125 sites in South Africa through its recently acquired subsidiary Atlas Towers. Nate Foster has left Atlas Tower South Africa and it is now headed by Paul Jansen van Rensburg. South Africa was SBA Communications’ first foray outside the Americas and the company has been beefing up its power management expertise in anticipation of further work in Africa. Atlas Towers have been working with Vodacom and MTN for many years and has a strong reputation in the market making SBA Communications a strong contender for the sites despite its relatively new profile in the African market. SBA Communications currently have around 34k sites globally and they have the financial firepower to comfortably accommodate at least a further 5,000 sites comfortably.

• American Tower is the world’s leading independent towerco, with 2,837 sites in South Africa. As a consequence of Cell C’s initial deal American Tower’s tenancy rates had grown out of sync with market rates leading to some tensions with mobile operators in South Africa, but with that situation resolved and new tenancies being signed by Vodacom and MTN it looks like American Tower is well placed to expand if and when any towers come to market. American Tower has signed deals in Africa in which MNOs retain equity in the resulting local opco, but has shied away from partnerships because American Tower highly prizes its independence. American Tower acquired towers in Ghana and Uganda from MTN and has recently bought out MTN’s minority holdings in the opcos.

• IHS Towers is possibly the towerco MTN knows best thanks to MTN’s shareholding hangover from past tower deals. IHS Towers is diversifying as an emerging market towerco with recent deals signed in Brazil and Saudi Arabia. Entrance in to the South African market would require the creation of a whole new opco, but given the close relationship between MTN and IHS Towers this should not be an obstacle to a deal. In Saudi Arabia IHS Towers has formed a consortium to explore a joint venture to manage the MNOs’ towers, perhaps giving IHS Towers a slight edge in any discussions with Vodacom should discussions head that way.

(Gyro Group are a dark horse; unlikely to be involved in the MTN tower sale in any way, they could be a useful partner for Vodacom if it were seeking to form a country-wide towerco and boost tenancies through the removal of parallel infrastructure. )

As you can see from the above, African’s major players are all poised to facilitate change in the South African telecom tower market and the demand for change is significant. At 2,500 words this editorial is already long enough, but I should also mention some other factors which will impact the market but which I cannot elaborate on: SA Towers, Eagle Towers and Blue Sky Towers have all been consolidated lately and we may see many of the smaller towercos snapped up over the coming year; Cell C will be churning off more and more towers as it migrates to MTN’s network which will impact the tower market significantly; fibre rollout continues apace; and COVID has reshaped South African cities’ urban geography as people are entering their second year of working from home.

TowerXchange Meetup Africa is currently underdevelopment as a hybrid event - part online and part on site. Contact Matthew Edwards for more information.