Zain KSA has approved non-binding offers from the Public Investment Fund (PIF), Prince Saud Bin Fahad, and Sultan Holding Company, to acquire stakes in the Zain KSA's telecom towers, which are valued at SR3.026 billion (US$807mn) for 8,069 towers. The deal is not the first announcement regarding the fate of Zain’s towers. Back in 2016 Zain agreed a sale and leaseback which fell through, and as late as Summer 2021 it looked like Zain would do a deal with IHS Towers. This latest deal, if it closes, would see the towers acquired by a consortium of investors new to tower investment, but part of the wider trend of increased investor appetite for investing in telecom tower assets.
Who’s buying Zain’s towers?
The PIF, Prince Saud Bin Fahad and Sultan Holding company intend to acquire an 80% stake of Zain’s towers, which are valued at SR3.026 billion (US$807mn) for 8,069 towers. The relatively low US$100k per tower implies a modest lease rate for the operator. The PIF would take a controlling 60% stake, Zain would be left with 20%, with 10% a piece to Sultan Holding Company and Prince Saud Bin Fahad.
The PIF is one of the largest sovereign wealth funds in the world and one of the key investment vehicles the House of Saud is using to diversify its holdings away from oil & gas. Formed in 1971 the fund largely invests in domestic non-oil & gas projects unlike other sovereign wealth funds. Under a five-year strategy that was announced in January, the fund aims to more than double the value of its assets under management to $1.07 trillion and commit $40bn a year to develop the domestic economy, until 2025. PIF is the 70% shareholder of stc (one of Saudi Arabia’s two other MNOs) which in turn is the 100% shareholder of TAWAL (Saudi Arabia’s leading towerco)
The minority parties are Sultan Holding Company which is an Emirati business based in Abu Dhabi which has a diversified investment portfolio including real estate, IT, engineering, oil & gas, and other sectors. Prince Saud Bin Fahad is a member of the House of Saud.
Few details of the deal have been released aside from the statement to the Saudi stock exchange.
Saudi Arabia’s turbulent tower market
There are three MNOs in Saudi Arabia; market leaders stc, Mobily (in which Etisalat has a 27% stake) and Zain. Additionally there are two MVNOs; Virgin Mobile and Lebara. Between them, Saudi’s MNOs own over 37,032 towers with stc’s carve out towerco TAWAL owning the largest portion.
Infrastructure sharing in the Kingdom had been limited until the introduction of TAWAL, with just more than 2% of sites holding more than one tenant prior to the towerco’s formation. The figure has been slowly increasing since TAWAL was established. In the major cities, Riyadh and Jeddah, there has been some infrastructure sharing as part of MNO densification plans to meet growing data usage, whilst in some of the country’s holy sites where access to land is limited, infrastructure sharing has arisen out of necessity. The market is ripe for consolidation and rationalisation.
Saudi Arabia is an attractive tower market thanks to the widespread adoption of 5G and numerous development projects. Saudi Arabia is home to several smart city projects and infrastructural megaprojects, each of which promises enormous demand for communications infrastructure during construction and in operation. TAWAL is positioning itself as a local infraco leader for smart infrastructure development, but a towerco with backing from Zain, PIF, Sultan Holding Company and a royal prince would also be competitive in such projects.
Zain’s Saudi towers have been coveted for some years. In early 2015, Zain appointed Citigroup to study the potential for a tower sale across its operations in multiple markets which led to processes for a sale of both their Saudi and Kuwaiti towers. Zain then entered exclusive negotiations with a consortium involving TASC Towers and local conglomerate, ACWA Group for the sale and leaseback of their Saudi Arabian tower portfolio, with a reported deal value of around US$500mn. With the acquirers unable to raise the necessary equity however in the desired time frame, the deal was subsequently cancelled.
Zain has had two further attempts in Saudi Arabia to monetise its towers. In 2018 Zain announced it had reached a deal to sell its 8,100 Saudi towers for US$647.7mn on a 15-year term and with a 1,500 BTS commitment to IHS Towers. However, on June 20th 2019, the Saudi regulator squashed the deal citing unspecific failures in the deal. The two parties did however finalise an agreement in Kuwait with Zain selling its towers to IHS Towers for US$130mn – a deal which closed in early 2020. Another deal involving IHS Towers and Zain’s Saudi towers was later announced in 2021 which would have seen Zain, Mobily, IHS Towers and local investment group Raidah form a consortium to acquire the towers of the two MNOs. This option was later abandoned by Mobily citing strategic concerns.
What happens next
If the deal closes then Saudi Arabia will get its second towerco and the market will be on its way to towerco maturity after a long adolescence.
For Mobily, the acquisition of Zain’s towers would put the pressure on the MNO to separate its tower operations. It would face two MNO competitors with lower capex and opex costs that are able to respond more nimbly to consumer demand. It would also then operate in a market with two credible buyers, a good position to be in for an MNO looking to sell its towers. In the past, Mobily has attempted the formation of towerco joint ventures with both Zain and stc. A sale to either TAWAL or to Zain’s new towerco would assemble Mobily’s portfolio with that of one of its peers.
For TAWAL the entrance of another towerco would eliminate a potential acquisition target (at least in the short run), and also reduce its potential build-to-suit pipeline as Zain would be likely to favour its own towerco for such projects. The entrance would not necessarily be all bad news for TAWAL, as shaking loose Zain’s towers from the MNO’s own balance sheet may make them a better acquisition target in the future, and may also act as a catalyst for Mobily to make a move in carving out their portfolio.
Zain would at long last have monetised its towers, and it would be rewarded for its patience, with the valuation of its towers rising from US$500mn in 2016, to US$647.7mn in 2018, to US$807mn in this deal. By retaining 20% “schmuck equity” the MNO has exposure to any appreciation in the value of its assets but also gains a war chest to invest in 5G and reduce debts.
There remains much uncertainty about the deal and what will happen next. This wouldn’t be the first deal that was being explored but which went nowhere. However, if the deal proceeds the new owners will need to hire a new management team, create a towerco brand, establish a new NOC and go about rationalising Zain’s towers and finding new tenancies.
