What IHS Towers’ MTN deal means for South Africa

IHS Towers announced on 17 November that it had signed a deal with MTN to acquire 5,709 towers in South Africa. The deal between Africa’s largest mobile operator and largest towerco also included a power-as-a-service (PaaS) deal at approximately 12,800 MTN sites, which means IHS Towers will manage power at sites it owns and sites at which MTN is just a tenant. The deal is valued at ZAR6.4bn (US$413.4mn), although due to the deal’s hybrid structure it is not possible to translate that to a price paid per tower.

The SLB and ESCO deals are expected to deliver revenues of US$220mn and adjusted EBITDA of US$80mn annually, in the first full year of operations. This is a 16% increase in IHS Towers’ 2020 revenues and a 10% increase in EBITDA versus 2020. Further growth is expected through a multi-year commitment for a portion of MTN’s build-to-suit towers.

Commenting on the deal, Sam Darwish, IHS Towers’ Chairman and CEO, said “I am exceptionally proud to announce IHS’ creation of the largest independent tower operator in South Africa, which represents the start of a new chapter in South Africa’s telecommunications infrastructure sector. The country has a growing population of almost 60 million people and we are committed to utilising our operational expertise to invest in the towers acquired and provide cutting edge power services where necessary.

“Our long-standing relationship with MTN Group, coupled with our two decades of operation on the African continent and track record of delivering consistently strong network uptime, will enable us to deliver an infrastructure capable of meeting South Africa’s increasingly sophisticated data demands. Although we have expanded into new regions over the last two years, this agreement is testament to our continued commitment to facilitating mobile connectivity across the African continent. With this transaction and our partnership with the Egypt Digital Company for Investment as announced last month, IHS now has a footprint in seven African markets, in addition to our four newer markets in Latam and MENA.”

For MTN, the deal is the latest in the Asset-Realisation Process which MTN Group has been running for the last two years. Tower-related sales have formed the bulk of the billions of dollars raised selling non-core assets. Among other deals, MTN has sold its 49% stakes in ATC Uganda and ATC Ghana. In fact, IHS Towers’ own IPO was a central part of MTN’s asset realisation programme as MTN was a 29% investor in IHS Towers itself. Read about IHS Towers’ IPO here.

South Africa has seen no transactions of scale since 2010’s sale and leaseback between Cell C and American Tower, but it’s been far from quiet. MTN’s tower sale is only the latest in a chain of major changes in South Africa that shows no sign of slowing down.

In 2010, American Tower acquired 1,400 sites from Cell C for US$200mn, kicking off South Africa’s telecom tower industry. 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 Atlas Towers was finally rebranded SBA South Africa in October 2021 following its takeover by US-headquartered SBA Communications.

There are an estimated 26,235 towers in the South African market, 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. Cell C is down, Rain is up, and all other MNOs are taking a new approach to their towers.

Now MTN have inked a deal to sell its 5,709 towers to IHS Towers, having winnowed its 20 original bidders down to an IHS Towers-led B-BBEE consortium (more on B-BBEE later). Here’s a rundown of what else is planned in South Africa.

• Gyro Group, the property division of mobile operator Telkom, is planning an IPO for their Swiftnet division by March of 2022. The Swiftnet portfolio includes 3.7k productive towers with 5.7k tenants (for a tenancy ratio of 1.54x). 2.4k Swiftnet Towers are euphemistically referred to as “growth sites” and have 1 or fewer tenants and a tenancy ratio of just 0.36x The remaining 1.3k are “mature sites” which number 1.3k sites with 2 or more tenants and an average tenancy ratio of 3.74x (made up of MNOs, ISPs and government users). An IPO would create a towerco with a national network and a new mandate to lease up sites.

• Following on from Vodafone’s formation of Vantage Towers in Europe, Vodacom CEO Shameel Joosub revealed that he planned to follow and carve out Vodacom’s towers into a separate entity. Over the last few years, Vodacom has developed a successful commercial towerco-lite business model in house, but without formally carving out its towers. That is due to change. Vodacom still retains the largest tower portfolio in South Africa with 8,500 sites. If carved-out and managed effectively this “Vantacom Towers” would be a major contender in the South African telecom tower market.

• MTN and Telkom are both implicated in another potential deal. MTN tried to acquire Telkom, attempting to swallow its third placed competitor to effectively turn South Africa into an duopoly. Bloomberg reported in early November that Telkom had so far shown no interest in a sale. A tie-up would be likely to fall foul of the competition regulator as it would leave South Africa’s telecom market highly concentrated. A decline in competition in South Africa’s telecom market would be damaging to the country’s towerco market where the growth strategy of small and large towercos is reliant on attracting multiple tenants to their towers. This deal is unlikely to reach completion, but it is evidence of MTN’s ambition to deploy its newly raised capital.

Read TowerXchange’s breakdown of drivers for the South African market here.

Since 2016, 3G population coverage has been above 99%, and 4G coverage reached 96.4% during 2020 (ICASA, 2021). 5G rollouts have begun making use of the limited spectrum available, with MTN and Rain launching independently and Vodacom partnering with Liquid Telecom to sue their spectrum. However, 5G rollouts are being held back by a lack of spectrum. Moves by the regulator recently may help ease matters in the short run but a long-term resolution will have to wait.

ICASA is currently in litigation due to its plans for a dual structure of spectrum auctions, and it is unlikely any spectrum auctions will take place until March 2022 at the earliest. Luckily ICASA has released new temporary spectrum to enable operators to deal with the continued elevated level of data demands since 2020’s lockdowns. Additional spectrum should see new towers built and lease-up of existing sites starting in Cape Town and Gauteng but expanding across the whole country.

An additional opportunity for all telecom infrastructure providers in South Africa is ICASA’s plan for a Wholesale Open Access Network (WOAN). The WOAN would be tasked with creating a wholesale 5G network across South Africa and to allow operators to roam on this network, again to reduce the market share of the larger operators and make market entry cheaper.

Setting aside for now the potential for mergers, IPOs and carve-outs, South Africa remains one of the most important telecom markets in Africa. TowerXchange estimates that South Africa requires 12,000 new towers over the next decade, driven by 4G capacity requirements and rolling out 5G. IHS Towers also has the opportunity to take an unassailable lead in the nascent PaaS market in South Africa.

The most interesting part of the IHS Towers-MTN sale and leaseback is the pan-network PaaS deal. IHS Towers is used to acting as a PaaS towerco in its African markets, but it has always provided power for tenants on sites which it owns. The MTN deal turns this on its head with IHS Towers responsible for power on sites it does not own, but where MTN is a tenant.

The power grid is widespread in South Africa, with MTN reporting that all but 53 of their sites are on-grid, however grid reliability has suffered because of failures at state energy monopoly ESKOM. Battery theft has compounded the problem, which has prompted Vodacom to issue a 1,200 site ESCO RFP for a more secure solution. MTN’s insistence that any sale and leaseback also includes a pan-network ESCO agreement must be viewed in this context.

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. IHS Towers is taking on a particular challenge in becoming the first towerco to offer PaaS at scale.

There are a number of challenges in providing ESCO services in South Africa. The first is around access and space. At IHS Towers’ owned sites they control access and how the tower compound is used. However, the majority of site power managed by IHS Towers will be at sites where they need to negotiate access and pay for space for their energy equipment. MTN have equipment on towers owned by other MNOs and other towercos, how easy will it be for IHS Towers to access these sites to manage and maintain equipment? What rates will be chargeable if IHS Towers wants space to install solar panels, enlarge battery banks or install hardened sites to deal with theft?

The other challenge is more economic. In Zambia, IHS Towers is managing off grid and bad grid sites where the energy assets it owns are in near constant use, drawing on grid power where possible, cycling solar, batteries and gensets to maximise the value of the energy equipment on site. In South Africa, sites may be able to rely on grid power for large portions of the year, but still require back-up power which can support the sites for over 4 hours several times a year. To reach a typical SLA in advance of 99.5% it may be necessary to invest in on site batteries which are rarely used. Nobody likes to own assets which are left unused, but nobody likes spotty signal either. Finding the right balance will be essential for making this strategy work.

The third challenge is theft. Telecom batteries in South Africa are not so much owned by MNOs, as temporarily leased from the gangs that will inevitably steal them. By some estimates South Africa suffers over 25,000 cases of battery theft or base station vandalism each year (based on Vodacom’s estimate of 700 monthly incidents), that is the equivalent of every site in South Africa being vandalised once each year. Some sites will be targeted multiple times. IHS Towers will be responsible for power equipment at half the sites in South Africa – hopefully this will be an opportunity to work together to confront this challenge. IHS Towers has dealt with this problem before, so it should be hoped they can make an impact in South Africa too.

Of course, the opportunity is also enormous. Even in Europe MNOs are carving out power provision to towercos, Cellnex is providing power in Spain and Vodafone is having Vantage provide its power. If IHS Towers can crack the ESCO business in South Africa it could win new PaaS tenants across the country by serving multiple tenants from its 12,800 PaaS sites. How other towercos will respond remains to be seen, but the potential is there for a valuable new business line.

IHS Towers is now in its 20th year of operations with 30,519 towers in total across 9 countries (and another 5,709 to add from MTN). Its October 2021 IPO introduced the company to public markets, giving it a market capitalisation of US$5.29bn.

Investing in South Africa is part of a diversification strategy the firm has been following since 2018. Although still in Africa, the South African market has much more in common with more developed markets like Brazil where 5G spectrum is now available, there is a competitive towerco market and a well-developed market economy. IHS Towers is also diversifying into fibre, in November 2021 IHS Towers completed the acquisition of I-Systems, a fibreco in Brazil in which IHS Towers will control 51% and TIM 49%. Perhaps this expertise in fibre could be transferred to South Africa because it is also undergoing a fibre boom.

In addition to planning to acquire MTN’s towers in South Africa, IHS Towers is also continuing to diversify internationally. Again, although in Africa Egypt has more in common with markets in the Middle East than the rest of Africa. IHS Towers has signed a deal with Egypt Digital Company for Investment (EDCI) to build and lease telecoms towers in Egypt. EDCI is owned by National Services Projects, a civil engineering company which is subordinate to the Ministry of Defence.

Once completed, the two will create a new company, to be called IHS Telecom Towers Egypt SAE, with IHS Towers holding an 80% stake of the new entity, and Egypt Digital Company for Investment holding the remaining 20%. The company is currently being licenced by the local regulator NTRA. Under the license, up to 5,800 towers will be built during the first three years of the license term, with the potential to acquire wireless telecoms towers owned by third parties to use them to provide the services as specified by the license. Read more about the licencing process here.

In October 2021 IHS Towers went public. Earlier that month it announced this deal in Egypt. The following month it announced the acquisition of a fibreco, its plan to acquire towers from MTN, and plans to tap the international bond market – never a dull moment at IHS Towers.

IHS Towers will own 70% of the South African towers business with the remaining 30% owned by a B-BBEE consortium. IHS Towers is in advanced discussions with a consortium of B-BBEE investors, which will be completed in due course.

Broad-Based Black Economic Empowerment (B-BBEE) is a government policy to advance the economic transformation of South Africa and to enhance the economic participation of African, Coloured and Indian people who are South African citizens in the South African economy. The current policy has been in place since 2003 and will be familiar to those active in South Africa. If you are not active in South Africa and plan to work with IHS Towers in their new market than you should familiarise yourself with B-BBEE, as you will be affected by it if you are entering the South African market.

Different factors will affect your B-BBEE rating; ownership, management control, skills development, enterprise and supplier development, and socio-economic development are all scored to produce a certification level. As a major supplier to MTN, IHS’s own rating will be important to MTN. Most recently MTN was certified Level 2, the second highest possible. IHS’s deal with a local B-BBEE consortium will be essential for it to operate legally in South Africa and will likely involve some of those original 20 bidders for the towers.