“The most challenging period for towercos”

TowerXchange Meetup Africa opened with the leader’s forum panel assembling the CXOs of Africa’s leading towercos to get a top-level take on the prevailing challenges and trends for African towers – and there certainly are challenges.

To little surprise, this past year was best described as “one of the most challenging periods for towercos” by one of our speakers as major macroeconomic headwinds impacted emerging markets, facing the weight of compounding regional and global down cycles.

A running theme of the meetup was ‘cost of capital’, with American Tower reporting a doubling from three per cent to six per cent in the US. The hurdle rates for investments have been even harder hit in Africa. Panelists discussed how capital costs in Africa has been lower for a long time, allowing towercos to justify fast, consistent investments to meet operators’ demands.

However, the pace of investment now must match a more conservative approach to capital allocations – a new solar array in Cameroon must compete with share buybacks, M&A and greenfield rollout; one panelist described the industry as feeling like its sitting ‘on a knife edge’.

These pressures are driving a new way of thinking for the industry. SBA Communications is now evaluating every new site deployment in front of an investment committee and has developed a sophisticated evaluation process to ensure the maximum return from every dollar spent, and IHS Towers discussed the key role that innovation needs to play in driving up efficiency.

It was suggested the the towerco model itself is on the cusp of a new technology rollout where African towercos, long stuck in the era of legacy systems, will have to become fully digitised.

One big contributor to this headwind has been currency devaluations. African towercos and MNOs need a lot of US$ funding, which in turn needs to be returned in hard currency to investors. The forex changes in key currencies, the Nigerian naira, South African rand, Kenyan shilling, Ghanaian cedi, among others, has meant US$ returns are shrinking.

However, this is not a new problem for the industry, who have weathered the all-too-common storm of currency fluctuations that anyone faces when operating in emerging markets. US$-linked contracts and escalators have helped hedge currency risks and mitigate losses, but not enough to keep up with inflation. The flip side of those escalators has been increased pressure on MNO customers.

One area where this has impacted most is in expansion, which has seen a noticeable slowdown in M&A that is likely to remain in the medium-term. Public investment valuations are also around 40-60% down, with private sector expectations also misaligned, according to one speaker. American Tower stated they are holding back on M&A and while around 2,000 new sites will still be rolled out per year this is mostly to meet contractual obligations, rather than new BTS contracts. Without fresh site orders we may see new site build decline next year.

Africa’s hunger for connectivity infrastructure continues to accelerate despite 5G rollout remaining slow, with expected increases in the importance of fibre and backhaul putting further pressure on new infrastructure delivery. IHS Towers stated they are thinking more about their greenfield fibre service in Nigeria and whether to expand it to new markets.

Despite new spectrum auctions for 5G licensing happening almost monthly, the jury still seems to be out on 5G investment returns – not just in Africa but around the world. The level of capital needed versus the returns raises a question over 5G infrastructure investments, especially with lots of runway left on 4G in Africa. MNOs need to continue to support end-user needs, but outside key areas where the network will have to evolve to manage capacity, 5G will largely remain a lower priority.

With macro tower rollout slowing, the discussion turned to opportunities for African towercos beyond the macro layer. While it was agreed that service offerings need to expand alongside customer needs and new technology will require new types of solutions, the vast majority of demand will remain tower and power. MNOs are still rolling out their 3G and 4G networks and the onus is on how to make this delivery as low-cost as possible. As one speaker put it, “the meat is still going to be with macro towers and sustainable power”.

Power continues to be critical to service delivery. American Tower consumes over 100 million litres of diesel per year in Africa and has spent over US$400 million so far to divest away from this. This pales in comparison with the astronomical 300 million litres (and counting) that IHS Towers consumes in Nigeria alone. Africa is still heavily dependent on diesel and while there is mutual agreement that this needs to change, the cost of change is going to impact how quickly this happens.

The towercos all showed keen interest in innovative solutions to help them manage this mammoth of a problem, whether its hybridising sites, electrification, minigrid deployment (albeit still very much in the testing phase) or partnering with ESCOs to help share the burden. One point of optimism is how Africa’s lack of infrastructure is allowing the continent to technologically leapfrog straight to deploying highly efficient and renewable networks.

Because the distributed cost of power is often cheaper than grid power, power networks are being designed to generate energy at the edge, not only alleviating pressure on the national grid but making towercos key components to solving Africa’s energy supply gap.

Despite a slowdown in large-scale M&A, speakers discussed the wealth of opportunity in consolidation with the African tower industry in a rather fragmented state where many small towercos are suffering from the same challenges the larger players face, only without volume of capital and may likely need to be acquired.

There were questions over whether some key African markets such as South Africa and Nigeria can support so many towercos, especially as many small towercos operate on a greenfield deployment business model, something that has been badly impacted as MNOs slow down rollout.

In South Africa, MTN reduced their rollout plan from 500 to just 50, creating a challenging dynamic for small towercos that are now forced to sweat their assets longer than anticipated and may force them to rethink their valuations as they look to exit.

MNOs are only scratching the surface of Africa’s massive connectivity gap, as well as the power infrastructure gap that follows, as the continent is set to double by 2050. While low ARPUs make the business case for non-macro sites challenging, deployments for coverage and densification will require all the capital that can be allocated to it.

While the discussion largely revolved around headline topics of finance and operations, panelists also discussed the increasing importance of talent and diversification in the industry. Towercos have made great overall progress in hiring local talent and are actively investing in educational programs to help build up Africa’s future talent pool.

There was acknowledgement that the industry has come along way from its starting point as a niche and largely unknown space to becoming a recognised player in Africa’s social and economic development. Africa’s international towercos are also all driving female representation, with IHS Towers at around 26% and Helios up to 50% at some levels, although this is lower at the more senior levels.

However, it was recognised that the lack of female representation in senior positions is due to the generational gap and are planning that over time a more women are encouraged to enter the industry to shrink the gap over time.