A Towering Vision for Kenya and Beyond

TowerXchange Meetup Africa will be moving to it's new home of Nairobi, Kenya in 2024. Ahead of this exciting change we spoke to Tom Muchiri, Atlas Tower's new Kenya Country Manager, to understand to understand this dynamic market and the role Atlas Tower seeks to play, both in Kenya and opportunities in new African countries too.

While I was born here in Kenya, I have benefited from a wealth of international experience over my career. I started in telecoms working for specialist telecom integrator American Management Systems in CRM, provisioning and billing systems integration. As part of our core expertise, we would instal or improve operating support systems across major network operators in US and the Americas and help them realise operating efficiencies.

From here I moved through automotive manufacturing in China, to corporate strategy for Jaguar Land Rover in the UK, landing back in Kenya working with Centum Investments which helped me really understand the dynamics of the Kenyan market. I’ve always been attracted to telecom and it was also a an investment thesis we took interest in at Centum. In summary it’s been a full circle in coming back here to Kenya and working in the telecom infrastructure space.

I was first introduced to the Atlas Tower team around 3 years ago as they were looking for a transactional advisor. In Kenya, any organisation regulated by the Communications Authority had to have a local investor, so I brought my experience working with local institutional investors to support them.

But due to the capital-intensive nature of the communications sector, it's very difficult to find local partners with a large enough appetite to invest alongside foreign investors. For instance, when Amazon entered the market, the regulator dropped this policy because no local institution would have been able to invest pari passu or more plainly, invest equally alongside them. This really helped lower the barrier to entry for foreign investment.

Over the last year I have become far more operational in response to massive shifts in the sector as well as changing internal personnel at Atlas Tower, seeing a renewed focus from the management team in the US, so I took over the Kenyan operations as a result. I am excited about my role at Atlas as it provides an opportunity to use all my experience leading our commercial operations, managing partners, and engaging stakeholders.

Atlas Tower has an interesting origin story due to its dynamic and owner-managed structure. The business started in the US in 2007 and through multiple cluster deployments built up to where we are now. In 2014 Atlas started in South Africa, so we have been on the continent for a decade now. We exited that market by selling our roughly 1,115 towers to SBA Communications and now the bulk of our towers are here in Kenya where we started in 2018.

Kenya is a sizeable African tower market with around 10,500 sites, 53% of these sitting with Safaricom, who are one of our main customers alongside Airtel Kenya. There is a third MNO in the market, state-owned Telkom Kenya, but the operating company has been struggling financially and ran into some payment issues with its towerco partner ATC Kenya. Because of this, the market is highly concentrated and does mean lease up isn’t as high as we saw in South Africa, a far more competitive environment.

On the towerco side, we consider ourselves number two in the market. Although ATC Kenya is by far the largest with around 3,600 sites compared to our 362 towers in the air or in construction, 90% of their portfolio comes from acquisitions. In contrast, 100% of our portfolio has been developed and built by the Atlas Team in Kenya, most of which have been anchored by Safaricom. It seems we have matched ATC stride for stride on organic growth since our origination in Kenya, 2019.

However, Kenya brings other benefits, particularly in security as sites are far less likely to be vandalised when compared to South Africa, saving us considerable capital in site deployment and operations as the security situation is far better.

What’s also interesting about Kenya’s telecoms industry and what makes it so strong is the penetration of digital platforms across the entire economy, particularly mobile banking which is really driving growth in the whole economy. We have seen a big push by the government to digitise the provisioning of its services, for example school fees are paid through Safaricom Paybill numbers, and even taxes have been moved to a mobile payment, so it’s become ubiquitous to all sectors of Kenya’s economy.

Surprisingly, despite this digital adoption the bulk of transactions in Kenya are still done on USSD, a 2G GSM protocol layer that continues to persist with the volume of MPESA and other mobile services transactions, so there is still massive room for growth. Such robust service layers right at the top of the telecom infrastructure are really driving how everything else is done here, right to the ground. It’s a remarkable feeling to be a part of it and build this foundation from the ground up by providing this critical passive infrastructure layer so that investors in the active equipment can provide all the beneficial services on top.

As such, there is a huge role for the telecom tower sector to play in this space across both tower and power provision to make sure we achieve key Sustainable Development Goals including providing more democratic access to critical banking, healthcare, and government services.

We take a very holistic approach to our services, offering urban, peri-urban and remote coverage for whatever planners need; anything from a 10-meter tall ‘stub’ on top of a building to a more typical 45-meter free standing tower, to even taller sites for remote or mountainous regions.

This last point on rural coverage is particularly key, as it can be a huge challenge to go into areas without transportation or power infrastructure. The Kenyan regulator has been pushing Universal Service Fund (USF) sites to make sure that at a minimum, even in the most remote areas of Kenya, 80% of all people and around 60% of the total geography have network coverage.

Because of this, power is also a key component of our value offering, so we are exploring multiple business channels that include energy services that have traditionally been a separate business or a pass-through. As such, we are doing similar things to what we did in South Africa; bringing the latest in tower technology and world class standards to ensure our sites are efficient, durable and safe, as well as innovating the business model. Make no mistake, we want to continue to win and cement our top slot in the tower sector.

When we arrived in South Africa we were the first towerco to successfully implement a built-to-suit (BTS) strategy. As of last year, there are over 30 BTS towercos using the same business model, evidence of a huge evolution in the market. Atlas Tower wants to be the catalyst that drives change in Kenya too, especially given the concentration of the market. By breaking down barriers to entry into the local tower industry, opening new channels of investment and creating healthy competition we want to see a market that is robust and sustainable.

The key for us lies in the word ‘organic’. This means we must be efficient with our operations and have a good stream of cash flow to reinvest, and we have very patient investors and shareholders who see the long-term picture of what we are doing. Every year it’s all about reinvesting in new towers and we want to ensure we can continue to facilitate this. By earning in Kenya Shillings (KES) we can also reinvest in KES, which ensures we can always continue to grow.

As our origins are in the US our investments are also US$-denominated. We’ve seen so much volatility over the last 2 years which has been so different from the previous 10; the US$ and KES pair consistently moved at around 2% a year against the dollar in the previous period compared to 25% last year and 17% the year before.

It's been very concerning to observe this volatility, so we have become much better at identifying the right sites to build and maximizing the commercial value of every dollar we invest. Having that very detailed, modular thinking on a site-by-site basis is critical as a build-to-suit player. This is something towercos built through M&A struggle with as often site builds by operators maximize different things besides commercial value and colocation.

Working with local institutions has always been a good idea and should be an open-market activity without stipulations on a minimum or maximum, but rather on fair access. We work with KEPFIC (Kenya Pension Fund Investment Consortium) to ensure that local institutions can participate, and they desperately want to as their current exposure is mostly in government bonds and the stock market.

They want to diversify into infrastructure, but we need to show them on how placements in the tower sector can help them capitalise on our industry’s growth. It’s also one of the best ways to diversify our capital sources by leveraging local institutional debt to mitigate the impact of US$ and KES pair forex fluctuations. Currently our debt is wholly US$ funded by the IFC; by localising a large portion of our debt we essentially build a “natural hedge” within our capital structure.

While not all African markets have access to strong local institutions, the Kenya economy has historically been dominated by the services industries relying on healthy institutions to consistently enforce the rules and attract private sector investments rather than natural resource extraction that so many other countries have depended on. This includes financial services, so there are several large institutional sectors such as pension funds, insurance companies and other asset managers looking for an improved risk-adjusted return.

In the pension fund industry alone, there are around 1.6 trillion KES looking for a fair return on investment. Investment managers need to consider better matching the maturity of the portfolio return with long-term liabilities. As such, infrastructure like telecom macro towers offers a long but consistent return through the investment cycle, so it's a great way for these firms to diversify their investments.

I’m going to quote the former mayor of Chicago here who said “never let a serious crisis go to waste” and I like this because it’s times like this where you try things you never thought you could or needed to do. We had to start thinking about a secondary revenue stream, which is power, and how to invest in this to increase our margins.

We didn't immediately come to this in the first instance, but rather through addressing the needs of our Mobile Network Operator (MNO) customers seeking to increase network resilience; the Kenyan regulator has pushed through requirements for MNOs to increase uptime from around 99.97% to 99.99%. For towercos this translates to a minimum level of power reliability that is just not humanely possible to achieve, as this equates to about a 15-minute window to react when any downtime occurs.

So, we started thinking about solutions in terms of creating redundancy in power generation capabilities; practically, this was achieved by increasing solar and battery installations across our portfolio to improve site resilience. Striving to exceed customer expectations and maintain our competitive edge, we are now investing in the newest, most efficient power technologies available.

We’ve continued these deployments because it also alleviates our dependence on generators and reduces the carbon footprint of our sites. If we have options to do things differently, we should embrace them, and take the role we can play in supporting sustainability goals seriously. For instance, one of our initiatives is working with mini-grid providers, adding to our resilience by plugging into their much larger solar equipment banks, as well as other players at the end of the power grid to build resilience and sustainability in power and communications infrastructure. We don’t have to do everything ourselves, rather, we work with other like-minded stakeholders to achieve key development and sustainability objectives whilst achieving a reasonable commercial return.

As I mentioned, power has become a critical additional revenue stream for us as well as a core component of our network resiliency solution. We do provide power-as-a-service, but the key here is to provide only as much power as is required, if you overdo it then you overinvest. You need to observe the power consumption of the active equipment as well as the generated power rates of solar PV, so it’s a match you need to dynamically calibrate.

Because of our focus on reliability, it was natural for us to go from a reliability- to an energy-as-a-service (or ESCO) model. In a word, the best way to meet stringent resilience standards is to do it ourselves. Kenya saw three big outages last year, some lasting over 24 hours in some areas. Despite the country’s ample energy generation, the challenge is in distribution; Nairobi is well covered but more rural parts of the country still see bad or no grid connection.

This makes a 99.99% uptime guarantee a particular challenge because we must ensure all our sites are up whether it's an urban, peri-urban or remote tower. It may seem kind of strange that when grid power fails, we feel like we failed; such is our company culture. One way we are striving to do better is to continue to raise standards such as achieving carbon neutrality. Currently 76% of our sites are utilizing renewable power, our 2024 goal is to ensure 90% of our sites are utilizing solar as a main source of power.

Atlas Tower has a truly global footprint with teams in Kenya, South Africa, the UK and the US, and we are looking at entering another country on the continent. The most interesting ones for us are the large markets such as Tanzania, Ethiopia and the DRC which offer real volume in demand for tower growth. Some of the smaller East African markets like Rwanda and Uganda are also interesting but the dynamics of the big countries are most appealing.

Tanzania is an attractive market despite having 3 towercos already, we wonder whether there could be space for one more? This would be driven by the build cycle of the operators, something we pay attention to very carefully. It’s also easier to work with our existing customers such as Airtel and Safaricom, to help us accelerate potential new market entry. Of course, Ethiopia is another interesting market to us as Safaricom is a major partner. However, Ethiopia does not have a clear towerco license or path to market entry currently, but we are waiting for that moment where a clear opportunity to enter presents itself.

While we do look at all kinds of models and opportunities for new market entry, ultimately, we look at each site as a single business opportunity. The bigger you get, the less discipline you have to look at your portfolio under the microscope and ensure operational efficiency. I know I have an appetite for more regional growth, but the Board is patiently waiting for short term volatility to subside.

So, let's wait and see. In the meantime, Atlas Tower will continue to be a builder, operator and owner of telecom towers; we build to last, operate to delight our customers and own because we believe that we can generate better long-term value than our peers.