Strategy-first: how towercos create value for operators

At TowerXchange Meetup MENA decision makers from TASC Towers, TAWAL, Helios Towers, SBA Communications, e& and Citi discussed the evolution of tower M&A; the slowly shifting mindsets of MNOs and the question of how tomorrow’s MENA tower deals will be structured, as “schmuck equity” makes a comeback.

Towercos all expressed a position of readiness to strike at the next tower deal, with an emerging appetite for North Africa, although barriers to foreign investment remain. Adjacent services are also on the radar but dependent on regulation and what the customer ultimately wants, while public listings seem unlikely in the short term but inevitable in the long run.

Historically from an operator perspective the driver of a tower sale was a desire to raise capital, but the CFO mindset in the region is different and selling towers is seen as a strategic choice. This had been one of the major barriers to tower activity in MENA, as it was very difficult to explain to an operator who doesn't need to raise cash why they should look at tower M&A.

MENA MNOs have also been prioritising building up their balance sheets; launching new businesses, acquiring assets and transitioning towards becoming digital and technology providers. Among all this exciting activity on the active and service side, it’s hard to prioritise the much less ‘exciting’ prospect of a tower sale or carve-out to the executive team, board and shareholders.

“If we carve out towers, tenancies will go up and we generate higher returns; it’s a new real estate business” might sound like an attractive proposition to those who understand the model, but it is rarely at the top of any CTO to-do list.

Ooredoo’s decision to offload its 20,000 towers across their five MENA markets had originally been part of a move by the MNO to raise capital. As negotiations progressed, the strategy of the MNO changed and an equity deal to create value for the operator was prioritised. Instead of maximising the money raised now, a plan was hatched to unite the two leading MNOs competing tower infrastructure into a third party towerco.

While towercos and operators discussed different sale or carve-out stratgies the region has appeard to adopt the towerco model slowly. But the region’s operators, stc, Zain and Ooredoo have all been developing their unique take on towerco strategy over the last five years. The industry is at a tipping point where activity will be sharp and sudden. Ooredoo and Zain’s latest deal has unquestionably turned heads from decision makers across the MNO landscape and will play a big role in driving discussions in the boardrooms of other regional players. How long until Orange, one of the other major operator in the region continues with business as usual?

To e&, a carve-out or sale and leaseback is still seen as a major undertaking. Aligning all the various parties, both internally and externally, with input from the CTO, CFO and CEO is extremely difficult to achieve without also facing other push factors such as funding challenges. Despite this, attitudes are still changing, as e& explained that they are “actively looking at tower sales or carve-outs", although it won’t be in any state of readiness in the next year.

Raising capital might not be the centrepoint of operator strategies, but towercos can still bring a huge amount of value to the table for MNOs outside releasing capital and asset valuation. Fostering an environment of co-location to enhance network efficiency and reduce network costs offer big benefits to OPEX and can also make key MNO priorities such as network densification for 5G and carbon emissions reduction (an emerging factor than operators will need to start considering) much easier.

North Africa has been the untapped “promise land” for towerco activity for some time, as described by one speaker. This region has a lot of strong fundamental conditions for the industry to capitalise on; high growth potential, moderate country risk, alignment to developed market, and increasing technology adoption. However, North Africa has eluded investment from foreign (particularly Western) institutions due to misalignment by stakeholders who lack appetite for the region.

Government and regulatory authorities have been a big driver of inactivity, as barriers to entry for foreign firms and restrictions on capital entry and exit have created unfavourable conditions particularly for private firms. This is opposition to the much more mature and open markets of Sub-Saharan Africa that have historically won over investors.

However, major economic headwinds in Africa and the completion of much of the M&A with the large multinational MNOs means remaining investment opportunities are becoming slim. With TASC Towers penetrating the region opening discussions with regulators and local operators, investor attitudes may change should one of the major privately-owned towercos see an opportunity to enter.

Investment attitudes from the towercos highlighted ‘opportunity’ above all, waiting patiently for the next and most attractive tower deals to surface. As one speaker described it, “we look at every deal that comes to market... it’s not about just waiting for the right deal; you can find yourself waiting for a very long time”.

There are opportunities to find investments with attractive returns and low risk, as well as avoiding highly competitive bidding processes. MENA has the advantage of not attractive competition from major tower investors such as Cellnex or American Tower, who are focusing their capital elsewhere. US$-pegged currencies in the Gulf region, where towercos have seen the most success, provide access to valuable dollarised contracts. This helps create a strong balance for regional towercos and help mitigate against revenues in weaker currencies, offering great opportunities for African towercos to hedge against their core markets.

What remains to be seen is what trend MNO’s will take on deal structuring. So far, operators have shown interest in retaining equity stakes or full control over their tower infrastructure. Despite declining multiples from record highs around 2022, multiples on tower valuations remain strong in developed markets. MNOs are now very much aware of this and will likely prove reluctant to let this go.

Due to the less mature state of the tower industry in MENA, as well as more restrictive regulatory frameworks, the towerco business model remains largely limited to macro and rooftop towers. However, increasing demand for faster data speed and high-capacity networks is driving deployment of existing and new types of connectivity infrastructure; data centres are moving closer to the edge, while 5G needs lower latency.

These technologies and emerging use-cases will all affect changes in the business models of telcos and service providers, as well as infrastructure providers. This has led towercos to enter various adjacent services in different markets; IHS Towers provides fibre services in Brazil and Nigeria, SBA Communications has launched edge data services in the US, while American Tower acquired a data centre arm in Coresite.

No plans beyond in-building and small cells have been made yet in MENA, but speakers emphasised their commitment to remaining relevant to their customers, providing whatever infrastructure services they need or want to push down the value chain.

Towercos will need to think carefully about where they allocate their capital in a world where investment has become more conservative. Towercos do have capital they want to deploy, but also have various ways of deploying this whether its debt pay-off, share buybacks or building new sites. Adjacent services can prove effective to maximize commercial value for customers and find additional ways of deploying capital if new builds are limited, but this hasn’t always proven to be the best choice.

Crown Castles’ fibre strategy in the US is one example of this, where investment into an infrastructure asset with a lower multiple than towers at elevated valuations has led to share price devaluation. While American Tower seems to have seen success in data centres, it also brings them into direct competition with large hyperscale's with massive pools of capital as well as competition with the operators themselves.

Despite the major role of MNOs in towerco shareholding, there are also opportunities for private and institutional investors, some who have already backed towercos in this space such as PIF in TAWAL and Razika Fund in Helios Tower Oman. One speaker suspects that TASC Towers will likely see another long-term investor seeking appetite for a share in TASC Towers. MNOs will also likely have some sort of exit plan, usually once the towerco has transformed their previously undervalued and underinvested towers into a cash-generating asset portfolio.

Finally, the topic of public listings was discussed among the speakers. TAWAL commented that while they are not looking at an initial public offering (IPO) any time soon, it will likely happen eventually, although doubt they will be the first in the region to do it. For Helios Towers, a towerco which listed in 2019, the decision was strategically driven to create long-term value for their customers, with some investors existing and other staying for the long run. While it might not be the best strategy to IPO in MENA, bringing in private capital is a good option for any towerco.