Helios Towers' shift from expansion to value creation

In 2010, Helios Towers secured it's first large acquisition deal with Millicom/Tigo in Ghana, Tanzania and the DRC. Since then, the towerco has expanded into 9 markets and stepped outside outside it's home African region into Oman last year.

However, the group's latest Q1 financial results show that this M&A-fueled growth phrase has peaked, with a switching focus from portfolio and market expansion to lease-up, value-creation and turning cash-flow positive.

TowerXchange spoke with CFO Manjit Dhillon to understand how Helios Towers' transition to maturity is changing strategic priorities, where fresh refinanced capital is looking to allocate, and what to expect from Africa's second-largest towerco moving into 2025 and beyond.

Absolutely, we are very pleased with our Q1 2024 results and look forward to releasing our H1 results within the next few days. While historically Q1 has been the slowest quarter of the year, due to MNOs finalising their capex plans, in 2024 we experienced a strong start with organic tenancy growth reaching 10%.

The main drivers for this momentum came from accelerating growth in our larger markets of Tanzania, DRC and now Oman, while smaller markets also continue to develop at a good pace.

As you would expect, the strong tenancy additions supported another quarter of impressive year-on-year financial performance – with Adjusted EBITDA growing 21%, return on invested capital increasing by +3ppt and net leverage decreasing by 0.7x.

This combination of strong organic growth, ROIC expansion and reduction in leverage reflects our focus on accretive capital efficient organic growth, after we invested in doubling our tower platform across 2021 and 2022.

That investment effectively coiled the spring for Helios Towers, and you are seeing the combination of low capex and high growth come through off the back of that. Notably, we expect to deliver neutral free cash flow this year, and with further growth across 2025 and 2026, be in a position to consider potential capital disbursements in the coming years.

This has certainly been a global issue which has impacted the industry, and to some extent exacerbated certain markets in Africa, for example Nigeria, although we do not operate there. In the majority of the markets where we especially operate, the impact has been broadly muted.

As a business we set ourselves up so that we have CPI and power price escalators across our markets and contracts. Where we do have FX or CPI escalators, we always want to ensure that the contracts are sustainable for our MNO customers.

We do not want either party to be over-encumbered by the structure or potential impacts, so we analyse and structure the lease rate to ensure that whatever the prevailing market conditions are, we come out as cheaper for the MNOs to tenant on our sites than to run the networks themselves. Contracts must be robust and sustainable for both parties in the long term, as the relationship between us and our customers is symbiotic.

Our power escalators move the relevant portion of our revenues up or down, depending on the local fuel and electricity price movements. It serves as a fantastic pricing hedge for our power costs, and we have seen its effectiveness in action over the last two years.

What is important is the volume we consume is on our own operating model, so we do a lot to reduce the volume of energy we consume, particularly through batteries, alternative energy and efficiency tools.

On the foreign exchange side, one of the critical factors for any international company is to reduce exposure, so we primarily target markets where they operate innately in hard currency; for example, the DRC is a dollarised market, the Omani riyal is pegged to the US dollar and Senegal and Congo Brazzaville use currencies that are pegged to the Euro by the French Central Bank.

Where we do have fluctuations, as you cannot completely remove exposure, we have CPI escalators in place that compensate for this, but we try to operate in hard currency wherever we can.

Fundamentally, the escalators are positioned in such a way that they do not contribute towards our EBITDA. We do not want to be making money on our escalators but rather on the core services that we provide, such as co-locations and new builds.

Rising rates have impacted the tower industry, and more broadly any business model which takes on large amounts of debt, simply because if the price of money is more expensive then there will be rising costs for those businesses with more debt.

We looked at the correlation between rising US treasuries and towercos share prices and we saw a strong negative correlation. Now as rates start to reduce, and we do expect that to happen fairly soon we should see some incremental recovery.

Specifically for us however, we have not seen a material impact on our cost of debt, as the majority of our debt was and is at fixed rate, so we were protected against these movements over the last few years. Thanks to this, we were able to set up our balance sheet well for the next planned growth phase.

Recently our US$975mn bond was maturing and we looked to chunk this down into two tranches, which led us to raise a term loan with our banking partners in 2023. This allowed us to raise pricing that was nearly equal to our cost of debt and materially reduce our bond hurdle from US$975mn to US$650mn, as well as extending average tenure by a few years.

Moving into May this year and on the back of strong results, an upgrade from the rating agencies and a plan to hit positive cash-flow, we were able to refinance our bond at 7.5% coupon, which is broadly consistent with the pricing we had previously. This was a fantastic outcome and we were delighted by the support from our investor base.

US treasuries were sitting at around 1.8% but have since moved up to 4%, so keeping our cost of debt at around the same rate really shows how the credit metrics of Helios Towers have improved. With around US$300mn of capital to draw, no near-term maturities coming up until 2027, and a strong balance sheet to focus on business performance, we have everything lined up to drive growth over the next few years.

We did previously have a 22,000 towers by 2026 target, which we have changed to a 2.2X tenancy ratio by 2026. When we first set this goal, the pipeline of acquisitions was greater than it is today, and some of the M&A discussions that were going on alongside our Oman deal we decided not to pursue.

The cost of capital has continued to rise and so we reviewed our M&A strategy; having nearly doubled our footprint from 7,000 to 14,000 towers and nearly doubled our market presence from 5 to 9 markets, we recognised our newly expanded portfolio is ready for a period of lease-up, and we have now reached a turning point to really drive up tenancies rather than continue to grow the portfolio scale.

The key is to make organic capital-efficient investments that increase our return on invested capital, which we will achieve primarily through tenancies ratio growth as well as build-to-suit.

By deleveraging, increasing capital on the balance sheet and becoming cash-flow neutral and then generative, we can also start potentially returning some capital to our investors over the next few years, while continuing to also invest in attractive opportunities in Africa and the Middle East.

We have always been strict in assessing M&A opportunities and is not off the table and will be a tool we may look to use in the future, however it is not something we plan to utilise over the next couple of years.

While we have been deleveraging the business through our growth phase, it is now one of our core priorities. When you purchase a portfolio you do so because there is exciting organic growth opportunities off the back of it, and this is what we are focusing on and delivering right now.

The response to this strategic change has been very positive both internally and externally, with the team really focused on operational excellence and top class delivery. It is exciting also that over the next few years we will be in a position to potentially to give back to our investors, which will be the first time since our inception, and signals the maturing state of Helios Towers.

Most of our contracts are long-tenured, and this figure of 7.8 years does not consider our auto-renewing contracts terms. However we are actively working on these contracts well ahead of their initial period deadlines, so we are not expecting any issues here.

Last year for example we renegotiated a contract was with a large MNO, with 2,300 tenancies, where the contract stayed broadly the same. There will always be some points the MNO want to renegotiate and vice versa, and you usually come to an agreement somewhere in the middle. What is important to communicate was that since taking over these towers from the MNOs we have invested and improved that network substantially.

Personally, MNO contract renewals are quite low on my risk list as our commercial and operational teams have built very strong relationships with our customers to ensure that we both continue to win from our partnership.

One topic of discussion within contract renewal discussions more broadly is on escalators, and this is why we put so much attention into getting this right. We have walked away from previous M&A deals due to an inability to formulate a strong mutually beneficial contract.

However once you have formed a partnership, we believe it is in both parties interest to try and grow that and foster mutual win-win structures, which is what we expect to continue to do over the coming years.

News headlines often lead to a very negative perception of what’s happening in Africa, but when you go to these markets such as the DRC, the day to day picture can be somewhat different. When I go to the markets the same thing is evident, we see an incredible buzz, energy, entrepreneurship and ever-growing demand to be connected to each other and the world.

Mobile and tower demand and tenancy growth are consistently strong regardless of what headlines say. The DRC has just shy of 30% mobile penetration, so there is enormous demand and constant growth that will continue.

However, it is incredibly important to ensure the safety of our on-site teams that might be related to political issues or conflict. We want to make sure that staff are keeping safe, and we have a keep-safe policy in place which prevents travel should it get too dangerous.

Health and safety is the number one item we discuss at all Board and management meetings and we are focused on ensuring that we capture the fantastic growth opportunities in the safest and most robust way possible.