After a challenging year for Africa’s largest towerco, IHS towers has renewed and extended leases on 13,500 sites with its largest customer and shareholder MTN out to 2032. The decision is a step out of the period of uncertainty which hung over the relationship between the two African telecom giants.
Economic instability in Nigeria has created intense difficulties for everyone operating there and the new leases will put operations in the west African country on a more stable footing nationwide. The lease renewal also updates an agreement struck between MTN and American Tower last year which will now see fewer tenancies relocated from IHS Towers sites to new American Tower ones.
The context
MTN has had a rocky relationship with IHS Towers over the last two years. In June 2023, MTN had pushed for greater representation on the board as the largest shareholder of the firm with a 26% stake. IHS Towers, concerned about its perception as a neutral entity to other customers, declined a proposal to allow shareholders with over 10% stakes to nominate board members.
Amidst these ongoing discussions were a series of contract renewal deadlines between IHS Towers and MTN. In August, it was announced that MTN had decided not to renew a contract with IHS Towers on 2,500 sites in Nigeria, instead opting for competitor ATC Nigeria (the Nigerian opco of US-based global towerco American Tower).
MTN cited the decision was based on a “superior bid submission” made by ATC Nigeria, but locals sources at the time suggested the decision was strategic. The pyrrhic decision saw IHS Towers’ share decline significantly, which in turn caused MTN’s market capitalisation to decline by US$200mn as a major owner of IHS Towers stock. Operationally, ATC Nigeria would need to build another 1,000 new sites to re-locate equipment while ensuring and upgrading 1,500 existing sites for co-location, a significant project to undertake in financial and human resources.
All this came on top of a worsening macroeconomic backdrop in IHS Towers’ largest market. Despite its global presence across 10 countries in Latin America, Africa and MENA, 16,409 of the group’s roughly 40,000 towers are in Nigeria, constituting over 60% of revenue.
In June 2023, Nigeria’s Central Bank unified Nigeria’s foreign exchange market by replacing old exchange rate segments into a single window called NAFEM in October. As a result, the Naira declined 53.9% from August 2023 to August 2024, while diesel prices have skyrocketed. 40-50% of IHS Towers’ portfolio is off-grid and diesel generators remain the primary form of on-site power generation. Over FY 2023, IHS reported a US$38mn increase in the cost of diesel alone.
But IHS Towers has been fighting back. Following months of wrangling with shareholders, IHS Towers and one of the firms' major investors Wendel announced in January 2024 a plan to improve alignment and accountability between the company’s board of directors and shareholders. Improving market perception was critical to restoring a tanking share price.
Changes included declassifying IHS Towers’ Board over 2024/2025 moving to an electoral system, lowering the threshold for shareholders to nominate directors from 30% to 10%, allowing shareholders owning 25%+ shares to requisition a general meeting, and lowering the threshold for removing a director from a 2/3 majority to 50%.
With concessions warming shareholders internally, externally IHS Towers went on to expand its relationship with Airtel Nigeria, taking on 3,500 new tenancies over the next 5 years. The deal also extended the existing 6,000 tenancy contract until December 2031, seeing a more normal return to contract renewal flow.
The lease renewals
Now, the future is looking brighter for Africa’s largest towerco. In addition to a successful renegotiation with MTN Nigeria to extend existing service lease agreements of 13,500 tenancy contracts to December 31st, 2032, all three parties (IHS Towers, ATC Nigeria and MTN Nigeria) have agreed to a revision and reallocation of the 2,500 contracted sites MTN did not renew with IHS Towers.
ATC Nigeria will “provide tower services for up to approximately 2,100 sites”, while IHS will manage 1,430 sites according to press releases from MTN and IHS Towers. This includes an additional 1,000 new sites to be rolled out over the next few years, allocated between the two towercos. It's not clear exactly how many of the IHS Towers are retained from the original 2,500 versus what has been committed in new build, but it’s a big step forward for the firm.
While it is somewhat a step back for ATC Nigeria, who has lost out on the full 2,500 new tenancies, TowerXchange understands that discussions between ATC Nigeria and MTN had stalled post-announcement. ATC Nigeria had already begun the process of design, site acquisition and surveying in preparation for the then-new tenancies, but most of this investment is expected to be recuperated.
The extended contracts have been revised with new financial terms that reduce the USD-indexed component of the leases linked to a discounted US consumer price index (CPI), making the leases majority naira-linked, as well as set a cap for the naira CPI escalator component. The terms also remove technology-based pricing, allowing payments for new upgrades based on tower space and power.
A new component has also been introduced indexed to the cost of providing diesel power to act as a hedge against diesel prices and FX fluctuations. The renegotiated terms aim to mitigate macro risks affecting MTN Nigeria as well as support margin recovery and resolution of IHS Towers’ negative equity position.
IHS Towers’s management are satisfied with the deal. Sam Darwish, Chairman & CEO of IHS Towers, said, “We are delighted to announce the renewal and extension of our agreement with our largest customer, MTN Nigeria. This marks a significant milestone for IHS Towers as it has completed the renewal of all tower MLAs in Nigeria, a testament to the deepened relationship between the two companies.”
“We are cognizant of the challenges faced in emerging markets and are proud to extend our relationship into the next decade, working together to navigate global and local macro conditions while broadening mobile connectivity in Nigeria through our critical infrastructure.”
What this means for Nigeria’s tower sector
The extension of 13,500 leases (about 23% of IHS Towers 60,000 leases) to 8 years out significantly strengthens IHS Towers’ financial position. The deal also frees up management time to focus on the other challenges facing the towerco and is a big step towards a warming relationship with their largest shareholder.
The new financial terms in its extension with MTN Nigeria includes a more substantial split between local and foreign currency and a new diesel-linked component. MNOs have been raising concerns across the continent over rising opex costs related to their network, as CPIs and FX escalators have pushed up operating costs. Telecel Ghana for example recently had its network switched off by American Tower over an inability to pay lease fees.
However, escalators can only do so much, and the reduction in USD-denomination will put further pressure on IHS Towers’ ability to generate hard currency returns for investors and shareholders. But the relationship between towerco and operator is symbiotic, and reaching a more sustainable agreement between both parties will ensure a healthier partnership in the long-term.
New pricing components indexed to the cost of diesel power will also help mitigate some of this, as hedging against diesel prices will be critical to staying afloat through the storm of hydrocarbon price volatility.
MTN Group has reason to be happy with the deal which is facing significant financial headwinds from its operations in Nigeria. In a disclosure to investors on August 7 MTN said the devaluation of the naira versus the U.S dollar drove higher operating and net finance costs for MTN Nigeria, its biggest market. The new leases and terms around fuels will allow the MNO to begin rebuilding the financial health of its Nigerian subsidiary.
Even American Tower has something to look forward to from the deal. Although the global towerco lost out on some tenancies it secured in its September 2023 deal with MTN, it is retaining the easiest to deliver tenancies – those locating equipment on existing sites – and losing those which would require substantial capex to serve, something difficult to finance in Nigeria. American Tower will be able to allocate that capital towards other clients in Nigeria like Airtel.
After a tumultuous first 18 months of Tinabu’s administration in Nigeria the country’s telecom sector is turning a corner and finding a new baseline from which to rebuild and grow.
