In the arsenal of tools towercos can use to grow, M&A has played a key role in scaling Africa’s tower industry over the past decade.
Africa’s four founding towercos – Helios Towers, IHS Towers, American Tower Company and Eaton Towers (since acquired by ATC) – all expanded rapidly due to large sale and leasebacks with major operators including MTN, Airtel Africa and Millicom Tigo.
But the global pandemic and Russia-Ukraine war has made Africa, and the world, a far more volatile place. M&A has slowed down due to conservatism on both sides, and a preference to allocate capital to organic growth and co-locations.
TowerXchange Meetup Africa’s M&A panel discussed how Africa’s macroeconomic environment has impacted market and industry dynamics towards M&A, and what the future holds in a region where 50% of towers are still owned by operators.
The current climate has become less favourable to M&A
The primary factor in the slow M&A environment in Africa has been the current interest rate environment. Nearly all major local currencies including the Tanzanian shilling, South African Rand, Kenyan shilling, Congolese franc and Nigerian naira have declined relative to the US$ since 2021.
Speakers at TowerXchange Meetup Africa discussed how MNOs still own around 50% of the towers on the continent, and many are trying to drive efficiencies by selling their towers. However, macroeconomic conditions have led to falling tower valuations, with little to gain from selling portfolios in the current climate.
“M&A can burn you when faced with high tax, high debt rates, and when in the cycle where debt is expensive” said CEO of IHS South Africa Sandile Msimango.
Changes in Africa’s largest tower market currencies against the US$ 2020-2024
On the flip side, as operational and procurement costs increase, it becomes harder for towercos to bring efficiencies off the back of a sale and leaseback. Significant amounts of capital are required to acquire and upgrade large portfolios, and with shrinking returns due to local currency revenue risk the business case is hard to justify.
The build-to-suit model is seen as a more productive use of capital. Organic growth tends to be slower with steadier cashflows offering a better return on investment. Building sites from new also allows for a more logical approach to deploying towers, instead of acquiring a sporadic portfolio of existing sites, and so should see a better return. “If you acquire towers through a sale and leaseback, MNOs also have a lot of negotiation leverage” said AMADI founder Akshay Grover.
However, speakers agreed that both M&A and build-to-suit will remain important tools for towercos to grow. “M&A allows towercos to quickly scale in a new market and take advantage of operational efficiencies of economies and scales” said Morne Edas, Founder of Infra Impact.
“There’s merit in M&A and in building towers, it depends on where you are in the cycle, what investors expect, and what the macroeconomic environment is” said Msimango. Sale and leasebacks can also help quickly drive up tenancy ratios, especially if a towerco already has an anchor tenant and is looking to bring a second customer on across an entire portfolio.
The dynamics of MNO-towerco relationships are changing
While macroeconomic conditions are making it harder to justify M&A, evolving needs from MNOs are also changing the way the next wave of sale and leasebacks will be structured.
Operators have been pushing for shorter durations of lease agreements, moving away from long-term 10-15 year contracts to those which match lease costs to more volatile market conditions. This is most apparent as MNOs are pushing more fuel and power components into lease agreements, which operators are recognising as a major lease liability.
Msimango stated that “some customers want to sign 3-year agreements, which makes no sense for towercos as the business model has a much longer ROI”. From an investor perspective this also makes little sense. “Will equity investors be ready to fund deals on the back of a 5-year contract? I’m not sure, and this is where the challenge is today” said Edas.
“In the short-to-near term we will see less M&A, which will change in the long term, but when this returns, we will see a new type of structure for sale and leasebacks”.
Over the past 12 years, MNOs have also seen the tower industry mature, both in Africa and internationally, and the value that towercos have been able to generate from their assets. Francis Njuguna, Head of M&A at Safaricom, said " MNOs are seeing the whole sector at play and they want to participate, showing a neutral host perspective to get their own co-locations”.
MNOs continue to face increasing pressure for voice, data and revenue elasticity, requiring more capex into active networks and services. Because of this, “the deals will likely continue” said Njuguna, with the towerco model proving to be an effective way of managing passive infrastructure, “but it will be a different model with more carve-outs and towerco joint-ventures".
Consolidation where it makes sense
Africa still has a long tail-end of SME towercos; only 10 of the 40+ towercos identified by TowerXchange in Africa operate over 1,000 towers.
The majority of these towercos are in South Africa, which has a large ecosystem including all four major players (American Tower, IHS Towers, SBA Communications and Helios Towers) as well as around 30 SME players fed by the large build-to-suit needs of the country’s operators.
This has led to a long cycle of organic and M&A players with small towercos building, scaling and then exiting to the larger towercos. “There are small player opportunities to consolidate and create economies of scale, while for bigger players there is the opportunity to buy up market share” said Edas.
Speakers discussed how the current climate in South Africa has become a sink or swim environment for towercos. The decline of state grid ESKOM led to MNOs switching their network capex budgets from rollout to resiliency, choking supply for the highly competitive build-to-suit market that the SME towerco sector relies on.
The razor-thin margins and volatile environment for towercos has led to conservatism from MNOs. “Operators will hesitate to let small towercos take on their assets for risk of business continuity and scale” said Msimango. SME towercos will need to look at creating better economies of scale, potentially by exploring mergers and joint ventures.
