Nigeria migrates to the independent tower company business model

(Editor’s note: this article was substantially updated on 10/9/14 to reflect IHS’s acquisition of 9,151 towers from MTN Nigeria)

IHS acquired 2,136 towers from Etisalat Nigeria in August, then added a further 9,151 towers from MTN Nigeria in September 2015, giving IHS an estimated 56% share of Nigeria’s towers. With Airtel’s ~4,000 Nigerian towers also ‘on the block’, and Helios Towers Nigeria, SWAP and several smaller towercos already accounting for a further 2,000 plus towers, TowerXchange forecast that 85% of Nigeria’s towers will be owned or operated by independent tower companies by the end of 2014, representing almost all the country’s towers except Globacom’s.

Nigeria is Africa’s largest mobile market with over 125mn* SIMs circulating among a young population of around 170mn*. While penetration may sound substantial at 72%, multi-SIMing and an urban-rural divide contribute to a low 32%* unique subscriber penetration rate.

Estimates vary as to the size of Nigeria’s tower network. If you add up the number of towers each operator claims to have, and add the independent towers, you get to a figure of 28,340. But if you avoid double counting tenancies on shared towers, the total may be nearer 25,000.

What we know for sure is that there are not enough towers in Nigeria – the Association of Licensed Telecommunications Operators of Nigeria (ALTON) estimates that the market needs another 50,000 to 660,000 towers for optimum mobile network coverage across the country, perhaps less now the market is increasingly geared up for efficient co-location. Indeed, IHS figure on a more conservative total of around 40,000 macro towers being sufficient for coverage and capacity.

Network extensions cannot come quick enough for some. Last year Nigeria’s Communications and Technology Minister complained that 40% of the rural population in her country had no coverage. The business case for rural network extension is complex in Nigeria, given the high costs of building towers, the low mobile penetration and ARPU to be found in remote areas, the lack of electricity and poor quality of transport infrastructure, and persistent security threats in some areas.

 

In urban areas, substantial cell site densification is required to overcome Nigeria’s notorious QoS problems, which culminated in the regulator’s suspension of SIM card sales by MTN, Airtel and Globacom earlier this year. 3G is still being rolled out and a wave of data demand is swelling. With 3G services launched as long ago as 2007, 3G penetration is around 15%* at present. LTE trials have been undertaken, and smart phone penetration (believed to be in the mid-teens%) is growing.

Federal regulators encourage infrastructure sharing and by extension the development of Nigeria’s tower industry, but the telecoms, consumer protection and environmental regulator, plus state and local authorities add layers of bureaucracy that can slow site builds to a snail’s pace. In many areas, state and local authorities have imposed swingeing taxes on cell sites. However the Federal government recently pledged to tackle this latter problem, which may result in as much as 70% of investment in infrastructure being spent on taxes.

For several years, network planners in Nigeria have had the option to co-locate on a finite inventory of independent towers, but the number of leasable sites will increase exponentially this year. The days of building parallel infrastructure on either side of a highway may be behind Nigeria, as networks will be planned on a more collaborative basis, where possible leveraging the nearest independent tower, rather than building new towers.

At the turn of this year, IHS, Helios Towers Nigeria and SWAP accounted for around a quarter of Nigeria’s towers. IHS alone now own 14,222 or 56% of Nigeria’s towers, and two thirds of Nigeria’s towers are now operated by towercos. By the end of the year, almost 21,500 Nigerian towers will be owned or operated by independent towercos, representing 85% of the assets. The only substantial operator-captive portfolio remaining will be Globacom’s, who have hitherto indicated no interest in divesting a tower portfolio that may now include a limited number of unique locations, thus attract a significantly reduced valuation were they to come to market in the future. A structurally sound tower in Nigeria in an attractive location could fetch a valuation of US$200-300k, if brought to market in a timely manner. And judging by the swathe of transactions, that time is now!

With the cost to build a tower in Nigeria coming in at around US$200-250k, is the premium paid to acquire towers justified given that IHS paid an estimated US$277k per tower for Etisalat’s towers? Absolutely! Acquiring, permitting and building a green field tower in Nigeria is a painfully slow process, and time to market is critical. In our dialogues with leading stakeholders at Africa’s MNOs, we think there is considerable “pent up demand” for co-locations, which could signal a healthy increase in tenancy ratios in the short term after assets change hands. For example, it’s notable that Etisalat Nigeria’s recent transaction with IHS didn’t include the usual a build to suit programme, in anticipation of the impending opportunity to co-locate on MTN and Airtel’s towers.

Lease rates have generally been higher in Nigeria than in much of the rest of SSA, Nigeria is host to more than one vintage of shared towers with tenancy ratios nearer three than two, and many sites in sought after metropolitan locations have four or more tenants on long term leases (tier one MNOs aren’t the only tenants on the towers). The economics make sense, which is why so many parties are vying for a ‘piece of the action’ in Nigeria.

Helios Towers Nigeria has raised capital through a recent bond issue and are believed to be bidding for Airtel Nigeria’s towers. IHS will doubtless scrutinize whether the portfolio adds sufficient unique locations to be worthy of their participation in the process. TowerXchange believe that American Tower (AMT) bid for Etisalat and MTN’s towers (and yes they were prepared to provide both AC and DC power)). AMT had previously distanced themselves from bidding for any assets in Airtel’s pan-African tower sale, but their appetite appears to have changed; the Economic Times of India quote unnamed sources suggesting that AMT is in prime position to announce the acquisition of Airtel’s Nigerian towers in Q3-4 2014 for more than US$1bn. Helios Towers Africa and Eaton Towers are not believed to be bidding to acquire Airtel’s Nigerian towers, and the smaller local Nigerian towercos probably lack the necessary capital.

Some commentators had suggested that one or more of Nigeria’s larger portfolios may be split between two towercos along a North-South divide, creating competition between the towercos to provide the best service, potentially resulting in the transfer of towers, or at least BTS opportunities, to the superior service provider. At present this seems an unlikely outcome, and a North-South split would have separated the relatively prosperous South from the poorer Northern region – a Northern Nigerian towerco would have faced very difference operational challenges from a Southern Nigerian towerco.

With the sale of the majority of Nigeria’s towers to independent towercos, the operational challenges that were the MNO’s problem are now the tower companies’ opportunities. Those opportunities include: improving site level profitability through investment in energy efficiency; reducing fuel theft; and unlocking economies of scale in maintenance processes.

Power is the primary challenge facing the new owners of Nigeria’s towers. In acquiring Nigeria’s distributed communication network, towercos are acquiring one of the largest energy generation resources in the country – MTN Nigeria alone generates enough power to provide for 10 Nigerian states!

The challenge isn’t just the scale of Nigeria’s cell site energy requirement, nor the unreliability of a grid typically available for just five hours a day, at a quality so variable that only 60% of it can be used. Quoting from the GSMA Green Power for Mobile’s (GPM) most recent bi-annual report, “In Nigeria, where the national grid meets only 30% of the country’s energy requirements, even base power requirements are largely met through the use of diesel generators (with the associated cost and environmental implications).” At the GPM Working Group in Lagos earlier in 2014, it was revealed that 7,066* of Nigeria’s cell sites run on dual diesel gensets 24/7, burning vast energy opex. Despite the hyperbole of press releases, there are few solar hybrid sites in Nigeria, but no shortage of hybrid battery sites (MTN alone has installed 2,660*). This leaves an inviting opportunity for a towerco, or an ESCO that can live with a towerco’s exacting terms, to invest in Nigeria’s towerpower infrastructure and unlock energy opex savings.

Fuel theft in Nigeria is believed to add more than 30% to diesel costs. The ‘diesel mafia’ are entrenched in some supply chains, rendering certain roads impassable without paying a “toll” and vandalizing solar panels which threaten the flow of diesel. Tales of generators being stolen by ramming through palisade fences or lifting them out with cranes are too common to be considered mere anecdotes. Robust site hardening solutions are required, a substantial investment for Nigeria’s new tower owners, but one which will pay dividends both in reduced shrinkage and in service differentiation from towercos whose investment in site hardening may lag, and who may thus find the achievement of SLAs more challenging.

By consolidating Nigeria’s tower portfolios, towercos such as IHS have a unique opportunity to unlock economies of scale by creating efficiencies in site operations and maintenance (O&M). The management of active and passive infrastructure at Nigeria’s cell sites has hitherto been outsourced, primarily to Ericsson and Huawei, under contracts which in many cases may have to be restructured after the transfer of passive infrastructure assets from MNOs to towercos.

Below the tier one OEMs, Nigeria is host to a fragmented ecosystem of frontline O&M and refueling subcontractors, with smaller contracts divided among a plethora of regional players. Where previously O&M resources were duplicated, for example with one regional subcontractor maintaining 50 sites for MTN, another 30 sites for Airtel and a third 20 sites for Etisalat Nigeria, there may now be the opportunity to consolidate those contracts and resources under a single regional supplier, reducing the drive time that amplifies the cost of site visits. Supplementing such efficiencies with robust remote monitoring solutions and advanced site management systems back at the NOC also offers the opportunity to progress from scheduled to preventive  maintenance. The scale of the tower transactions in Nigeria has even forced tier one OEM’s to stand up and take notice – a partner like Ericsson or Huawei could perform a valuable role in consolidating and managing all those local subcontractors, while unlocking efficiencies by sharing resources across passive and active infrastructure maintenance. So, this is a great opportunity for the towercos and site monitoring and management vendors, and the shake out will see winners and losers at the managed services layer of the value chain.

Nigeria’s migration to the independent tower company business model will be complete by the end of 2014, releasing substantial capital and ushering in a new era of collaborative network planning for MNOs.

Towercos will have paid around US$4bn to build and acquire 85% of Nigeria’s towers by the end of 2014. Pent up demand for co-locations will see tenancy ratios rise fast, generating tower cash flow that quickly justifies the capital deployed. But the spending spree will not be over – hundreds of millions of dollars of improvement capex will be deployed bringing tower structures and power solutions up to a standard to ensure the exacting SLAs of multiple tenants can be met. Towercos will now oversee the majority of BTS programmes in Nigeria, a country where a further 15,000 towers could be added in the coming years. So in conclusion, TowerXchange call this as a win for Nigeria’s MNOs, a win for Nigeria’s towercos, a win for their investors, a win for tower and power equipment and service vendors and, most importantly, a great opportunity for the enhancement and extension of Nigeria’s communications infrastructure – a win for the people of Nigeria!

*Source: GSMA Market Intelligence and GSMA GPM. All other statistics drawn from the TowerXchange Journal and our proprietary research.

All the leading stakeholders in the Nigerian tower industry, including C-level representation from IHS, American Tower, Helios Towers Nigeria, SWAP and their counterparts at MTN, Etisalat and Airtel, will be participating in the TowerXchange Meetup Africa, taking place on October 20 and 21 in Johannesburg. For details of how to join them, click here.