The case for MNOs to retain “schmuck equity” in towerco joint ventures

The African independent towerco business model seems to be working. More and more towers are transferring from MNOs to towercos, more and more tenants are being added to towers. As 2G voice networks are overlaid with 3G and even 4G data networks, anchor tenants are starting to add second antennas to selected towers, generating amendment revenue. BTS programmes are yielding organic growth (and even better tenancy ratios). Efficiency programmes are reducing opex costs. It’s looking like betting on African towercos might pay dividends. So I thought I’d have a look at the bet MNOs are making on African towercos by retaining equity in joint ventures.

In an interview with Moneyweb in August 2014, MTN CEO Sifiso Dabengwa suggested “in Nigeria we intend to have 51%”, referring to MTN’s equity stake in what we now know is a towerco joint venture between MTN Nigeria and IHS.

MTN retaining a majority stake is a markedly different approach to the operator’s strategy in Rwanda, Zambia, Cameroon and Cote d’Ivoire, where MTN sold 100% of the equity in pure sale and leaseback deals (with IHS as counterparty). It’s also a different approach to Uganda and Ghana, where MTN retained a 49% minority stake in joint venture towercos (with American Tower as counterparty).

It is important to note that IHS retains 100% operational control of the joint venture towerco being formed from their acquisition of MTN’s Nigerian towers.

The independent tower company business model is dependent on that first word, “independent”, to secure the trust of tenants. Elaborate ‘Chinese walls’ are structured within the contracts and governance processes of joint venture tower companies; having MNOs as board members does not mean their representatives stay in board meetings when sensitive matters, such as other tenant’s leaseback rates, are discussed. So MTN retaining a majority stake in their joint venture towerco with IHS in Nigeria requires no compromise in the protection of competitively sensitive data. So there is no implication that the structure of the joint venture as 49-51% as opposed to 51-49% adversely affects the prospects for co-location sales, nor does it affect the level of trust those tenants can place in their towerco partner.

At TowerXchange, we’re advocates of MNO’s structuring tower transactions to retain what Helios Towers Africa’s Chuck Green called “Schmuck Equity” – retaining some equity in the joint venture towerco to benefit from the relative favorable relative multiple arbitrage between MNO and towerco valuations. Retaining “Schmuck Equity” makes sure the tower strategists don’t look like Schmucks for selling assets for US$200mn that a few years later are valued at US$1bn!

There are plenty of examples of African tower transactions where the operator retained “Schmuck Equity”, starting with the ground-breaking deals between Helios Towers Africa and Millicom (Tigo) in Ghana, DRC and Tanzania, where Millicom retained a 40% stake in the joint venture. Indeed, Helios Towers Tanzania was restructured to reduce Millicom’s stake to 24.5% and enable Vodacom to retain a 24.5% stake when their towers were acquired and rolled into the same entity.

Retaining an equity stake comes at a cost of course. When Airtel first floated the idea of divesting their African tower assets, they considered retaining a minority stake, but chose instead to complete a pure asset sale to maximise cash released to pay down debt.

You may have noticed that all the aforementioned towerco joint ventures in Africa involve the operator retaining only a minority stake. Speaking to one of the other analysts covering the telecom tower sector, neither he nor I could think of a precedent worldwide where an operator retained a majority stake in a towerco, operator-led carve out towercos such as Indus Towers, Bharti Infratel and edotco notwithstanding.

Perhaps most critical for IHS and it’s investors is whether and how a path from their 49% minority to a 51% majority equity ownership is defined within their agreement with MTN, and therefore what the implications are for future refinancing and exit strategies. IHS’s investors scrutinised the structure of their deal with MTN exhaustively, such that they became comfortable with its unique structure.

So MTN, IHS and their partners are embarking into uncharted territory with the unique structure of their Nigerian joint venture. Could further emerging market towerco joint venture towercos be structured with the operator as the majority shareholder? I feel this deal structure is unlikely to be repeated.

IHS were committed to their vision of building and defending a market leading position in Nigerian towers. That commitment is justified by the fact that towercos have been trading in Nigeria for long enough to prove that tenancy ratios well in excess of two can be achieved in urban areas. Combine that with the need for network extension and densification, and you have a potent set of Tower Cash Flow drivers. So when IHS saw an opportunity to acquire Africa’s leading operator’s tower assets, in Africa’s most profitable telecoms market, in IHS’s priority market, they were prepared to be flexible about the structure of the deal.

 

  MTN were in a strong position. They didn’t need to sell their Nigerian towers. So they could name their terms. And MTN’s terms included retaining an unprecedented majority stake. I’m not sure any other towerco would or could have done the deal. For most towercos, owning a minority stake would constitute deviating too far from the established business model. But for IHS, it was worth deviating from the business model for this particular opportunity.

IHS has struck a great deal with MTN Nigeria. IHS now owns 56% of Nigeria’s towers, no other towerco will catch them as market leaders, and they have two extremely credit worthy anchor tenants (MTN and Etisalat). IHS acquired Africa’s most desirable tower portfolio at a cost per tower of less than US$200,000. One advantage of MTN’s unique requirement to retain a majority stake was that it doubtless meant there were less potential counterparties bidding at auction, which may have had some effect on the valuation realised. Despite this, I also think this is a great deal for MTN.

MTN Nigeria is a very profitable operation, whose principle challenge is (or was) energy logistics. Prior to this transaction, MTN Nigeria generated enough power to provide for ten Nigerian States. But MTN has now washed their hands of energy logistics in Nigeria. MTN have structured an SLA which requires that IHS deliver 99.9% uptime on priority sites, a level of performance IHS have proved they can achieve on their existing Nigerian towers. So MTN are free to concentrate on their core business of selling bytes and minutes, and delivering a first class customer experience. Meanwhile, the tower strategists at MTN are quietly, and deliberately, building up a very selective, attractive portfolio of African tower assets.

The “Schmuck Equity” retained by some of Africa’s leading operators is substantial. If one can buy tower assets at six to seven times Tower Cash Flow, add value through co-locations and efficiency programmes, after which those same assets attract valuation multiples in the high teens or twenties, you can start to see why every stakeholder wins when high quality towers are released from balance sheets – regardless of who has the majority stake.