Gulfraz Qayyum is a Managing Director in Citi’s TMT investment banking practice, covering the EMEA region, with responsibility for their business in the Middle East and Africa. He has been advising telecom companies on M&A and capital raising deals for over 15 years, and he has worked on a number of sellside, buyside and financing transactions in the towers space.
TowerXchange: What can you tell our readers about the kinds of companies and transactions Citi has advised on in emerging market towers?
Gulfraz Qayyum, Managing Director, Citigroup:
Citi has leveraged its early leadership in the tower space and combined that with our strong industry banking franchise and global footprint to become a leading advisor. We’ve completed close to a dozen transactions in Africa alone and we’ve been similarly active in other emerging market regions.
The vast majority of our advisory mandates are on the sellside, which have given us unique windows not only on how operators think about their passive infrastructure, but also into the broad buyside landscape and the financing environment.
TowerXchange: If an operator is considering bringing a portfolio of towers to market, how should they prepare, and how long should they anticipate it taking to have a comprehensive IM to bring to market?
Gulfraz Qayyum, Managing Director, Citigroup:
Obviously this will vary from operator to operator. Assuming internal buy in is secure, key preparation steps relate to compiling and/or validating a comprehensive tower database, establishing a clear picture on the passive infrastructure cost base, how transition will work, for example, employee transfers, and having views on key deal economics.
The time line will depend largely on internal systems and the availability of data, but anticipate 2-4 months, potentially more. Getting the preparation right is key to running an efficient process, retaining the confidence of buyers and ultimately maximising value for the seller. I would add that going live isn’t predicated only on the IM but we would advise an equal focus in having other key buyer interface content in place or on track. This includes the data room and transaction documentation.
TowerXchange: What are the challenges for operators creating a data room given the pragmatic way African networks have been rolled out, and the resultant incomplete paperwork?
Gulfraz Qayyum, Managing Director, Citigroup:
It’s far from an easy exercise and many man hours can be lost trying piece together information and reconcile systems, often manual ones. We typically find there is a lack of internal split between the passive and active infrastructure costs which complicates matters when trying to demonstrate the value proposition to buyers.
There is also a major challenge around land leases and titles. Often land title is unclear and established verbally, which means clear language stipulating lease periods, pricing and rights of the landlord and tenant are missing or incomplete. There are signs of improvement though with many countries having undertaken an exercise to register land.
TowerXchange: What are the key data points required to conduct towerco’s and investors’ financial, commercial and structural due diligence on a potential tower transaction in Africa?
Gulfraz Qayyum, Managing Director, Citigroup:
The viability of tower investments is critically linked to marketing and lease-up potential. Get a feel for the market rate and potential tower overlaps. The top tower operators have become highly sophisticated in identifying sites with potential for colocations and this sort of tool is invaluable. Ensure there is enough wind-loading capacity to meet your colocation targets and calibrate this with expected augmentation capex. Likewise, getting a grip on and being able to reduce operating costs, particularly energy costs, is crucial.
The viability of tower investments is critically linked to marketing and lease-up potential. Get a feel for the market rate and potential tower overlaps
It is also key to understand the specifics around the ground leases (maturity profile, escalation etc.) to gain comfort around one of the larger cost components. Sometimes taken for granted, make sure you have a solid anchor tenant counterparty.
Lastly, regulation remains an understated risk. Governments are increasingly active in managing the local telecom industry and understanding the idiosyncrasies of local regulation can be a key risk mitigant for all stakeholders. In fact it is probably advisable to establish a relationship with the regulator prior to investing to get a view on the direction of regulation.
TowerXchange: How does the perspective of a potential investor differ from that of the potential towerco buyer - do they emphasise different data points?
Gulfraz Qayyum, Managing Director, Citigroup:
At the risk of generalising and over-simplifying, towerco operators exercise a standard of rigour in excess of what a non specialist buyer or financial investor would. For example, gritty details such as quality of tower structures, fuel theft, fencing, battery standards and access / proximity to grid et cetera.
We like the combination of sophisticated and well capitalised financial sponsors with the tower operators who have amassed significant expertise and have the pragmatism and can-do attitude required to be successful in Africa.
TowerXchange: For what typical multiples of Tower Cash Flow have we seen towers changing hands in Africa? Is there an upper threshold that will ‘price out’ the ‘Big Four’ African towercos, and is there a lower threshold below which operators are reluctant to part with the assets?
Gulfraz Qayyum, Managing Director, Citigroup:
Multiples are not an established input into the valuation exercise in many emerging markets. The reason is deal parameters such as anchor lease rates and prevailing market clearing rates vary significantly. There are also no (or a limited number of) disclosed private or relevant public market benchmarks. Buyers and sellers pay attention to the often unique cash flow and risk characteristics of each deal and therefore rely on DCF analysis.
The price at which any trade is struck is clearly a function of the buyer’s return/value targets and the fit of any asset within its portfolio, whereas for the operators there are several aspects of the sale which are important other than the price, including the ability of the towerco to deliver reliable service and up time. Nevertheless, there is definitely a reserve price at which selling the towers becomes unattractive compared to other solutions such as services agreements or the status quo.
TowerXchange: Africa is effectively in competition for towercos’ capital with other global tower markets - how do opportunities in Africa compare with opportunities in other emerging markets, or indeed with mature tower markets?
Gulfraz Qayyum, Managing Director, Citigroup:
Africa, and some other emerging markets, for example in developing Asia, are unique in that
a) there is a pressing need for cost rationalisation and more efficient ways of doing business;
b) the markets are still underpenetrated and we foresee growth, both subscriber and technology driven and
c) there are ample opportunities for capital to be put to work in the tower segment.
We are also seeing specialist Africa money invested in or looking seriously at tower opportunities.
On a more general note, passive infrastructure outsourcing is a proven strategy in most geographies and we expect capital to continue to be available for the right opportunities regardless of where - subject of course to risk adjustments. American Towers is a good case in point, where the company continues to invest in its developed home market and has more than dipped its toes in Latam and Africa.
TowerXchange: The tower market has been relatively nascent in MENA compared to SSA - why and do you forsee that changing in the next 12-18 months?
Gulfraz Qayyum, Managing Director, Citigroup:
You’re right. In fact, whilst there have been several attempted deals in MENA, none have come to fruition to date. I would say its because the operators don’t need them as much as they do in Africa, where large coverage requirements, ever declining ARPUs and continuing strong competition are motivating operators to seek out more effective business solutions. Many operators in MENA have not felt it necessary from an operational or financial point of view. They have either been happy to sit on the sidelines or adopt tough negotiating positions which cause deals to collapse.
Is the situation likely to change? I think it will, but not uniformly. In some of the larger markets like Egypt, Iraq and possibly Saudi, we can expect tower initiatives. The market reality, one where growth has tapered and capex budgets are stretched as operators respond to an explosion in data traffic, is ripe as far as sharing or monetising tower assets is concerned. In the smaller markets, or markets with limited competition, I think tower sharing is still quite some time away, unless mandated by regulation.
TowerXchange: What’s your personal view of the transaction volume likely in Africa in the coming 12-18 months? TowerXchange forecasts that up to 30,000 African towers are currently for sale or coming imminently to market - does the tower industry have the ‘digestive capacity’ to almost treble in size in the next year or so?
Gulfraz Qayyum, Managing Director, Citigroup:
There are undoubtedly willing sellers and willing buyers and investors. The key question for me is whether there are sufficient industry resources within the towercos to handle this magnitude of towers. In other words, if there is a bottle neck in the short term, it will be more operational than financial.
