Challenging macroeconomic conditions but a bullish outlook for Nigerian towers

The past twelve months have been eventful for the Nigerian tower industry. IHS had a busy year acquiring HTN Towers, issuing a $800mn corporate bond, restructuring MTN’s equity in the company and kicking off their ‘big five’ energy initiative. American Tower began to build towers whilst continuing the integration and upgrade of Airtel’s sites and driving up co-locations. MTN was fined NGN330bn (US$1.6bn) by the regulator and EMTS defaulted on its loan repayments leading to a takeover by its lenders a rebranding to 9mobile. TowerXchange examine 2016’s key developments and examine what is on the horizon for Africa’s largest mobile market.

Nigeria is Africa’s most populous country and also one of the youngest with a population of 179mn with a median age of 18 years. In 2016 the country fell into recession, hit by the fall in oil prices, with oil accounting for the majority of the country’s foreign earnings. GDP shrank by an estimated 1.5%, their first annual contraction for the past 25 years. Inflation rose from 10% at the beginning of 2016 to 19% in December; and following June’s removal of the currency peg which had kept the currency artificially high, the Naira depreciated by over 40%. Liquidity became an issue for many Nigerian companies, a problem compounded by reduced consumer spending.

The IMF is however forecasting an economic rebound with GDP growth expected to be 0.8% in 2017 and 2.3% in 2018. After oil production dropped by 14% in 2016 it is once again starting to rise, and foreign inflow of capital is expected to increase. Speaking on the challenges faced by the Nigerian economy in 2016, MTN executive chairman Phuthuma Nhleko spoke of the importance of taking a long-term view, “I think we do have a situation where a lot of economies, particularly emerging markets that are not sufficiently diversified, will tend to be far more impacted by the fall of a particular commodity. In this particular case it’s oil,” he said. “It is still a very important market, with almost 170 million people. And [just] because you are going through a difficult phase in the last two to three years, is certainly not a reason to reconsider a very large investment,” he said. “My message is: Let’s not get too focused on the volatility of the period. Let’s take a 10- to 20-year view in these countries.”

There are 154mn mobile subscribers in Nigeria, with telecoms contributing 9.8% of Nigeria’s GDP (Source: NCC). Over 99% of mobile subscribers use GSM technology, with MTN having the largest market share (40%) followed by Glo (24%), Airtel (23%) and EMTS (13%) – see figure one.

There are two CDMA operators, Visafone and Multilinks (whose subscriber base has continued to decline) and a host of LTE only players including Smile, Spectranet, InterC (formerly CDMA player Intercellular Networks), SWIFT, Bitflux Communications and Ntel (which acquired the assets of and fixed line operator Nigerian Telecommunications - NITEL - and its mobile subsidiary M-Tel through the liquidation process in April 2015).

Nigeria’s total subscriber base has grown by 36% in the past four years, with recent growth impacted by the disconnection of unregistered SIMs in accordance with the government regulations. A further 62mn additional mobile subscribers are expected by 2020, illustrating the huge growth still expected in what is already Africa’s largest mobile market.

Nigeria is still very much a 2G market (with 2G accounting for 70-80% of connections) and smartphone penetration sits around 15-20%. The rollout of 3G and 4G is however very much underway with MTN adding 799 3G sites and 1,833 LTE sites in 2016 (Source: MTN 2016 Annual Report). Globacom and EMTS have also invested in 4G rollout, along with the country’s LTE-only players and Airtel announced this April that it was partnering with ZTE to commence their 4G network rollout.

In October 2015, the Nigerian telecoms regulator, the Nigerian Communications Commission, fined MTN Nigeria US$5.2bn for a failure to disconnect unregistered SIMs by the deadline stipulated. After filing a court case and then agreeing on an out of court settlement, the fine was reduced to NGN300bn (US$1.67bn) in June 2016, with MTN agreeing to settle the payment over a three-year period. In line with this, MTN Nigeria announced plans to list on the local stock exchange although the timeline for this has been pushed out given the current economic conditions in the country.

After one of the most challenging years in the operator’s 22-year history, the board undertook a deep strategic review and replaced many of its senior management with Rob Shuter being appointed Group CEO. MTN company also launched their IGNITE initiative which will be headed up by former Chief Procurement Officer, Saim Yaksan. The transformation initiative is designed at improving the business and financial performance of the group, starting with their two largest operations, South Africa and Nigeria.

In spite of 2016’s financial woes, MTN Nigeria announced ambitious rollout plans for 2017 including the construction of 3,904 new towers as well as the addition of 3G and 4G technologies to 7,345 existing towers. With 40% of market share, MTN is keen to retain its position as market leader.

EMTS, the Nigerian subsidiary of Etisalat, signed a $1.2bn debt facility with 13 local banks in 2013 to refinance a $650mn loan and fund the modernisation of their network. Since the economic downturn, Naira devaluation and dollar shortages in the country, Etisalat has been unable to keep up with repayments, leading to the company defaulting on their loan in March this year. The regulator agreed with local banks to pursue a default deal rather than a receivership as to not further deter investors and deepen the country’s debt crisis.The regulator originally agreed with local banks to pursue a default deal rather than a receivership as to not further deter investors and deepen the country’s debt crisis.

With debt restructuring talks between the operator and its lenders not leading to a resolution, UAE state investment fund, Mubadala Group pulled out of the operator (in which it had a 40% stake) and Etisalat Group was ordered to transfer its 45% stake to United Capital Trustees, the security trustee of the opco’s consortium of lenders. Etisalat Group terminated their management and support agreements with EMTS and ordered the business to rebrand, with the company now operating under the name 9mobile.

77% of Nigeria’s 28,241 towers are owned by independent towercos (figure four), with EMTS, MTN and Airtel having all divested their portfolios through transactions with IHS (the former two) and American Tower (the latter). Globacom is the only GSM player to have not sold their tower network and have publicly stated that they have no intention to do so.

IHS entered the Nigerian market as a build to suit player before agreeing transactions with EMTS and MTN. EMTS’ towers were sold in two tranches under sale and leaseback structures; MTN formed a joint venture with IHS in which MTN kept 51% of equity but relinquished operational control to the towerco. In February of this year, MTN exchanged its 51% stake in the joint venture for additional shareholding at the group level, taking its equity stake in IHS Holdings from 15% to 29% and simplifying its ownership structure in the process.

American Tower’s acquisition of Airtel’s 4,717 Nigerian towers marked the international towerco’s fourth tower transaction in Africa having entered South Africa through the acquisition of Cell C’s 1,400 towers in 2010; before entering Ghana and Uganda through the formation of joint ventures with MTN in the two countries (joint ventures in which American Tower kept a majority share versus the minority stake IHS agreed in Nigeria).

There is a fragmented ecosystem of small towercos and private tower owners in Nigeria. The most significant of these was HTN Towers, an old growth organic build play, having built over 700 towers across Nigeria under their original guise of Helios Towers Nigeria. Their build to suit portfolio was supplemented by the addition of 491 Multi-Links towers claimed as a legacy of the restructuring of the aforementioned CDMA operator. In 2016, IHS acquired HTN Towers (read TowerXchange’s analysis of IHS’s acquisition of HTN Towers’ 1,211 towers) marking the first major in-market towerco consolidation on the African continent.

Whilst the acquisition of the Multilinks sites created problems for HTN Towers with the demise of the CDMA market, at the time of their sale, HTN Towers boasted one of the highest tenancy ratios in Africa at 2.2 tenants per live tower and represented a highly attractive acquisition for Nigeria’s leading towerco.

Such a positive story however cannot be told of SWAP who acquired the towers of Multilinks’ CDMA competitor Starcomms back in 2010 and after loss of their anchor tenant have struggled to drive up their tenancy ratios and generate revenue to invest in their tower portfolios. After speculation over a merger between HTN and SWAP had been rife a few years ago, the two reached an agreement whereby HTN would manage, market and lease space on the SWAP towers, an arrangement which has been passed on to IHS following their acquisition of HTN Towers. It is however reported that IHS have given notice to tenants on a number of SWAP towers with a view to decommissioning sites and moving tenants onto existing owned sites.

Following the acquisition of HTN Towers, the next most significant middle market towercos in Nigeria are BCTek (which has a 20-year contract to manage and market a portfolio of 700 towers originally built as a surveillance network, over 80% of which are police compounds) and Communication Towers Nigeria (which claims to have 500 cell sites across all 36 states).

With no further operator portfolios expected to come to market and fierce competition from IHS and American Tower for build-to-suit contracts, opportunities for both organic and inorganic growth for Nigeria’s smaller players are limited. Read TowerXchange’s interview with Hotspot Network (whose 160 towers IHS are believed to be in the process of acquiring) on the challenges faced by Nigeria’s middle market towercos.

The past 12 months have marked a busy period for IHS including the aforementioned acquisition of HTN Towers and restructuring of MTN’s shareholding as well as the issuance of a $800mn bond, refinancing of a Naira debt facility, kick off of their big five energy project in conjunction with new site build, decommissioning and growing their tenancy ratio.

Before entering into a discussion of IHS’ performance and activities in more detail, it is first important to understand IHS’ structure in Nigeria. Prior to MTN restructuring their equity in IHS to additional shareholding at the group level, MTN held a 51% share in Nigeria Tower Interco BV (the parent company of INT Towers Ltd) with IHS Holdings owning a 49% stake. IHS now own 100% of Nigeria Interco BV.

Towers acquired from Etisalat as well as towers built outside of the MTN joint venture are held in IHS Nigeria Ltd, those acquired from HTN Towers, including the MLL arrangement with SWAP are held in IHS Towers NG Ltd. Both IHS Nigeria Ltd and IHS Towers NG Ltd fall under IHS Netherlands Holdco BV (see figure five).

Whilst IHS has a 100% stake in each of these companies, 2016 results have only been made available for IHS Netherlands Holdco BV, and as such exclude towers and tenancies in the former joint venture with MTN. Whist the following results aren’t for IHS’ entire complement of towers in the country, IHS manage their entire Nigerian portfolio under a single portfolio strategy; a single sales and marketing team sells tenancies on all sites with no distinction made between which entity the towers are held under, similarly engineering and operational teams do not distinguish between sites held under the different entities. As such, one can assume that the results are roughly representative of the company’s entire Nigerian portfolio.

Revenue growth

IHS Netherlands Holdco had a net increase of 643 PoP tenants and 759 technology tenants in 2016, 7% and 50% increases respectively. The increase in PoP tenants was primarily driven by Airtel, MTN and smaller operators in the market, whilst the increase in technology tenants was driven by operator 3G and 4G rollout (Nb. PoP tenants are the number of distinct customers on each tower; Technology tenants are the number of distinct technologies on each tower by one customer who is a PoP tenant; for example if one existing PoP tenant deployed additional technology such as 4G at the same site, that tower would have one PoP tenant and one technology tenant).

Revenue in US$ terms increased by 5% to $344.8mn with this figure strongly impacted by the devaluation of the Naira; In Naira terms, the recorded revenue increased by 27%. In dollar terms, the average revenue per site increased by 7% to $58,619; in Naira terms the average revenue per site increased by 29%.

Capex spend

IHS Netherlands Holdco’s 2016 capital expenditure was down 42% on 2015 figures, due in large part to power system refurbishment on acquired sites being completed in 2015. There was also a decrease in discretionary capex due to a slowdown in MNO expansion in the country.

Of 2016’s $153.4mn capex spend, 50% was spent on site refurbishment and augmentation, 16% was spent on maintenance and 21% was spent on build-to-suit activities. With the company adding 232 new build-to-suit sites in 2016, this equates to an average spend of $139,000 per new site.

In addition to the construction of 232 new build to suit sites, IHS Netherlands Holdco reactivated 22 dormant sites whilst decommissioning 383 sites. This led to a net decrease of 129 sites in IHS Netherlands Holdco’s portfolio. Decommissioning was centred around dormant or single tenant sites, with $3.5mn being spent on decommissioning dormant sites acquired from HTN Towers.

Power developments

IHS’ big ‘Big Five’ energy initiative moved forward in 2016, with five companies being selected to replace diesel generators with hybrid solutions on around 10,000 sites. The five companies awarded the contracts were IPT Powertech, MP Infrastructure, Biswal, Netrux/Uppercrest and Makasa Sun.

The project is being carried out under a “guaranteed savings model”. Speaking on the model in an interview with TowerXchange, IPT Powertech’s VP and COO Khaled Habbal explains:  “The guaranteed savings model is a combination of the design, manufacturing, supply and deployment of energy efficient solutions along with field maintenance service and continuous opex and capex optimisation. The guaranteed savings model is a risk-free approach ensuring the operators and towercos full economisation/savings while maximising the lifetime of the equipment. We guarantee the performance and savings of our own solutions while respecting the contractual KPIs and SLAs”.

Deployment is underway and TowerXchange look forward to learning more about the success of the model in due course.

In spite of Naira diesel prices increasing by 49% due to the removal of the currency peg, IHS reported a 12% decrease in the cost of power per tower and a 15% decrease in cost of power per PoP tenant as compared to 2015 figures.

Bond issuance and Naira refinancing

On 24 November 2016, IHS entered into a Naira credit facility with a group of existing and new lenders giving it access to a loan facility of NGN26.5bn with an option to increase this by additional NGN20bn if so required. The credit facility will be used to repay existing loans in local currency with any excess available for other expenses.

On 28 October 2016 IHS Netherlands Holdco B.V. announced the successful launch of an US$800mn high yield corporate bond issue which was listed on the Irish Stock Exchange. The bond, with a 9.5% coupon and a maturity date of 2021, is the largest high yield corporate bond to come out of Africa outside of South Africa and was assigned a Ba3 rating by Moody’s.

Impact of EMTS’ financial troubles

In IHS Netherlands Holdco’s 2016 annual results, the towerco reported that US$6.3mn in payments were more than 120 days overdue from EMTS. The company was in ongoing discussions with the operator, managing to receive US$25mn in payments in Q1 2017 and continues to work to collect other outstanding payments.

Revenue growth

With 2016 marking American Tower’s first full year of operation in the Nigerian market, having acquired Airtel’s sites during the course of 2015, the company experienced exponential growth in 2016. Driving co-location sales, revenue increased by 96% to $215.4mn, taking average revenue per site up from $23,261 in 2015 to $45,424 in 2016 (a 95% increase in spite of the Naira devaluation). Around two thirds of 2016 revenue was from new co-locations and American Tower’s tenancy ratio in Nigeria is understood to be just under 1.3.

With average revenue per site sitting at $45,424, this makes Nigeria American Tower’s second most profitable country in Africa in terms of revenue per site, leapfrogging both South Africa (at $33,872/ site) and Uganda (at $41,541/site) and lagging behind Ghana (at $54,181/ site).

New site build

American Tower built their first towers in Nigeria in Q3 2016, adding nine towers in total in the quarter. Assuming no decommissioning took place, the differences between 2015 and 2016 tower counts reported by American Tower imply that a further 15 new sites were built in Q4 2016.

Investment in power upgrades

American Tower began significant investment in energy equipment refurbishment following the acquisition of Airtel’s sites in 2015. Activities carried out included the correction of operational issues at solar sites which were running on diesel generators 24/7; rectification of various infrastructure issues which enabled 233 sites to be reconnected to the grid; and repair of hybrid sites (which were using deep cycle batteries) including software upgrades and replacements of damaged fans, cables and rectifiers. These collective actions resulted in savings of 348,000 litres of diesel per month (see figure ten).

In 2016, American Tower continued their programs to reduce generator usage and increase generator lifespan. The company reports an increase of over 30% in generator lifespan from 18,000 hours to 24,500 hours across 4,700 deployed generators in the country.

New site rollout and co-location growth

MTN Nigeria have announced ambitious growth plans which includes the addition of 3G and 4G infrastructure to 7,345 existing towers as well as the addition of 3,904 new sites by the end of 2017. As part of this, IHS has been awarded a build-to-suit program involving the addition of 1,650 new towers as well as the addition of approximately 2,000 tenancies to existing sites. With American Tower now starting build-to-suit operations in the country, expect their site count to also increase.

Whilst other operators have not announced their 2017 rollout plans, all need to add new towers and new technologies. Depending on who you speak to, Nigeria requires somewhere between 30,000 and 50,000 new towers to meet growing demand and improve coverage; similarly significant 3G and 4G technology upgrades are required as Nigeria moves on from 2G and smartphone penetration grows.

How quickly these new sites will be rolled out does however remain in question, with the last five years having seen an average of only a little over 1,000 towers added per annum. MTN tend to be the most aggressive in network rollout, keen to maintain their position as market leaders. Whilst the operator remains on track for their 2017 3G and 4G technology upgrade plans, they have slowed their build-to-suit rollout amidst financial challenges in the country. Glo, whilst the second largest operator, prefer to handle new rollout themselves although have been using towerco sites, accounting for 22% of IHS Netherlands Holdco’s PoP and technology tenants in 2015 (according to Hardiman Telecommunications and Moody’s Investors Services). EMTS new rollout is very much on hold given the operator’s current financial woes. We await news from Airtel.

One thing we can be certain of, however, is that significant new build and significant 3G and 4G overlay is very much required and towercos are positioning themselves for this boom.

Investment in power infrastructure

With 10,000 IHS sites having been awarded to five companies to install and manage hybrid solutions (under the first phase of the Big Five project), energy companies are keenly awaiting news of when the second phase of the project will be announced. A further 6,000 sites are expected to be included and it is thought that these will once again be split between five parties, unlikely to be the same five involved in the first round.

With a large portion of the emergency refurbishment carried out on the American Tower sites acquired from Airtel, American Tower will continue to look at ways to reduce diesel usage through the deployment of hybrid systems. The company is already operating solar and battery hybrid systems which it has refurbished since acquiring from Airtel and one can expect significant rollout of further equipment across their portfolio of 4,742 sites.

Over 75% of Nigeria’s sites are believed to be off-grid, with grid availability reportedly as low as four hours per day making the business case for alternative sources of generation extremely compelling. For more information on the energy strategies of IHS and American Tower read “Energy priorities and strategies for Africa’s ‘Big Four’ towercos”.

Challenges faced by Nigeria’s towercos

 (i) Macroeconomic conditions

Given the macroeconomic climate in Nigeria, there is a degree of conservatism amongst operators in the market with some struggling to make payments. IHS Netherlands Holdco report that as of 31 December 2016, $13.2mn in customer payments were more than 120 days overdue, with $6.3mn of that attributable to EMTS. The recent takeover of the opco by United Capital Trustees means that uncertain times are ahead for payments due to towercos in the market. Several parties including BUA Group, Virgin Mobile and Vodacom have expressed an interest in buying the operator, a takeover which would be well received by towercos.

(ii) Dollar availability and forex fluctuations

The availability of U.S. Dollars remains a major challenge for towercos and operators alike, leading to investment delays, increased costs and challenges in importing goods and services. Liquidity has been improving recently, with the Central Bank intervening in the interbank market since February 2017.

(iii) Diesel prices

Diesel prices in Nigeria are volatile attributed to their linkage to a U.S. dollar oil price which has led to a rise in its price over the past year due to U.S. dollar shortages and attacks on oil pipelines in southern Nigeria; although a certain component of any increase in price can be passed on to the mobile network operators.

(iv) Discussions around active sharing

The Nigerian Communications Commission (NCC) has indicated that it will consider developing a framework for the sharing of active infrastructure, although details are yet to emerge. There has been some reluctance from the regulators to enable active sharing, with concerns about the loss of revenue from spectrum auctions with operators sharing frequencies. There are also concerns from government about a loss in tax revenue as the volume of equipment that needs to be imported will be reduced. Should active sharing begin however, this could threaten a loss of revenue for towercos.

(v) Challenges in new site rollout

Determining land ownership can be a real challenge in the Nigerian market with a lack of detailed land registers. Whilst land is comparatively cheap and towercos have good negotiating power with there often being few alternative uses for land in many areas, managing community relations is key.

(vi) Theft and crime

As with much of sub-Saharan Africa, theft presents a major challenge; in a bid to combat crime and theft IHS Netherlands Holdco spent $11mn on security services in 2016.

2016 marked a particularly challenging year for Nigeria due to both macroeconomic and telecoms specific issues. With positive signs on the horizon in terms of an economic rebound, coupled with the sheer scale of growth expected in the Nigerian telecoms sector, the mid to long term outlook for the Nigerian tower industry is positive. Extensive new build is required, 3G and 4G rollout is just beginning and whilst poor grid infrastructure presents a number of challenges, great strides are being made in hybrid solutions to reduce dependency on diesel in the market.

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Sources: IHS Netherlands Holdco 2016 Annual Results; American Tower 2015 and 2016 Annual Reports; HTN Towers’ H1 2016 Financial Results; MTN 2016 Annual Report; Nigerian Communications Commission; TowerXchange Research

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