Operational priorities, growth & diversification opportunities for towercos in MEA

The towerco asset class has been experiencing exponential growth, signifying the potential held by and confidence in the towerco business model globally. TowerXchange took a deep dive into the economics, growth opportunities and priorities of sub-Saharan African towercos, inviting Helios Towers, Eaton Towers and Atlas Tower to a discussion at the 2017 TowerXchange Meetup Africa & Middle East.

Significant revenue growth was forecast by each of the towercos in the countries in which they currently operate. Major rollout is required with the emphasis in more developed countries being placed on meeting the growing data demand (with IBS coming to the fore in the most advanced markets), whilst in less developed countries such as the DRC, primary focus was still going to be heavily focussed on improving 2G and 3G coverage and capacity. Speaking on the DRC, Helios commented that the country had one of the highest number of subscribers per tower (approximately 6,000), further emphasising the amount of new build requirements.

Spectrum limitation is an issue impacting growth, although MNO consolidation in markets has helped. Whilst regulators and ministries have been opportunistic about spectrum rollout thus causing bottlenecks, the towercos commented that they plan to be ready when customers have the spectrum to continue to roll out 3G, 4G and ultimately 5G. In South Africa, Atlas referenced how the Ministry of ICT was proposing the formation of the Wholesale Open Access Network in a bid to stimulate MVNO activity in the market but Atlas felt that such spectrum would be better placed in the hands of MTN and Vodacom.

Towercos spoke of operators having significant network upgrade spend planned, with Eaton referencing Kenya in particular as a market where MNOs were channeling investment into both new build and technology upgrades. All of the towercos noted how amendment revenues in particular had really stepped up in the past year with this becoming an increasingly large portion of the total revenue growth.

With towercos being the only independent telecoms infrastructure providers in many of their respective markets, the growing trust that they have worked hard on developing with the MNOs means that a lot of this spend on network upgrade is coming their way. In markets where there are competitors present, the towercos measure their success by their “take rate”, i.e. the percentage of new business won versus the percentage of towers owned.

When speaking of tower transactions in the sub-Saharan African market, we repeatedly hear the statement that the land grab is over and that most of the attractive tower portfolios have been sold; but does this mean that the towercos are done buying?

Eaton commented that they were “absolutely not done buying stuff”. In particular what makes a lot of sense is acquiring additional portfolios in countries where they already have a presence. Such a move brings immediate benefits as you can spread management SG&A costs across the portfolio (Eaton is known to be in the running for Telkom Kenya’s ~1,000 sites, and should the acquisition proceed this would lead to an 80% increase in their total site count in the country). Eaton have turned down different opportunities in markets they haven’t seen as attractive but have capital available to invest should the right opportunity present itself in new country; Egypt in particular, where the towerco had previously agreed to acquire 2,000 MobiNil (now Orange) sites, remains attractive to the towerco.

Helios’ ethos is to look at opportunities in the right markets where they are able to be a strong player and deliver good service at the right price point; a high release of capital coupled with high lease rates in tower transactions has caused issues for other players in the sector and so they want to avoid getting into that position. Helios are very keen on the markets that they’re in and should towers come to market in those countries, Helios would be in a leading position to acquire them. In terms of expansion outside of their existing markets, Helios would be open to looking should the right opportunities arise.

Atlas’ African footprint has been confined to South Africa, to date, and they remain committed to the market with ambitious growth plans through 2018. The towerco does however have plans to expand into other sub-Saharan African countries with a shortlist in place and investments already made in two countries with local staff recruited.

With IHS having entered the Middle Eastern market in partnership with Towershare through the acquisition of Zain’s Kuwaiti sites, and the pair in talks to acquire the operator’s Saudi Arabian portfolio, there are significant signs that the Middle Eastern market is opening up to the towerco business model. With few towercos present, Dubai-headquartered Towershare has been positioning itself to be MENA’s leading player, and the partnership with IHS brings much valued scale and a long track record of operational experience to the table. In Iran, the formation of Iranian Towers, a new towerco venture between MNOs MCI and Rightel and towerco Fanasia, represents another significant player in MENA’s emerging towerco industry, whilst TowerXchange knows of more parties either active or looking to enter the build to suit market in Egypt, Algeria and Saudi Arabia.

It is as yet unclear as to what extent Zain’s landmark deal in the region will precipitate other transactions. The operator themselves is thought to want to get the Kuwaiti and Saudi deals done and then assess lessons learned before examining other potential divestments. In Egypt, MobiNil (now Orange) had previously agreed the sale of c. 2,000 towers to Eaton Towers, only for the deal to lapse after failing to obtain the relevant regulatory approvals in time. Orange is known to have shelved plans for further tower sales across its portfolio preferring instead to focus on the ESCO model as an alternative form of outsourcing; in Egypt the MNO currently has an ESCO RFP out covering 800 sites. Saudi Telecom Company and Mobily’s on-off joint venture in KSA appears to be off for now and TowerXchange eagerly await news of their next steps; whilst Ooredoo, which has worked with towercos in Myanmar, is keen to look for partners in its more challenging markets.

With Eaton having previously reached a deal in Egypt, CEO Terry Rhodes commented that they would still go back and address the market should the opportunity arise. Speaking on the Saudi Arabian market and the ongoing process there, Terry commented that they had looked at it but decided against. Saudi Arabia has totally different business characteristics to those that Eaton are accustomed to; there is huge penetration, high ARPU, enormous use of data and a lower growth potential.  Kash Pandya also confirmed that Helios had looked at the Saudi process but decided against it. Speaking more broadly on their appetite to get into MENA, Kash mentioned that it really depends on the market and the market position of the MNO who is looking to sell their towers.

Towercos are very much incentivised to spend capex on energy equipment, with reduced downtime improving performance on SLAs and their reputation with MNOs, whilst energy savings translate into improved margins for the towercos. Questioned as to what extent the towercos were coming under pressure from their MNO partners to share some of the savings they are achieving through power investments, the panel commented that the pressure was not so great. MNOs are happy to see towercos invest capex to improve the quality of their network and in large part don’t seem to disagree with towerco thinking that those who make the capital investment should benefit. Should the MNO take steps on their side to lower power consumption, such as through the installation of more energy efficient active equipment, then the towerco would be more open to discussing gain sharing.

Whilst towercos are incentivised to invest in improving the energy efficiency of sites, there has been a notable difference between the strategies of different players as to how readily they invest in replacing new technologies. IHS has been the most advanced in terms of energy equipment upgrades: in the Cote d’Ivoire over 70% of the company’s 2,599 sites now have solar-hybrid systems in place with further upgrade work being done in Zambia and Cameroon. In Nigeria the company is undertaking a major overhaul of energy equipment on its portfolio through their “big five” initiative.

Eaton commented that they had always had a more cautious approach to spending capex, sweating the assets as hard as they can without risking prejudicing service agreements. The company added, however, that there is every incentive to invest and improve: once they can see that a technology is proven to be working at scale they will look to upgrade

Helios Towers have also put in place preventative maintenance programmes to extend generator lifespan and has also embarked on the installation of hybrid solutions with phase two of their programme now underway. The company is on schedule for 400 hybrid sites in 2017 with 400 DRC solar systems planned by Q1 2018. Speaking on the solar systems, Kash Pandya commented that they were pleased with the results so far.

Eaton had inherited several hundred solar sites through various acquisitions and had found that the solar systems were not performing well. The attitude of the previous tower owner had been that solar could be installed and left alone. In reality you need to ensure that the panels are being effectively cleaned and that you have specialist people who can manage the systems. Whilst Eaton thought that solar looked promising, they didn’t forecast any major deployment.

On the subject of batteries, Helios reported that they were in the process of evaluating lithium ion, adding that should they get the results promised, they plan to start switching lead acid for the technology. Further investigation is going into the assessment of alternative chemistries at present with MTN reporting that they’re in the early stage of testing different technologies with zinc air showing good promise due to the limited to no re-sale value of components.

Along with the maintenance and upgrade of energy equipment, tower owners are also bringing grid connectivity to more of their sites, with Helios reporting in Q2 that they had brought connections to approximately 200 sites with a further 100 sites planned before the end of the year.

The ESCO model has been gaining traction in the African market amongst MNOs, with Millicom, Orange and Airtel all signing ESCO agreements and MTN voicing that they have begun evaluation of the ESCO proposition.

For towercos, however, the argument has been less compelling. Kash Pandya commented that Helios were keeping a watchful eye on ESCOs but that they are yet to see a strong argument. The very capabilities that ESCOs are proposing are Helios’ core capabilities themselves: Helios serve the telecoms sector but are a power infrastructure business and are keen to look at generating additional revenue from additional services and competencies. Whilst Atlas’ footprint in South Africa means that power has been less of an issue for the towerco, their expansion into other markets may present opportunities for ESCOs to get involved. Although Atlas are yet to speak to ESCOs, they are not opposed to having the conversation and remain open minded as to whether a compelling business model can be presented.

The focus on reducing opex and controlling capex doesn’t solely hinge on site technologies; optimising the O&M regime and managing your business with greater discipline is critical to driving efficiencies.

Eaton comes from a low cost challenger culture and so has historically kept a very tight control on costs and overheads. In the company’s London headquarters there are just ten people with no more than a further 200 people running the company’s local operations in their five markets. In terms of the local operations, Eaton have focussed on employing local staff whilst also pushing more responsibility into their supply chain partners. Further improvements in margins are a knock on effect from not only meeting but improving upon SLAs with their customers, with the towerco reporting that their biggest customer is paying them service level bonuses in every country.

In the wake of the rush of tower transactions, Helios Towers’ focus has very much switched to optimising the operational cost base of the organisation with Kash Pandya explaining that individuals such as Colin Gaston and Roy Cursley have come into the business with a valuable set of skills sets which have been driving performance improvements. The company has been using Six Sigma processes to drive out inefficiencies, reporting an 80% reduction in the number of suppliers they use leading to $30mn in supply chain savings. They have trained up 75 individuals in Six Sigma principles, focussed on employing local staff with typically just one expat per country and improved operational headcount per tower by 30%. The company has improved service uptime by over 80% and is making good progress in its target of less than two seconds of downtime per tower per week.

Atlas, who have now been in the tower business for over ten years, explained that the fact that their sites were on grid meant that opex was marginal in comparison to the figures that other towercos are used to. Whilst opex is lower, the towerco still looked at ways to constantly improve their spending, reporting that initiatives such as ensuring a quick turnaround with vendors could help negotiate discounts. As a towerco’s portfolio continues to grow, economies of scale start to have an impact, with the company being able to negotiate volume discounts.  Having also built the vast majority of their sites, Atlas don’t have to deal with many of the issues brought by legacy assets; the company can decide exactly when they want to deploy capex on a quarter by quarter basis meaning that every dollar is spent at the right time.

Similarly to Helios and Atlas, Eaton noted they had also put huge focus on optimising procurement, ensuring that they buy and build as effectively as possible. In addition to procuring effectively, panellists also advocated the use of standard site configurations when designing sites; reducing variation to bring further efficiencies to their operations.

In developed markets, there is a growing trend for towercos to diversify their business models beyond macro sites and expand into areas such as small cells, DAS and fibre in order to meet densification requirements and solve capacity problems. In sub-Saharan Africa, activity on this front has been much more limited, and so TowerXchange questioned the panellists on their appetite to expand into this line of business and the role that towercos could play.

On the whole, towercos felt that there was plenty of growth in macro sites still to be had in Africa and so that was where their focus would remain; Africa is at least 6-8 years behind more developed markets and so it is going to be a while before we start to see small cells becoming more important than new macrosite rollout.

With South Africa being a more developed market it was likely that small cells would start to play a bigger role there sooner. Atlas, who are South Africa’s fastest growing towerco, observed that they are having to start looking at alternative site typologies, increasingly looking at small cells. Ultimately a towerco should aim to have as many touch points with an MNO as possible, being a single point of call for access to a whole range of site types.

Helios commented that they were in the very early days of looking at small cells. They have done in-building solutions in some markets and although this remained a small part of their business it was growing. Additionally, Helios are currently piloting a small cell solution in one of their markets, with a view to understanding the business model and associated challenges better and learning from it. Helios’ view was that they saw the role of small cells starting to become a more significant part of the African telecom infrastructure business in the next four to seven years.

Eaton have been addressing a small part of addressable market in Nairobi and see there being more potential. The towerco recently went to Indonesia and India to look at what towercos were doing there with small cells, fibre and DAS with a view to understanding what other low cost markets (albeit ones that are more developed) are doing. A lot of interesting things were learnt from the trip but ultimately the economics of playing in that space are more challenging. In addition the space brings new operational challenges, for example, dealing with building owners is harder than dealing with land leases.  Ultimately however, it is an area that MNOs want to get into and so towercos want to find solutions that work. In key buildings such as malls, stadiums and convention centres, indoor DAS is already profitable in Africa; as long as it is an area that all MNOs want to get into, the business model can work.

When it comes to fibre, major rollout is currently underway across the African continent, with one participant commenting that you can even get FTTH in Kinshasa. Liquid Telecom are currently putting a major focus on bringing fibre to the tower, acting as a neutral host from which MNOs can lease capacity, American Tower appear to be dipping their toe in the African fibre market having recently acquired Frogfoot Networks in South Africa and IHS have a fibreco license in Nigeria. Atlas have been involved in fibre in the US market but are yet to look at this in Africa and others stakeholders maintain a watchful eye on the potential held by the fibre sector.

Speculating on how the dynamics will play out, Chuck Green who was one of the founders of Crown Castle commented that when they had created the towerco, there was a notion to move along value chain to share anything that was shareable up to the switch; what Crown Castle is doing today in US is exactly that. It seems logical to expect that in emerging markets we’ll follow same pattern with the beauty being that you know what to expect by following in the footsteps of more developed markets, even if you don’t know the timeframe. Crown Castle has extended their offering beyond macro sites, densifying into in-building solutions, small cells and now fibre. Ultimately, Chuck added, that’s the future for this business model. Towercos need to respond to the demands of the carriers and investors appear happy to continue to build the growth pattern of the business.