From the first round of capital raising to bonds, IPOs and business model diversification

With new towercos forming in the African market, IPO activity ramping up amongst the continent’s bigger players and new business models being proposed as the telecoms sector matures, TowerXchange invited three investors and Helios Towers to join a discussion examining finance and investment trends and appetites in the African tower industry. We summarise the key talking points in this article.

Standard Bank is the largest bank in Africa offering a diverse set of products from finance to advisory through to capital markets. The bank has been very active in the tower sector across the continent and provide debt from their own balance sheet ranging from mezzanine financing to senior debt. Whilst the company doesn’t do private equity they can help companies raise private capital and can further support in the public capital markets. Philip Hobden, who is a Director in their TMT unit, joined this year’s debate.

Dutch-headquartered ING Bank provides senior debt globally and has a keen interest in the telecom infrastructure space. They have had exposure to the towerco business model in Europe, Indonesia and Myanmar and started looking at the African market five years ago. Whilst the company is active in the Middle East, there hasn’t been much towerco activity in the region (to date). Jeroen Kleinjan, Managing Director in their TMT division, joined the discussion.

The IFC has a focus on digital infrastructure which spans towers, data centres and broadband. The organisation has invested in three home grown towercos in Africa whilst also having towerco investments in Asia, Latin America and Eastern Europe. A half to a third of the IFC’s tower investments are in sub-Saharan Africa and the company has also invested in CSquared which is rolling out fibre in Uganda and Ghana. Eric Crabtree heads up the company’s tower and data centre practice and was one of this year’s panelists.

Helios Towers is Africa’s third largest towerco with a portfolio of 6,501 sites across four markets. The company has a diverse investor base, issued their maiden corporate bond in early 2017 and is understood to be gearing up for an IPO in the first half of 2018. Helios was represented on the panel by their Chief Commercial Officer, Alex Leigh. The panel was moderated by RBC Capital Markets’ Managing Director and Senior Analyst, Jonathan Atkin who covers the telecom sector.

With a diverse set of towercos in the room, alongside a range of companies who are looking to potentially expand beyond their current capabilities, the panellists were questioned as to what KPIs or milestones they would be looking for in a deal or company in order to get involved.

For ING, the main KPI which they look at is the EBITDA size; it is difficult to finance a start up build to suit towerco with senior debt and so they would require a minimum EBITDA in the range of $20-25mn. Standard Bank, however, voiced that they do not have a minimum EBITDA requirement, adding that they have done zero EBITDA deals if they have the right credentials in place. The bank did however require a minimum transaction size in order to be able to offset the cost of doing the work. For the IFC, as minority investors they would typically look for quality co-investors whilst also seeking a board position in the towerco.

In terms of those aforementioned “right credentials”, a seasoned management team and well structured contracts with creditworthy counterparties were critical. Investors had a much stronger appetite for contracts signed with number one or two MNOs in a market, whilst it became a lot more challenging to do deals where a third of fourth placed MNO was the counterparty. How M&A in a market might play out as well as the macroeconomic conditions, all influenced the investors’ decision making process along the way.

As one of Africa’s leading towercos, Helios Towers tick the key boxes. The company acquired their first tower portfolio back in 2010 and have since grown their portfolio to over 6,500 sites, posting an EBITDA of $85mn in 2016. Speaking on financing in the early days, Alex Leigh commented how the involvement of Helios Investment Partners had brought significant value to the shareholding. Helios Investment Partners had been one of the investors in build to suit towerco, HTN Towers (which has since been acquired by IHS). The involvement of Helios IP in Helios Towers Africa attracted like-minded investors with either an experience in towers or real emerging markets experience.  The first hurdle that the towerco had to overcome was to make investors comfortable in the markets in which Helios operated. Their investors understood the growth opportunities whilst having confidence in the towerco business model with its long term contracts and recurring cash flow.

Helios were supported from a lending point of view by institutions who had African or development finance in their DNA. The likes of Standard Chartered, Standard Bank, the IFC, FMO and other DFIs supported the company’s vision as they developed their track record.

Helios’ discipline that it has demonstrated in contracts, on par with the contractual discipline of the US publicly listed towercos has helped instill confidence in a wider group of investors, with Helios’ drive towards operational and business excellence further strengthening their reputation.

On 8 March 2017, Helios Towers Africa announced its maiden corporate bond. The $600mn bond, listed on the Irish Stock Exchange and paying a 9.125% coupon with a 2022 maturity date, was three times oversubscribed.

The majority of the proceeds were to be used to refinance existing debt, with US$31mn being used to fund the acquisition of remaining sites not yet closed in the DRC, Congo Brazzaville and Tanzania; $110mn to be used for planned capital expenditures; $62mn to be used to finance the buyout of Vodacom Tanzania’s 23.7% stake and remaining shareholder loans in Helios Towers Tanzania; and $23mn allocated for estimated fees and expenses.

Helios’ bond, as well as that of IHS, served as great branding for the towercos, and more broadly, the towerco business model in Africa, with the panel commenting that it introduced the companies to investors who ultimately may invest equity in the potential upcoming towerco IPOs. The size of both bonds was an important factor in their successful listing; at over $500mn greater liquidity was afforded. The bonds enabled firms who were less familiar with Africa to access investment opportunities on the continent with a greater deal of comfort. IHS’ bond was given a rating higher than the sovereign rating in Nigeria due to its dollar-linked contracts, a quality which was significant given the economic troubles in Nigeria at the time.  For Helios, the geographical diversity of their portfolio as well as the early involvement of DFIs as anchor investors helped bring comfort to conventional investors who otherwise would have had concerns with the African specific risks. The bond also came at a time when there were significant inflows into emerging market asset classes as investors sought high yields; thus creating a perfect time to issue.

Speaking on Helios’ bond, Alex Leigh commented that it was a natural step in the company’s evolution and growth. Until then, Helios had financed their operations with operation-specific loans which were separate for each market. Whilst they were well supported by the banks, managing separate loans created a lot of additional work from a treasury point of view. The towerco can now support operations with one finance team which has best in class international finance processes. The move has fuelled and simplified growth.

As to whether we could expect more bonds in the African market, the panelists thought that it was very specific to the circumstances of different towercos. Whilst it was impossible to say whether issuances were likely in the short to medium term, one thing the panel did agree on was that Helios’ and IHS’ bonds have laid the foundations for future issuances by either them or other towercos in the market.

With the bond issuances having also paved the way for potential towerco IPOs in the African market, the question was raised as to what activity we could likely see around the mooted IPOs by three of Africa’s largest towercos.

The IFC observed that whilst they haven’t yet had one of the towercos in which they are investor list, they have been through the process with internet services company Yandex which listed on the NASDAQ for US$12bn. One take home from the listing was the lengthy SOX compliance required. Ultimately you’re looking at spreadsheet yield investors who need stability, systems and order, towercos need to make sure that things such as permitting compliance and environmental compliance are up to scratch and that processes are standardised.

In addition to ensuring that accounting, reporting and governance are all in order, towercos will also be working on their equity stories, firming up their proposition with regards to growth versus dividends and explaining when one may switch the other. The towercos may also need to reconfigure their board in preparation.

In terms of a listing destination, the panellists commented that the London Stock Exchange and Johannesburg Stock Exchange are the natural homes for African corporates. With the most valuable towercos listed in the US it was questioned whether it would be feasible and indeed favourable for the African towercos to list on the other side of the Atlantic. Jonathan Atkin from RBC Capital Markets, who was chairing the panel, commented that in the past five or so years both a European and a Chinese data centre operator had listed in the US, attracted by the deeper ecosystem of listed firms with common business models. Aiming for a listing on a local exchange when you’re the only company of your type may leave you having to educate a generalist.

(For further insights into the prospective African towerco IPOs read: “IPOs on the horizon for Africa’s towercos”)

Whilst discussion around the towerco business model in sub-Saharan Africa tends to centre around macro sites, the panel were asked about their views on the investability of business models that incorporated alternative site typologies. The IFC commented that they hadn’t seen any business models with a sole focus on small cells or DAS in Africa, although they had seen this in other emerging markets, sometimes embedded into advertising and marketing.

Small cells and DAS is a natural step for many towercos although some have been deterred by the requirement to become involved in managing active components whilst others have cited uncertainty about the kind of cost structure of the model and the amount of scale that would need to be achieved in order to make the business profitable.

According to the panel, one characteristic of African towercos which would make them perhaps more adept at handling some of the complexities of the small cells and DAS market than their peers in developed markets, is their superior logistics capabilities. In Africa, a towerco’s operations are more complex and having sophisticated processes in place to deal with these may serve them well in handling the logistic and speed to market demands of small cells rollout.

Beyond small cells and DAS the panel touched upon data centres, commenting on how they were yet to see anyone looking to build scale in data centres on the African continent. On the fibre front there has been a bit more progress with American Tower having recently acquired Frogfoot Networks in South Africa and IHS having a fibreco license in Nigeria.

Ultimately however, towercos can leverage their contract expertise and execution capability to support other infrastructure although the panel thought that it would be a while before we saw any kind of scale in small cells. As the cost of 4G handsets continues to come down however, the demand for data will continue to grow exponentially, creating opportunities for small cell solution providers. The future success of the market requires companies to exert the right kind of discipline to deliver value to MNOs over ten year periods, opportunistic companies who are only in the market for the short haul could be detrimental to the reputation of the sector.

The panel were yet to see any major activity in the ESCO space, observing that the only opportunities to date have been with MNOs on a rather limited scale. Whilst the ESCO model doesn’t appear to be gaining much traction with the larger towercos, the panel felt that there could be opportunities for ESCOs to work with middle market build to suit players who do not have the same operational capabilities as their bigger cousins. In India, there has been a mixed response to ESCOs in the market but the investors thought that it could be possible to stitch together a successful ESCO business in the African market.

In conclusion, the panel all echoed the same sentiment that the towerco business model was now well proven and increasingly attractive should the right conditions be in place with the company in question.