The health of the Nigerian tower industry at the end of 2017

In light of the new developments in the Nigerian telecoms sector, TowerXchange held a roundtable discussion on the Nigerian market as a follow-up our Q2 analysis on the country’s tower industry. In this article we summarise the most significant recent developments and examine how these are being felt by stakeholders on the ground.

Earlier in 2017, TowerXchange published a detailed study on the Nigerian tower industry, from how the independent towerco market had first evolved in the country to the impact of Nigeria’s deep recession throughout 2016 and early 2017 (read the full article in journal 19). With the recession starting to lift, and further developments being reported in the country’s telecom sector, TowerXchange brought together key stakeholders from the Nigerian tower industry to join a roundtable discussion examining how such changes are being felt on the ground. Welcoming a host of different companies and representatives including IHS, American Tower Nigeria’s former CEO, Gordon Porter, managed service providers and manufacturers operating in the market, the roundtable was held under Chatham House rule at the 2017 TowerXchange Meetup Africa & Middle East. In this article, TowerXchange examines the key developments in the market in recent months and shares some of the anonymised opinions of the roundtable’s participants.

There are four GSM mobile network operators in the Nigerian market, namely MTN, Glo, Airtel and 9mobile (formerly Etisalat Nigeria). In addition to the four GSM players there are two CDMA operators and a host of LTE-only players. GSM subscriptions make up over 99% of subscriptions in the market, with total GSM subscriptions, as of September 2017, standing at 139mn. MTN has the largest market share (37%), followed by Glo (26%), Airtel (24%) and 9mobile (13%).

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 subscriptions) although rollout of 3G and 4G is underway as data usage continues to grow exponentially. MTN, the country’s largest operator, reports a 72% increase in data revenues for the year to date with voice revenues increasing 5.4% in the same period (source MTN Q3 2017 quarterly report).

There are 29,113 towers in the Nigerian market with 78% owned by independent towercos (figure two). Of the country’s four GSM players, three have divested their tower portfolios with Airtel selling to American Tower and MTN and 9mobile (whilst they operated as Etisalat Nigeria) selling to IHS. Back in 2010, IHS also acquired CDMA operator, Visafone’s towers and more recently bought HTN Towers and their portfolio of 1,211 sites. As part of IHS’ acquisition of HTN Towers, the operator also inherited the management contract for 702 towers owned by SWAP Technologies with 368 of these towers being live; in Q2 2017 this agreement was cancelled. Number two operator Globacom still retains their towers as does fixed line player NATCOM. In addition to IHS and American Tower there are a number of other smaller towercos in the market including BCTek Engineering, Communication Towers Nigeria and Hotspot (who recently sold 85 towers to IHS). Whilst IHS and American Tower remain each other’s biggest competitors, the two have commented that the market is big enough for both players, adding that their presence helps rationalise pricing, avoiding any rash price cutting manoeuvres that their smaller competitors might do.

Further details of the evolution of the tower industry can be read in journal 19 in the article “Challenging macroeconomic conditions but a bullish outlook for Nigerian towers”

The two most notable events in the Nigerian telecommunications sector in the past 18 months were MTN Nigeria’s NGN330bn fine for a failure to disconnect unregistered SIMs and the takeover of Etisalat by its creditors after failing to meet its loan repayments.

As part of the settlement with the Nigerian government, MTN is to list shares on the local stock exchange with the operator announcing in a recent analyst call that preparations for the IPO are underway. Having appointed Citigroup and Stanbic IBTC Capital as joint transaction advisors, MTN stated in their Q3 call that they expect a listing in H1 of 2018 if market conditions are favourable.

Since our earlier analysis of the Nigerian market, Etisalat has exited the country after being forced to transfer its 45% stake to United Capital Trustees, the security trustee of the opco’s consortium of lenders. The opco was rebranded to 9mobile and Barclays was appointed to find new investors for the embattled MNO. 16 expressions of interest were received by the bank with local press reporting that 10 bidders had been progressed through the pre-qualification phase. Those 10 parties were named as Globacom; Bharti Airtel; Smile Telecoms; Africell with Centricus Capital; Abraaj Capital, The Carlyle Group; Helios Investment Partners; Alheri Engineering; Dangote Group’s telecoms business unit; Teleology Holdings Limited; and Africa Capital Alliance (ACA). According to the report, the companies will be required to submit bid bonds of USD150mn each as part of the financial bid process. At the time of going to press however, Barclays were reported to have pulled out of its role after questioning by the Central Bank of Nigeria over the transparency of the bidding process.

Whilst MTN still remains conservative regarding capital expenditure and full payment for the fine is yet to be made, those on the ground in Nigeria report that talk around the fine and its impact appears to have mostly subsided and that investment has picked up. On the subject of currency challenges faced by the operator MTN Group CFO, Ralph Mupita commented in a Q3 earnings call that they had no concerns about dollar availability impacting on their plans for network rollout. The company’s service revenues grew by 11.2% for the year to date, in spite of the economic challenges in the country, and the operator remains committed to one of its most important markets.

Etisalat were a significant customer for towercos, with IHS in particular exposed given the operator’s presence as anchor tenant on the 2,691 towers that IHS had acquired from them. Whilst the operator was behind on their lease payments to IHS, since the opco’s takeover by its creditors, IHS report that they are starting to see payments come through. Whilst the opco is up for sale there has been an investment freeze which has a dampening effect on towercos and the supply chain, yet observers expect a buyer to enter. Whilst it is not yet clear who that buyer will be, with just over 17mn subscribers and a good quality network, towercos are optimistic of a turnaround in due course.

In terms of new site build, the majority of build to suit contracts in the country have gone to IHS with American Tower having historically shied away from new build. It is widely thought that Nigeria requires a doubling of its tower stock in order to meet growing mobile usage, with 13,000 new towers forecast to be added in the next five years. Whilst country specific breakdowns are not available, IHS forecast they will add 1000 new sites per year across their entire portfolio, and with Nigeria accounting for two thirds of their total portfolio size, one can expect the market to receive its fair share of such activity. In Q3 2017, IHS’ subsidiary, IHS Netherlands Holdco (which owned the towers outside the former JV with MTN in the country and which issued an $800mn bond in 2016) added 53 new towers. Whilst American Tower have historically not built in Nigeria, the towerco’s Q3 results report a net increase of 9 towers in the country, with the operator understood to be considering further new build opportunities. Whilst major new site rollout is required, stakeholders in the market remain cautious as to what timeline this will be achieved in.

Stakeholders report that every year an additional 4,000-5,000 new sites are promised by the country’s operators, only for this number to be drastically scaled back amidst cost control measures. After a challenging 12-18 months however, companies on the ground report that MTN, Airtel and Glo have started investing significantly, rolling out additional 3G equipment and moving into 4G. MTN has announced their intention to take over 11,000 slots over the next year, which is driving the others to act to keep pace.

Whilst the appetite of MNOs to reduce capex spend sends new build opportunities towercos’ way, and rollout plans hold the potential for increased tenancies, significant frictions exist in the market between the two parties. With the majority of existing lease payments indexed to the dollar and operators receiving revenues in Naira, MNOs complain of lease rate payments in the market tripling in local currency terms after depreciation of the Naira. Such escalating lease payments were a major contributing factor to Etisalat’s exit from the Nigerian market and as such, towercos are coming under increasing pressure from MNOs to reduce their fees; with the regulator threatening to wade in on the situation. With the towercos having paid hard currency for the towers, they have loan payments in USD to repay and pressure from shareholders makes it difficult to meet MNO demands. Such a stance puts towercos between a rock and a hard place, drop the lease rates and risk your own financial metrics or enforce the payments and risk your counterparties going bust.

Grid availability in Nigeria is reported to be as low as four hours per day, with the vast majority of sites being off-grid. The Nigerian government initiated a utility-scale solar programme to increase generation capacity but the programme appears to be on hold as they await guarantees from the World Bank for projects. Whilst lack of generation capacity is a contributing factor, Nigeria’s power challenges are multifaceted with transmission troubles equally contributing to the poor grid infrastructure.

Whilst a large proportion of Nigeria’s ~29,000 cell sites are off-grid entirely, operational experts on the ground comment that this is actually one of the biggest strengths. Managing off-grid sites is better than trying to manage those on poor grid; it is easier to dimension off-grid sites properly rather than deal with the variability of supply to those on poor grid.

Understandably, given the scale of the power challenge in Nigeria, much of the discussions on our Nigeria roundtable centred around methodologies being deployed by local stakeholders to handle such issues.

Running a diesel generator on a site can cost as much as $1500 - $2000 per site per month in Nigeria, and that is before you start taking into consideration the capex spend associated with the replacement of broken or stolen components. The price of fuel in Nigeria has increased relative to the increase in underlying diesel price with such price hikes levied by suppliers who are struggling to locate US Dollars. Towercos also complain of high charges to connect to the grid whilst the implementation of new electricity tariffs has further impacted the sector.

Whilst American Tower have been more conservative in their investment in power infrastructure, with the mainstay of capital being directed towards generator efficiency programs and getting the most out of existing equipment, IHS have had a much more bullish attitude to upgrading the generation equipment on sites.

With a desire to increase the proportion of their operational costs being paid in Naira, IHS embarked on their ambitious “big five” energy initiative to install solar hybrid systems on their portfolio of sites in the country. Dividing their assets between five different contractors (and retaining a portion in-house for benchmarking purposes) IHS handed over the installation and management of energy equipment to their network of partners.

Whilst the partners were known to IHS through their work in the installation, commissioning or operation of sites, many had a steep learning curve as they sought to put in place processes to manage a large portfolio of assets effectively. Simultaneously, the decision to use DC over AC gensets has also caused teething problems as companies got to grips with the newer technology. Whilst rumours had been circulating the IHS may look to cancel contracts with their partners, it is understood that at least four of the five partners are performing within the initial parameters laid out and IHS has reported a 50% reduction in diesel consumption.

Linked to and extending beyond the power challenge, stakeholders reiterated the challenges presented by theft and organised crime in the Nigerian market. One company had had some success with the installation of tracking systems in batteries, using the technology to catch crime syndicates who had turned such theft into a professional operation. Some spoke of designing cabinets with access locking codes whilst others highlighted the success they have had in displaying wanted posters.

Participants explained that  it wasn’t just the theft of equipment on sites that presented problems, the unauthorised installation of additional equipment on sites by MNOs and their contractors is another area that is eating into profit margins. One participant discussed their use of smart cameras which can detect the addition or amendment of any equipment, although underscored the importance of robust implementation of such systems.

Training and continuity of personnel on sites helps to improve site operations, whilst a balance of local and expat stakeholders is critical to getting the right mix of expertise at the right price. Nigeria has a large and diverse supply chain, with many tiers of contractors reporting into each other. Everyone on the table spoke of their desire to rationalise this supply chain, consolidating the market to fewer, larger, more professional parties in which you could have confidence that the job would be done effectively. Whilst this remained an ambition, few thought that the market would evolve this way any time soon.

The logistics of getting equipment into the country continues to be a challenge with port congestion remaining high. On what kind of import timeline could be considered good, one party suggested 16 weeks as a typical benchmark to aim for. A handful of parties have assembly lines in place in the country, the added advantage being that complete products may be subject to import tariffs of 20%, whilst components may only be charged 5%

In addition to threats from the regulator to interfere in the lease rate disagreements between MNOs and towercos, participants at the table spoke of the increasing influence of both national and local government on the profitability of the tower industry. Often both local and national governments will both handle the same services, with each looking to levy taxes. The regulator has also been threatening to impose quality of service regulations on towercos in the market.

At the TowerXchange Meetup Africa & Middle East this year we held our first regulatory task force for the global tower industry, an invite only session for towerco CXOs co-hosted by the IFC. With participants including American Tower, IHS Towers, Helios Towers, Eaton Towers, edotco, Powercom and ANTOSC amongst others, characterisation of emerging threats as well as industry-wide solutions to tackle them were raised. A full report will be available shortly.