TowerXchange’s updated Pakistan tower market study 2018

Following the recent announcement of the cancellation of edotco’s acquisition of Jazz’s 13,000 towers in Pakistan, TowerXchange has updated our Pakistan tower market study to include a deep dive into what this means for Pakistan’s fast-growing mobile market and what opportunities may come to the fore next. 

While towercos have been licensed in Pakistan since 2006, towers were initially seen as a source of competitive advantage by fiercely competitive MNOs. Attitudes toward infrastructure sharing have thawed since 2011, with over 10,000 co-locations now on Pakistan’s towers. That culture of infrastructure sharing has now crystalised with the rise of edotco, who remain committed to the Pakistani market despite their latest setback.

In September 2018, edotco and Pakistan Mobile Communications (PMC, operating under the brand name Jazz and majority owned by VEON) announced the cancellation of edotco’s planned acquisition of 13,000 Jazz towers, which had been announced in August 2017. 

As Pakistani regulators failed to approve the transfer of control over Jazz’s tower unit Deodar before the specified deadline, despite original hopes that it the deal would complete in Q417, edotco was forced to abandon the process. 

Jazz (then Mobilink) had carved out their towers to subsidiary Deodar, consolidated towers acquired from Warid, and had reached agreement to sell Deodar to edotco. edotco was to acquire a 55% controlling stake, while the Dawood Hercules Corporation (DH Corp), would have acquired a 45% stake in edotco Pakistan. DH Corp is a listed investment conglomerate in Pakistan with a US$600mn market cap.

The total proposed deal value was US$940mn, funded by US$600mn of local debt and equity splits of US$174mn from edotco and US$166mn from DH Corp, and would have made edotco the eighth largest towerco in the world. 

Commenting on the cancellation, edotco CEO Suresh Sidhu said: “We do not foresee this affecting our business goals. We are confident in the potential of the growing market in Pakistan and are committed to the existing operations there.” With local MD Arif Hussain adding: “We have seen strong progress in Pakistan since our first acquisition, and business continues to grow with new orders for sites as well as high demand for adjacent opportunities such as energy solutions. We remain focused on building the business in Pakistan.”

As well as this cancelled deal in Pakistan, VEON-owned assets in Bangladesh, Russia, Ukraine, Kazakhstan, Armenia and Georgia have all come to market in the last three years and failed to reach a conclusion, with only the sale of the Wind towers in Italy to Cellnex completing in 2015. 

One of Asia’s fastest growing mobile markets, The Pakistan Telecommunications Authority reports that mobile teledensity is currently 72.97% in a country with a population over 200mn. There is ample room for growth in mobile broadband penetration, currently around 34% (an increase of 10% in the last 12 months alone). ARPUs are low, reportedly around US$2, but GDP is growing, disposable income is increasing, and the macroeconomic indicators are good for MNO and towerco growth in Pakistan.

3G was launched as recently as the end of 2014, but adoption has been swift, aided by sub-US$30 3G handsets coming on the market. 4G launches commenced in 2015, with compatible devices increasingly available. 3G and 4G rollouts are both continuing, with the current focus being overlaying existing sites, while future densification may prompt some limited new build of infill sites.

Following the aforementioned acquisition of Warid, VEON rebranded their Pakistan opco from Mobilink to Jazz, consolidating their market leadership – they currently have 56mn, or 36.39% of the country’s subscribers. In 13 years Telenor and China Mobile’s Zong have acquired 43.3mn and 31.1mn subscribers respectively, while Etisalat’s Ufone has 20.6mn subscribers.

While Pakistan’s tower network is extensive, and population coverage in Pakistan is believed to be in excess of 90%, population per tower is ~6,000 compared to ~1,500 in Malaysia.

Pakistan has a Universal Service Fund which actively awards capital to deploy towers in remote locations.

As Pakistan’s oldest and market leading MNO, Jazz has Pakistan’s largest network, and is often the sole service provider in rural areas..

After initial reticence to share infrastructure in the last five to six years a culture of tower sharing has blossomed in Pakistan. In particular market leader Jazz, then Mobilink, grasped the opportunity to lease out the country’s largest and most pervasive tower portfolio on a commercial basis since 2011-12, adding significant co-locations and value to the assets.

The original Mobilink towers account for around 8-9,000 towers in the current Jazz portfolio, with another 4-5,000 towers formerly owned by recent acquisition Warid, a deal which created estimated 2-3,000 sites in overlapping locations (within 250m of each other). While many towers will be retained for densification, there are significant opportunities to create efficiencies by decommissioning adjacent sites, saving land costs, and increasing the tenancy ratio of the remaining tower. 

VEON-owned Jazz announced the plan to divest 13,000 towers to Malaysian towerco edotco in August 2017. The cancellation of this deal was announced in September 2018, mainly due to regulatory obstacles. It remains unclear what Jazz plans to do with their assets in light of this cancelled deal, and whether another agreement would come up against the same barriers. With an increasing number of MNOs choosing to retain assets globally, Jazz may choose to retain Deodar in the medium term and operate it as a more commercial towerco, or they may follow the lead of their sister opco Beeline in Russia, and reabsorb the SPV into the wider organisation now the deal is cancelled.

Telenor has leveraged infrastructure sharing to accelerate time to market since entering Pakistan 12 years ago. Telenor Pakistan is a strong promoter of all forms of network sharing; towers (sharing primarily with Jazz), fibre (sharing with Zong), and has taken a lead role in exploring active infrastructure sharing. Telenor and Zong undertook Pakistan’s first RANsharing trials across around 30 sites, while the Norwegian-owned MNO has also shared IBS, both under the MORAN model where spectrum is not shared.

While Telenor has been mentioned on the grapevine as potentially interested in the sale and leaseback of their Pakistani towers, the company has little history of tower monetisation, and no need to release capital; their partnerships with towercos are likely to remain focused on co-location and BTS. Telenor are believed to have ~7,400 of their own towers, but may prefer to leverage co-location for future rollout: they already have over 2,000 co-locations in Pakistan.

Ufone has been exploring the potential sale and leaseback of their towers in Pakistan for some time. The process was stalled by the de facto merger of PTCL and Ufone, and associated management changes, but Ufone could yet contribute over 6,000 further assets to the pool of commercially shared towers.

China Mobile’s Pakistan opco, which trades under the brand name Zong, has around 9,100 sites, of which around 2,000 are co-locations.

TowerXchange estimate the prevailing tenancy ratio (the average number of tenants across all towers in the country) to be around 1.25x in Pakistan, with a clear pathway to 1.5x. Of around 10,000 co-locations in the country, most originate from barter arrangements, with some application of commercial lease rates, but often offset against one another so no cash changes hands. These agreements will continue to be converted to commercial leases as towercos continue to become more prevalent.

Tenancy ratios on commercially leased towers are reportedly rising at a respectable 0.06 per year in Pakistan, but that could accelerate with the rollout of 4G.

Non-traditional MNOs may represent potential upside on tenancy ratio growth in Pakistan, exemplified by LTE service provider Qubee and Wi-Fi Broadband provider BurQ.

Tower lease rates in Pakistan are believed to be in the US$800-1,000 range.

A towerco licensing regime has been in place in Pakistan since 2006, and the Pakistan Telecommunications Authority (PTA) has set unofficial targets to increase the infrastructure sharing ratio in the country. That said, the usual local site permitting challenges persist, with differing policies from region to region, and multiple layers of taxation.

edotco acquired Tanzanite Towers for US$88.9mn, consolidating Tanzanite’s existing 700 towers while buying out a rival who had been rumoured to have entered exclusive negotiations to acquire the Jazz towers which edotco subsequently agreed to buy. 70% of Tanzanite’s towers are in urban locations, and 40% are ground based towers. The tenancy ratio was 1.6, and Tanzanite reportedly had a pipeline of 200+ new build towers, derived from contracts with all four of the country’s MNOs. Prior to the acquisition of Tanzanite, edotco’s footprint in Pakistan consisted of around 20 towers, plus 13,000km of fibre, acquired when they entered the country in 2014.

While edotco has consolidated Pakistan’s previous number one towerco Tanzanite Towers, since 2006 several local entities have been licensed as towercos, although only AWAL Telecom appears to be actively trading as such.

Pakistan’s MNOs cite power as the number one operational challenge in the market, followed by security and landlord issues.

While Pakistan’s electricity grid remains unstable, and outages can last eight or more hours, the situation has improved notably in recent years. Backup diesel genset (DG) runtime is being reduced at sites on the country’s better grid connections, with DGs increasingly being removed from such sites.

edotco offer a full tower+power service in Pakistan, meaning they lease tower and ground space as well as providing DC energy.

“The majority of Jazz towers have only a small 9KVA DG and out-dated batteries,” said one representative of a Pakistani MNO at the TowerXchange Meetup Asia 2016. “Backup power was not provided for most of our co-locations, so we have to install our own DGs and high capacity batteries.”

“In recent years we have invested US$30-40mn every year into power infrastructure to ensure high availability,” continued the same MNO. “It will be interesting to see if the towercos are open to making that magnitude of investment.”

The range of operational challenges in Pakistan is huge. “We understand Pakistan – we know it is not an easy country in which to operate a tower network,” said one towerco. “But there are commercial implications of this; for example the lease rate for a tower in Karachi and a tower in the FATA have to be different.”

The cancellation of the edotco/Jazz deal is a blow to the tower market in Pakistan, where parallel infrastructure is highly prevalent and a decommissioning programme would have been highly beneficial to efficient infrastructure sharing. Rather than open up 13,000 towers to commercial co-location, and drive independent ownership of infrastructure to support the rationalisation of infrastructure, edotco has faced a setback which will put the transformation of the Pakistan tower industry on hold. 

However, as Ufone have expressed an interest in selling their ~6,000 towers in Pakistan, and Telenor Pakistan have also been rumoured to be interested in a deal, there may be other avenues to rapid inorganic growth for edotco once the dust has settled. In a market where tower sharing is encouraged by the regulator, several of the MNOs have expressed an interest in divesting their towers and there is an active and committed towerco with a warchest of capital for acquisitions. In addition, Jazz may yet find another buyer for their assets or choose to retain them as a carve out towerco.