African towerco CXO 2018 perspectives

TowerXchange were honoured to welcome four of the continent’s leading towercos to this year’s TowerXchange Meetup Africa towerco CXO panel; Ted Manvitz, SVP & CSO of IHS Towers, Kash Pandya, CEO of Helios Towers, Terry Rhodes, CEO of Eaton Towers and Nate Foster, CEO of Atlas Tower to share their views on the growth opportunities and challenges facing the sector in Africa. Here we report back on some of the most salient points raised.

Between them, IHS Towers, Eaton Towers, Helios Towers and Atlas Tower own over 35,000 (23%) of Sub-Saharan Africa’s 150,834 towers and have a presence in 20 African countries. IHS Towers possesses the largest portfolio, owning close to 23,000 towers, of which two thirds are currently in Nigeria; Helios Towers has over 6,500 sites in the DRC, Tanzania, Ghana and Congo Brazzaville; Eaton Towers has the most diverse portfolio with 5,300 towers in five markets; whilst Atlas Tower, which has held the accolade of being South Africa’s fastest growing towerco, has recently expanded its footprint to Kenya and Botswana. Invited to this year’s towerco CXO panel, hosted by Gulfraz Qayyum from Citi, the towercos shared their feedback on 2018’s events and looked ahead to what the market holds for towercos in Africa.

Each of the towercos on the panel remained bullish as the level of growth that we would see in macro-sites across the continent. The towercos observed that each of the markets in which they are currently operating are under penetrated with low subscriber levels, with the towercos believing that they will continue to play a key role in feeding growth in those markets. Eaton’s Terry Rhodes explained that there is still a need for broader coverage, quality of service is still a major concern and investment in networks is required to overcome this, 4G licenses are being awarded fuelling further rollout and the continent continues to see a data revolution which is driving further investment from mobile network operators.

Speaking on some of the specifics of the markets in which they operate, Helios’ Kash Pandya explained how average mobile penetration sits at just 40% across their four markets, with mobile ownership in the DRC, Helios’s largest market, being just 25%. With a population of over 85mn in the DRC, this equates to 63mn citizens without access to a mobile phone (and the population continues to grow).

Helios’ tenancy ratio sits around 2x, up from 1.1-1.2 back in 2010. The towerco has invested heavily in readying their towers for further tenants, with a significant proportion of sites able to take three or more tenants. Given the number of customers in each of their markets, with three or four or even up to six MNOs in a given country, Helios remained confident that they would fill such space.

With Nigeria representing IHS’ largest market, and the largest mobile market in Africa, Citi questioned IHS’s Ted Manvitz about how recent events such as 2016’s economic downturn, Etisalat’s insolvency and MTN’s fine had impacted growth. Manvitz explained that it was important to separate out perceived and real risk. In the case of Etisalat/ 9mobile, their contracts in place with IHS held up through the change in ownership and the operator continued to pay them. Despite the noise around the challenges facing the operator, IHS felt that 9mobile remained a good business; the MNO still has 15mn subscribers and IHS will continue to work with them as they restructure and reinvest. 

With regards to MTN Nigeria, their fine a couple of years meant that they invested less for a period of time. This also came at a time when macroeconomic conditions were poor and dollar scarcity in the market created challenges for all concerned. Fast forward however a year or two and organic growth is Nigeria is looking strong, IHS has completed 4000+ technology upgrades for the year to date in Nigeria, on top of 2000 upgrades in 2017 and have built 1700 new sites in the same period. 

Throughout the devaluation of the Naira and contraction of the economy a couple of years ago, IHS still grew in double digits, and the past couple of years are some of the best that the towerco has ever had. Manvitz explained that you tend to hear a lot about the bad news in markets, with the good news rarely getting the same amount of airtime. Manvitz added that IHS had invested for the long run and that whilst they always knew there would be hiccups along the way, the towerco’s core business continues to be strong. Whilst many of the perceived risks are real, the impact of such risks isn’t as dramatic as many expect and there is a need for education. IHS felt encouraged by the future growth potential of Nigeria and its other markets.

With their African business having been confined to South Africa until recently, Citi questioned Atlas Tower on how they viewed the proposed introduction of a wholesale open access network (WOAN) in the country. Nate Foster shared his view that nowhere on the planet has a wholesale open access network been very successful, and questioned to what extend the South African government was well equipped to run such a network, with state owned entities in the rail and power sector for example, having been plagued by challenges. Foster offered the opinion that commercial operators would do a better job with the spectrum than a WOAN would and said that he was not optimistic about how successful a WOAN could be in the country. Foster added that the introduction of a WOAN could also disadvantage some of the more entrepreneurial companies in the sector, having a further negative impact on the market. 

All towercos on the panel had an appetite for further geographical expansion when it made business sense. Eaton voiced that whilst they would restrict expansion to the African continent, they remained committed to looking at new opportunities, Helios explained that they had allocated a significant chunk of capital for expansion outside of their existing markets, feeling that diversification of their geographical footprint was important. IHS is in the process of entering the Middle East, with their acquisition of Zain’s towers in Kuwait expected imminently and discussions underway with other operators. And Atlas has recently commenced building towers in both Kenya and Botswana, expanding beyond the South African market. 

The African continent continues to see a reasonable wave of MNO consolidation with M&A activity in 2017 and 2018 having been seen in multiple markets in which the towercos operate. Helios, who witnessed the acquisition of Tigo by Orange in the DRC in 2016 and the merger of Airtel and Tigo in Ghana in late 2017 observed that they had weathered M&A activity successfully. Kash Pandya explained that having robust contracts in place was fundamental to this success, something that all the major African towercos have, having learned from their US counterparts; if an MNO wants to terminate a given contract, they need to pay down the life of the contract. It is also important that your value proposition stacks up, Helios has worked hard to maintain a price point that offers a better TCO for an operator, thus making it very difficult for the operator to move away from the arrangement. Maintaining a healthy dialogue and being flexible is also key to retaining and extending contracts through periods of consolidation. 

Eaton’s Rhodes added that although you may see a standstill in investment for a while when MNOs consolidate this will generally be followed by a substantial uptick in investment and amendments with extra equipment being put on towers. MNOs don’t just merge and cut costs, they merge and invest. What’s more, due to the underpenetrated nature of the markets in which the towercos are operating, the upsides are usually outweighed by the downsides following MNO M&A activity. Following operator consolidation in Uganda, Eaton observed that they gained more in additional commitments than they lost in decommissioned towers. Helios’ Pandya added to this stating that you will often see the competitive behaviour of other MNOs ramp up following the merger of their competitors; when Airtel and Tigo merged in Ghana, MTN invested in network rollout; in the DRC, Helios benefited from investment by Vodacom following the takeover of Tigo by Orange. 

MNOs continue to feel pressures on their margins, they are struggling to keep up with technology cycles whilst ARPU is not keeping pace and so we are starting to see a trend whereby MNOs are asking for discounts from their towerco partners. 

Speaking on the subject, Terry Rhodes underscored the importance of getting contracts right from the beginning. It is important to set lease rates at the right levels, not substantially higher or lower than the market rate; MNOs should be discouraged from taking too much money out from the sale of the towers and towercos should avoid overpaying for a tower portfolio. It is important to make sure that the starting point is right, whilst the MNO may be tempted to take a large amount of capital upfront, it can set unsustainable lease rates over the next 10-15 years. 

The panel also explained that it was also important for towercos to make sure that they are delivering when it comes to service. MNOs are looking for good operating performance from their towerco partners and if that is delivered and trust is maintained, then a healthier relationship whereby the MNOs feel they are receiving value is achieved.

Whilst frictions can ensue between MNOs and towercos over lease rates, with the two parties sitting on opposite sides of the table, there are many pressures and threats which impact both companies and which can be best addressed by working together in partnership. Regulatory and taxation issues are good examples of issues which can have a negative impact on both MNOs and towercos; in Uganda for example, Eaton referenced the social media tax which the regulator has proposed. Whilst the tax of around five cents per day doesn’t sound like much, this is around half of ARPU in the country; if the tax stays in place, MNO margins will be hit significantly and the knock on effect to towercos will be that the operators won’t invest as much in their networks. On issues such as this, it is important that MNOs and towercos work in partnership to jointly manage the risks.

Given Helios’ formal announcement and postponement of IPO proceedings in 2018, and both IHS and Eaton having looked into flotations, the inevitable questions of what happened and whether we could see IPOs return to the table in 2019 were raised.

Both IHS and Helios commented that the macro environment in 2018 was suboptimal for a listing. 2018 wasn’t a great year for listings full stop; of the 40 IPOs on the London Stock Exchange, only half of these managed to get away, and then subsequently traded off.

Education of investors remains critical, explained Manvitz. The private equity investors which have capital at work in the towercos understand the risks and opportunities in Africa; the conversation is now being extended to public equities investors with a proven appetite for towers, but investors who may not yet have been exposed to Africa. IHS decided to issue a public bond to bring the dialogue to investors, and familiarise them with the business. Commenting on the strength of the company, Manvitz added that IHS is a mature business which is cash flow and bottom line positive, with margins reflecting that of their US peers and FX protection in place. The company will continue to diversify and show strong organic growth and when the macro-economic environment improves, the opportunity in the public market will return. IHS and its investors are not pressed on time and so can wait for the right conditions.

Helios also referenced that they could well revisit an IPO, the earliest being in H2 2019 but potentially in 2020. Pandya explained that Helios would retain its readiness for a listing, a lot of work goes into preparing the business and so it is important to keep that capability whilst engaging with investors. As with IHS, Pandya commented on the strength of Helios’ financials observing that they had reported 14 successive quarters of growth, with EBITDA having risen from 25% to 49% from 2015 to 2018. Whilst investors need to become more comfortable with the African market, Pandya explained that the perceived risk of Africa is greater than the reality and that a well run business such as Helios will continue to succeed. 

Eaton’s Rhodes commented that whilst Eaton did look at the option of a listing, they never gave an intention to float. Those that did test the financial markets found that they were uncomfortable with the African towerco business, lacking a benchmark from which to be able to price companies. The financial markets recognise towercos in the US, Latin America and Indonesia but are less familiar with the African market and are unnecessarily worried about risk.

Eaton are growing fast, with double digit organic growth and investors that are happy and in no hurry. With Eaton’s peers having stepped back from listings for now, this allows Eaton to refocus on their core business, something they are very happy to be doing. 

Whilst Atlas themselves would be unlikely to aim for an IPO, Foster commented that successful IPOs by either Helios, Eaton or IHS would be useful in creating a valuation benchmark for towercos in Africa. Whilst an IPO would not be on the horizon, Atlas commented that there would be an eventual exit plan but there is still a lot of growth ahead for the towerco. Foster observed that Atlas are building 1.2 towers every working day with plans to reach 1000 towers in South Africa by the end of 2019 and are starting to build in Kenya and Botswana, remaining focussed on the macro tower market.

Discussion around diversification of business models beyond macro towers was reserved for a separate panel at this year’s Meetup, with activity in this area on a global, and more recently African level, starting to ramp up. Whilst the appetite of the towercos on the panel to expand beyond macro towers and beyond Africa varied, all felt that there was still a lot of growth in the African macro tower business, with significant organic growth in each of their existing markets.

Helios Towers, Eaton Towers, IHS Towers and Atlas Tower hosted further roundtable discussions at this year’s Meetup, reports from some of which will also be available shortly.