On 20th June 2019, the Saudi telecoms regulator, the Communications and Information Technology Commission (CITC) wrote to Zain Saudi Arabia, precipitating the operator announcing the postponement of their tower sale to IHS Towers on 23 June. Originally announced in November 2018, the IHS-Zain KSA deal marked an inflection point in the MENA tower market, but questions will now be asked about what happens next. TowerXchange examines the context for the deal and how the MENA tower market will develop absent this long-awaited, highly anticipated deal. On 27 March 2019, in a disclosure to the Boursa Kuwait, Zain announced that its Board of Directors had signed an agreement with IHS Holding Limited (IHS Towers) for the sale and leaseback of 8,100 towers, plus a 1,500 build-to-suit programme, in a deal worth SAR2.52bn (US$672mn). The deal was subject to approval from the Saudi Communications and Information Technology Commission (CITC).
On 23 June 2019, in another disclosure to the Boursa, Zain stated that they had received “a letter from the Communications and Information Technology Commission (CITC)… stating that IHS Holding Limited has not yet met the regulatory requirements for the sale and lease back of passive infrastructure… Accordingly, IHS did not obtain the necessary license and therefore the CITC refused the completion of the transaction, for the interim… for regulatory reasons”.
Contrary to press reporting of these developments, no-one is using the word “cancellation” in these latest correspondences. The disclosures specifically state that IHS has “not yet met regulatory requirements” while the CITC has “refused the completion of the transaction, for the interim.” Keen readers of TowerXchange will be aware that towercos have been trying to complete sale and leaseback transactions in the country for many years, and that the regulatory environment has been evolving throughout this time.
IHS told TowerXchange “We are aware of Zain’s regulatory announcement on 23 June 2019 and continue to work with both Zain and the Kingdom’s regulator, Communications and Information Technology Commission, in order to establish appropriate next steps. We remain committed to Saudi Arabia as well as further expansion into the Middle East.”
What we know (and don’t know) about the regulation of towercos in KSA
The regulation and licensing conditions for tower companies in Saudi Arabia, which are believed to fall under the “wholesale infrastructure services license”, were defined as recently as July 2018. The special terms and conditions for the Wholesale Infrastructure Services license in the Kingdom of Saudi Arabia can be downloaded from the CITC website at www.citc.gov.sa.
It remains unclear exactly how IHS has not yet met the conditions necessary to acquire a Wholesale Infrastructure Services license, nor whether remedial action can be taken by IHS to secure the licence. Upon review, the terms and conditions for the license do not appear to, for example, preclude the participation of foreign direct investment in provision of wholesale infrastructure services, nor are there any financial conditions that IHS do not appear to meet. IHS is MEA’s largest towerco generating annual revenues in excess of US$1bn.
In the meantime, sources suggest that STC Telecom’s carve out towerco TAWAL has successfully secured a license.
Zain KSA
Zain KSA’s shares closed down 6.6% at 11.80 Riyals on Monday down from 12.64 the day before following the announcement overnight on Sunday. The deal to divest the towers was part of Zain’s plan to reorient as a digital services provider. IHS Towers would have taken on tower management in Saudi Arabia allowing Zain to reduce debt and free up capital to invest in other areas of the business focused on customer satisfaction and service delivery.
Quoted in Zawya, Hassan Abdelgelil, an Analyst at CI Capital, believes the news “should have a negative effect on the company’s solvency on the long run, as Zain KSA’s ability to settle the Murabaha facility (an Islamic financing facility – TowerXchange), due in 2021 and extendable to 2022, is now highly questionable. We expect Zain KSA to look for another source of funding, such as the capital increase which has been put on hold due to changes in the structure and lower accumulated deficit, or a new buyer for the towers, which might be lengthy.”
Zain Kuwait
IHS still has another sale and leaseback deal pending with Zain Kuwait, for 1,700 towers at a cost of US$165mn. The logic behind the Kuwait deal and Saudi deal was different, and of course the regulators involved are unrelated. As Kamil Hilali, Chief Strategy Officer at Zain Group explained to TowerXchange earlier this year: “In Saudi Arabia, the focus was always deleveraging and to expedite expansion through a build-to-suit agreement. In Kuwait, coverage no longer represented a competitive advantage. Kuwait is a relatively small market, less than 7,000 square miles, so it makes sense to monetise our passive assets. Once finalised, we would have achieved a first mover advantage in releasing that capital to be reinvested in the execution of the new strategy.”
MENA Towers
The Zain KSA deal postponement is the latest setback in the stop-start development of a MENA tower market. Fewer than 6% of MENA’s towers are in the hands of independent towercos, most of that is accounted for by STC’s carve out towerco TAWAL. Many previously announced tower sale and leaseback deals were abandoned or cancelled, and the transformation of telecom infrastructure ownership has struggled to build momentum, but a number of deals announced since 2017 had seen MENA looking like it was going to mimic the US, Asia, Africa and Europe in moving toward an independent tower ownership model.
In 2011, and again in 2016, Saudi Telecom Company (STC) and Mobily explored a joint venture to share their existing tower portfolios in the Kingdom to reduce their capital and operational spend. The deals were abandoned after reports that the two parties couldn’t agree on how ownership should be shared. 2016 also saw Mobily explore a tower sale in Saudi Arabia, with a number of names linked to the transaction, including IHS Towers, Digital Bridge, TASC Towers, edotco, Providence Equity Partners and Towershare, plus local investors and conglomerates including Saudi Aramco, Al Rahji Group and Al Zamil Group.
In April 2019, STC announced a carve-out of 14,200 towers into a new MNO-captive towerco in Saudi Arabia called TAWAL. TAWAL is still reviewing its strategic direction and setting up its operational and executive functions but TowerXchange understands it to have regional ambitions with major implications for the development of the tower market in MENA. Zain and Mobily’s towers, and their tenancies, will be obvious early targets for TAWAL’s towers.
Conclusions
Regulators in the MENA region have to ask themselves whether they want to see infrastructure sharing professionalised and accelerated by independent towercos. If they have a goal to unlock efficiencies and release MNOs’ capital to invest in spectrum and in 5G rollout, they are not going to attract a much better investor than IHS Towers, whose balance sheet and track record give them exemplary credentials.
It is not yet clear on what grounds IHS was found to have not yet met the regulatory conditions recently defined in Saudi Arabia – regulatory conditions which STC’s carve out towerco TAWAL evidently did satisfy. TowerXchange remain enthusiastic evangelists for the professionalisation of infrastructure sharing, and efficiencies can be equally unlocked by operator-led towercos like TAWAL, and by pureplay independent towercos like IHS.
We remain optimistic that this development will not bring an end to the appetite of pureplay independent towercos to invest in MENA towers.
