Blue Sky Towers grew out of the Cape Town managed service provider, Merlin Project Services. They currently enjoy an enviable tenancy ratio and will soon pass the 100 site milestone. The team at Blue Sky Towers combine more than two decades of experience in South African telecoms, deep engineering experience, and a focus on managed build out and effective lease up of their towers. As they expand out of their native Western Cape, TowerXchange discusses the power situation in South Africa, the pipeline of build-to-suit and prospects for 5G in Africa’s most developed telecoms market.
TowerXchange: First please introduce yourself – how did you get into the tower business? Tell us about the relationship between you and Merlin Project Services.
Tony Moller, Director, Blue Sky Towers:
Blue Sky Towers has its roots in another company, Merlin Project Services, which was started in late 1990s with my fellow directors Ian Moller and Ken Jensen. We have a background in civil and mechanical engineering in Cape Town and set up Merlin to serve the Western Cape’s small industrial sectors, offering turnkey design and construction services.
From the late 1990s Merlin Project Services worked with Vodacom building out their 2G sites, and we went on to work with the other MNOs too. Then, in 2013 the South African market changed when Cell C’s passive infrastructure sites were bought by American Tower, allowing the independent towerco model to enter South Africa. 2014 and 2015 saw some significant restructuring within South Africa’s MNOs as they downsized their internal property departments, shedding a lot of internal expertise and new site roll-out capability. As such, they came to rely more heavily on their managed service providers and towercos.
Noticing this change, in 2015 Merlin Project Services acquired and built a few sites in the Western Cape, from which things developed. We were able to leverage our experience locally to design and build good, multi-tenant towers with good leases and permitting. Through a concerted site acquisition and permitting process, we have in the last three years started adding many more sites to our portfolio and have expanded into other regions beyond the Western Cape.
We do not believe we are a “mom and pop towerco”, and nor do we believe we are an American Tower or Atlas Tower either, but we do believe we have all the expertise needed to run a towerco. Merlin Project Services brings the expertise in construction, our one sister-company Merlicon has the site design expertise and Wintocor (another company division) provides specialist telecommunication installation and maintenance expertise. We partner with specialist town planners for permitting - put all that together and you have the basis of a strong towerco!
TowerXchange: How is Blue Sky Towers financed?
Tony Moller, Director, Blue Sky Towers:
Blue Sky Towers is largely self-funded. We are currently in discussions concerning some outside financing through local banks, but we’re not looking at anything complicated and we’re not looking at a sale of assets. We have seen two incremental jumps in size over the last three years, and in order to take things to the next level, we will require some additional financing. Our aim is to rollout what we can manage ourselves and where we have an anchor tenant lined up, so that puts an upper limit on our external financing requirements.
TowerXchange: The last time we checked you had 60 towers with 15 more in process, what does your estate look like now?
Tony Moller, Director, Blue Sky Towers:
We now have approximately 100 towers built, building, or permitted ready to build and we have a further 200 sites in our pipeline undergoing permitting. Although most of our sites are in the Western Cape, we have a pipeline in the central region and Eastern Cape too, with our first sites now having been built in the Central Region.
85-90% of our sites are greenfield towers. But, because we are essentially engineers by discipline, we have developed a capability to roll out quite unique solutions, including disguised rooftops for temples, mosques and inside church steeples. We are looking at DAS, IBS and small cells but we don’t own any ourselves as yet. Again, our experience in Merlin Project Services through installing DAS systems has helped us understand the options, so we are ready to respond to any increase in demand for DAS.
TowerXchange: There are a number of middle-market towercos in South Africa, from single digit “mom and pop” companies to Atlas Towers on 800 sites, where do you want Blue Sky Towers to end up?
Tony Moller, Director, Blue Sky Towers:
We would like to expand from our current site footprint, to around 200-250 towers in the next couple of years. We see a healthy runway in South Africa for new greenfield towers, and there is still a couple of years to run before we see significant investments in densification for 5G.
We are focusing on maintaining a good rate of lease-ups rather than rapidly building a large portfolio of new sites. A lot of our sites have all four South African operators on them, and our overall tenancy ratio is around 2.6x to 3.0x. We are not willing to put up naked steel and compromise on that. We began with Vodacom and Cell C as anchor tenants, but we market to all four players equally at the moment. We have also started to place ISPs on our towers, which puts us in a good position to get an even higher tenancy ratio, especially with the entrance of Rain into the market place.
Eventually, demand for alternative site typologies will pick up with the build-out for 5G, but we are not anticipating that soon. In fact, there are a large parts of Southern Africa still languishing in 2G, so there are differences in demand in different areas of the country.
TowerXchange: South Africa was exploring a shared wholesale open-access network for 5G roll-out, but this has been withdrawn. How do you expect the move to 5G to affect you? How are you responding to increased demand for densification? Do you expect to stick mainly with macro sites or will you diversify?
Tony Moller, Director, Blue Sky Towers:
South Africa is five years behind Europe, and 5G hasn’t launched in Europe, so I don’t think 5G is going to have a big impact in the short to medium term in South Africa. South Africa’s fibre infrastructure is even further than five years behind that of Europe, and this backbone is essential to a 5G network. Fibre coverage is improving rapidly in key metro areas, but there’s still a lot of investment required, which is why we believe you see American Tower partnering with Frogfoot and Helios Towers partnering with Vulatel.
There were plans for a Wholesale Open Access Network (WOAN) in South Africa which would have rolled out a single 5G network to reduce 5G capex and enabled competition through active RANsharing. This plan wasn’t supported by South Africa’s operators and was withdrawn earlier this year. The policy regime in South Africa is not particularly stable, and because we’re a small player we can’t plan 5-10 years hence based on policy like this. If the WOAN is reintroduced we’ll respond, but we’re focusing on greenfield passive tower infrastructure now and the runway we’ve already identified.
When 5G investment comes, we will almost certainly see an increase in demand for camouflaged structures, for which we are already exploring new diversified offerings like small cells, or disguised rooftops. The standard 25m greenfield tower site is becoming harder to permit and build in the areas we operate, and so a diversification of site design will be inevitable.
TowerXchange: What are your projections for build to suit over the next three years in South Africa? How many new towers are you planning on building?
Tony Moller, Director, Blue Sky Towers:
In the next three years we see scope for another 2,000 to 3,000 towers in South Africa. After that we believe you will likely start seeing demand for small cells and densification picking up, and since you need several small cells to cover the same footprint as a macro tower the total demand for sites will be even larger in the long-run. As I’ve said, large parts of the country are still on 2G and have patchy coverage, so if you look at the average number of users per tower and where South Africa is now, then around 1,000 new sites a year looks to us like a realistic requirement.
South Africa remains quite different from the rest of Africa, where we have traditionally enjoyed a fairly stable power supply through Eskom, so I do not see the need for Blue Sky Towers to become an ESCO
TowerXchange: South Africa has had some pretty significant power problems over the last year that have led MNOs to want to outsource some of their power headaches, is managing cell site power something you are exploring?
Tony Moller, Director, Blue Sky Towers:
Eskom, South Africa’s power utility, has had problems before and we have been told those problems have been solved before, so the latest difficulties aren’t completely unexpected. However, South Africa remains quite different from the rest of Africa, where we have traditionally enjoyed a fairly stable power supply through Eskom, so I do not see the need for Blue Sky Towers to become an ESCO. Although we have done our due diligence and explored how tower+power models work elsewhere on the continent.
On our sites, MNO’s generally install eight hours of battery backup sufficient for 4 to 8 hours of downtime of the primary power supply, which is a three phase supply connected to the site by Blue Sky Towers from the existing supply authority for the area. In the last three months we have experienced some supply issues associated with Eskom grid stability, but in the prior 18 months there were not any real outages, so the system is working on current performance. Outside of major cities power does become less reliable, but we select sites which sit on good grid. We would rather deal with the low-hanging fruit than switch our strategy and take on the more difficult rural and hard-to-reach sites, given our current financing model.
TowerXchange: Please summarise your vision for the future of your company.
Tony Moller, Director, Blue Sky Towers:
We will focus on maintaining our consistent organic growth in build-to-suit and ensure strong lease up on our towers. We will be moving from a single region operator to a multi-region operator, and we may even move beyond the borders of South Africa.
We want to run a well-defined portfolio of soundly-built and well-managed towers. We have seen other small tower players get it wrong and collapse, but we plan to grow organically and purposefully and would like to ensure that have all the systems in place to ensure we do it right. We will do our due diligence, search for good sites, permit them efficiently, build them soundly and market them actively. We would like to be a premier middle-market towerco for South Africa.
