Zain pioneering the sale of towers in the MENA region

In a regional first, in October 2017, Zain announced that it had reached a deal with IHS Towers for the sale and leaseback of its tower portfolios in Kuwait, in November 2018 news followed that Zain had agreed another sale and leaseback agreement with IHS Towers in Saudi Arabia. The transactions should be finalised imminently. The company announced that 1,700 Kuwaiti towers will be sold for $165mn and 8,100 Saudi towers for $650mn, while both deals include provisions for further new build. The move sees Zain pivot from a traditional telco to a digital service provider without the encumbrance of a portfolio of non-core, passive infrastructure. TowerXchange spoke with CSO Kamil Hilali about the transactions, the Kuwaiti and Saudi markets and the changes in Zain’s strategy that led to the decision to dispose of its towers. 

TowerXchange: Please tell us a bit about Zain’s footprint and what brought it to sell its tower portfolios in Kuwait and Saudi Arabia.

Zain has a broad footprint across MENA and has different strategies and approaches in each geography, but there is a Zain ethos of quality and innovation across all of those markets. Zain started operations in Kuwait, but has operations in Bahrain, Iraq, Jordan, KSA, Sudan and South Sudan and operates a concession in Lebanon branded Touch. In 2011 Zain exited most of Africa with a sale to Airtel, but remained in Sudan, South Sudan and a kept small stake in Morocco’s 3rd operator. So overall, that’s 49 million customers across eight countries and Zain is the market leader in five of them: Kuwait, Iraq, Sudan, Jordan and Lebanon. Across all its operations, in 2018, Zain saw net income of $649mn and EBITDA of US$1.7bn on revenues of US$4.4bn. Our 39% EBITDA margin is one of the highest in the region.

Zain has looked at a tower sale for some years in several key markets, including Kuwait and KSA. The main reason for undertaking such a transaction is that it creates shareholder value as it reduces debt obligations, unlocks capital and resources, thus allowing more focus on core operations in driving new business growth. These two markets are very prime for Zain as we expect exponential growth in digital services, especially in the Government, Enterprise and B2B areas.

TowerXchange: Tell us a little about yourself, what is your background and how did you come to manage the first successful tower sale in the Middle East.

I am in charge of the development and implementation of Zain’s growth strategy and its transformation from mobile operator to a digital services provider. My responsibilities also include business development, strategic investments and portfolio management.

Prior to my current role, I was head of the Group’s M&A team and this prepared me for the complex negotiations involved in a successful sale and lease back of towers. Before that I had experience in private equity in MENA and asset management with JP Morgan in the U.S.

TowerXchange: When plans for a tower sale were initially mooted, what was the attitude internally? Where did the idea come from?

Working with an independent towerco was something Zain had been looking at for a long time. For at least the last three years, we have been mobilized for these two transaction and they were both initiated by our Group CEO. The timeline for both Saudi Arabia and Kuwait, was roughly similar. 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.

TowerXchange: Were there concerns about losing control, or was the attitude more positive?

To be frank, there is no precedent in the region so the concern we faced internally was totally normal and completely to be accepted. It is a big change. An important external stakeholder we had to work with was the regulator in both markets. We had to help them understand the business and execution plan and clarify them why it is beneficial for the sector and local economy as a whole. Under the terms of the agreement, Zain will be selling only its passive, physical infrastructure to IHS and will retain its intelligent software, technology and intellectual property with respect to managing its network. This is why Zain is looking across the region and reaching out to explain the fundamentals of tower transactions to the market. Other MNOs and regulators across the region are starting to think about their infrastructure and we have quickly become known as a reference for such divestment.

The regulator had questions, but there was nothing particularly concerning or surprising in their reaction. We were asking to move from a simple telecoms market to introducing a whole new player, in the form of a towerco. They needed to know the towerco were a reputable entity, knew what they were doing, that strategic infrastructure was protected, and so on. So, it is a process to make sure all t’s are crossed and i’s are dotted. It is important.

We chose to work with IHS Towers for many strategic reasons noting they are one of the largest independent tower operator in the MENA region by tower count. They are a company that possesses high calibre of expertise with sound operational experience in diverse and very difficult markets. In many African markets in which IHS Towers operate, for example, power reliability is poor and some sites in the divested estates of towers require that level of power expertise.

TowerXchange: Is there any kind of Middle Eastern body that ties the regulators together? How does information spread in the region?

The region’s regulators have been quite sophisticated. That might not be the usual image of telecoms regulators, but the regulators in the region have access to top-notch international talent. And they’ve been through a journey of discovery of the benefits and challenges of separating active and passive infrastructure. Many regional regulators have gone through public consultations to work out how infrastructure sharing can work in their area. There’s a big appetite to apply best practice and in keeping abreast with global trends in the telecommunications sector by offering licenses to provide wholesale services for tower infrastructure, thereby reducing capital expenditure challenges on telecom operators and raising the efficiency of mobile networks. This pro-activeness also allows new investors to enter the market, creating job opportunities and showcases the country as a more attractive place to invest.

Although the Kuwaiti deal was agreed at the end of 2017 we’ve had to undergo a long but constructive regulatory exercise which will allow us to close in early 2019. This slowed us down but it means that now there is a clear legal regime for towercos in Kuwait. Because of the learnings we have brought to the region, we expect the process for our Saudi sale and engagement with Saudi regulators to be shorter and to be able to close out the deal by mid-2019.

TowerXchange: How are the build to suit elements of the contracts designed? How will the tower sale help with 5G?

We look forward to the efficient roll-out of 5G services to our customers and contributing to the socio-economic development of the country. Both the KSA deal and the Kuwait deal involve provisions for further new build. So the deals are not just about monetising passive assets but they will also help with future roll-outs of 4G densification and 5G networks. KSA has the larger new build component because Zain are expanding our network significantly more in KSA, whereas in Kuwait we are already very well established. We need to improve coverage in KSA, but we also need to boost the capacity of the network as we build out a 5G-capable network. The increase in density of sites for 5G requires significant investment in new sites. Both KSA and Kuwait are investing and beginning their 5G roll-outs this year, so this is a live problem that will require new traditional sites and rooftop solutions.

TowerXchange: What is on the horizon for Zain as it moves forward without its towers?

Zain sees the impending Tower deal as beneficial on multiple fronts. Once closed in these two key markets, we are very confident there are important learnings to take forward, not just for Zain in other markets, but for other MNOs – and not just for telecoms but for increasing infrastructure sharing across the Middle East. It is a tremendous opportunity.

Lots of value accretive deals will be happening with Zain during 2019, not all of them I can announce just now. But the flexibility and capital released from the tower sale will help us do some really exciting things in unlocking opportunities in the digital space and at the same time meet the ever-increasing demand for reliable broadband access and data consumption. In the next few months, we will elaborate more on the strategic direction of Zain Group and our stakeholders will see what our move into becoming a digital services provider really means.