Jazz to sell at last?

Souring inflation and insufficiency of US dollar liquidity over the last 6 months has thrusted Pakistan’s economy into a crisis with energy prices and a shortage of equipment driving up opex spending for towercos and MNOs. However, the sale of Jazz’s towers and Telenor's exit brings a new wave of tower activity to a market which still has enormous room for growth. 

Jazz, the Pakistan subsidiary of multinational operator Veon, is close to completing the sale process of its 10-12,000 tower unit Deodar in Pakistan. The deal is valued at between US$600-960mn with a per-tower valuation of US$60-80,000. This is not the first time Deodar has been on the market - edotco Pakistan attempted to acquire the portfolio but stopped short in 2018 after failing to obtain regulatory approval. However, a depreciating local currency (PKR) and high inflation threatens to derail any sale agreement due to a disparity between Jazz’s valuation and what any buyer is willing to pay.

The original deal with edotco was valued at US$980mn back in 2017; even if a buyer was prepared to pay the same amount in Pakistani rupees today the amount in US dollars would be half of what it was. This explains the massive difference in valuation between US$600 and US$960mn. The SLAs and other licensing agreements within the contract are also reportedly very tilted towards Veon, making it less likely that a towerco will agree to the current agreements in the contract. Although there are several buyers involved in the bidding process and the portfolio is highly sought after, agreeing on a fair price may delay any agreement unless Veon is willing to let go of their standards.

Jazz has plans to spend the capital across several avenues such as paying off debts which are becoming more expensive with inflation. The MNO also paid 50% upfront for spectrum and needs capital to pay the other 50% in instalments owed in US dollars. Some capital will also be used to drive ongoing 4G rollout as 20-30mn people remain without service in the country, as well as exploring new revenue opportunities in digital infrastructure. Jazz recently launched a video demand app and is looking at fintech and a digital retail banking license among other new services.  

Norwegian multinational MNO Telenor announced it is selling its Pakistani unit due to competition and rising costs, having run a strategic review back in July due to rising energy prices. The sale will include Telenor’s tower network of around 7,500 sites. While the operator’s subscriber base grew 6% YoY, its ARPU fell 10% and in Q3 reported a 22% YoY earnings decline. Citigroup is reportedly struggling to find potential buyers for the business unit which is valued at around US$1bn. The first round of bidding took place in November and although the companies involved were not named, the parties involved are Middle Eastern and Asia-based.

Despite the MNO’s poor recent performance, Telenor is the 2nd largest MNO in Pakistan with a strong subscriber base and while slow to rollout due to the sale process the operator has a good 4G network. A merger may be exactly what the market needs to reduce competition and increase MNO volume. In 2016 Jazz acquired Warid Telecom which brought significant benefits including cost reductions, expanding customer base and generating additional revenue for network investment. There are three other operators in the Pakistani market - Jazz, Zong, and Ufone. With Jazz currently selling its towers and Veon embroiled in a global strategy of freeing up capital the MNO is unlikely to be interested in Telenor. Chinese state-owned MNO Zong is not keen on consolidating or creating any regulatory issues.

Source: Pakistan Telecommunications Authority, Pakistan cellulcar market share (October 2022)

Ufone is a likely candidate to acquire Telenor but the operator has its own challenges with declining profits and facing pressure having recently acquired 4G spectrum. The MNO is also 64% owned by the Pakistani government and 26% owned by e&. It seems unlikely the Pakistani government would have the upfront capital given current market conditions so would likely need to offer Telenor shares. Ufone is already struggling with lots of board-level gridlock between the two shareholders and a third would only complicate things further.

Saudi Arabian MNO stc group is also interested in Telenor and have been trying to enter the Pakistani market for some time. Despite the low ARPUs Pakistan has a massive subscriber base and stc has been looking to rapidly grow its customer base, which currently sits at around 38mn. TAWAL is due to launch operations in Pakistan imminently having acquired a small portfolio from AWAL Telecom in February and if a merger between stc and Telenor were to go ahead, the towerco could receive the 7,500-tower portfolio from its parent operator. 

Pakistan has been experiencing market challenges for some time in the telecoms space, compounded by the recent global energy and inflation crisis. Since the start of 2022, Pakistan saw significant increases in energy prices across the country causing profitability problems for towercos and MNOs. Tower operators cite power as the number one operational challenge in the market and this has only gotten harder as the strength of the PKR has been declining for some time. A shortage of US dollars in the market prompted the government to temporarily restrict the import of oil and passive power and telecoms equipment, which has halted rollout and increased energy costs by 80% over the last 6 months.

The declining PKR is also impacting the valuations of telecom assets having already impacted the Deodar sale and is likely to shake up any agreement for Telenor’s Pakistani unit. Pakistan also has high country risk due to its unstable political environment with the threat of changes in governments and policies and is on a par with Nigeria. However, local investors may be interested in keeping their capital onshore, while optimistic investors might look past current market condition and recognise the promising macros and opportunities of the market.

Source: xe, PKR to US$ exchange rate over the last 12 months (December 2022) 

Despite rising opex costs, MNO service charge rates are still around 150-200% lower than where they should be due to price war competition. However, operators in the market have started to put their prices up, not enough to address the gap in rising operational and energy costs, but MNOs and regulators are actively addressing low ARPUs. Further consolidation through an acquisition with Telenor, and further takeover of tower management by towercos will help alleviate some of the burdens of Pakistan’s competitive telecoms market. 

Although fuel shortages have led to load-shedding and blackouts of up to 8 hours, the deployment of renewable energy on sites is helping to reduce long-term opex and maintain SLAs. Thanks to policies from the previous government in addressing environmental concerns, imports of solar equipment were tax-free and banks were asked to provide low interest funding. This has created a huge drive of solar deployments, with edotco solarising 47% of their sites. Unfortunately, due to economic pressures the government has stepped back on this deal and the cost of renewable imports has gone up. Power also remains a pass-through, meaning towercos aren’t incentivised to invest in renewable energy, especially when MNOs aren’t willing to invest. MNOs have seen energy costs go up by 150% over the past 6 months and are focused on present cost savings rather than committing up-front capex for long-term energy solutions.

A solution here may well be ESCOs, who have shown their ability to provide capex in lowering energy costs across challenging African, LATAM and Asian markets. Pakistani MNOs have started to work with ESCOs with several proof-of-concepts taking place. Engro’s energy partner REON Energy ran a successful 20 site ESCO pilot with Zong and signed a long-term lease with Telenor for solar a complete power pack at sites including solar, battery and power solution swap. IPT Powertech do operate through a local subsidiary in the market but have shown an interest in expanding in Pakistan in response to the rise energy management challenges.

Want to learn more about Pakistan's evolving tower landscape and how towercos and MNOs are tackling the energy crisis? Hear from Pakistan's industry leaders at TowerXchange Meetup MENA on 13-14 March in Dubai.