Read this article to learn:
- Opportunities in different markets
- The key value drivers for MENA investors
- Inhibitors to towerco investment and the lack of tower transactions
- The role of governments and regulators as drivers of change
- The future for growth in MENA towers
It has proved difficult to close tower transactions in MENA, with several processes abandoned for financial or regulatory reasons. A year ago, towercos owned and operated less than 1% of MENA’s 275,000+ towers. While that figure remains modest at 6% today, several towercos are poised to play a critical role in the investment landscape of this developing region. TowerXchange examines what is driving the value proposition for towerco opportunities in MENA and examines the common threads for the lack of transaction closes in the region to date.
Assessing potential tower transactions
With the MENA region being so diverse, opportunities for towercos naturally vary from country to country. Some countries enjoy a stable currency which make them attractive to long-term investors, while others are less economically and politically stable, which present exciting growth opportunities to investors who are more risk tolerant. Needless to say, different markets are attractive to different investors, with varying levels of interest from towercos.
As stated by Eric Crabtree from the International Finance Corporation (IFC), in larger MENA markets investors will begin by firstly assessing the macro environment such as currency stability and convertibility, secondly, explore and understand the management team and their ambitions for growth and thirdly, examine specific market factors, like how many healthy MNOs exist and will divestiture be approved by the regulator.
Expanding on this, our panel discussed the levels through which investors move to assess the opportunities for tower transactions in a particular market; how many mobile operators exist, how healthy are their balance sheets, what are their future growth plans and what does the management team look like? There are also the macro factors to take into account, including the current stability of the country, the regulatory environment and the scale of likely investment, given that build-to-suit is the most logical entry point in some markets for towerco investment.
Finding value for MNOs
Persuading MNOs to pass a key component of their business into towerco hands remains a challenge across the entirety of the region, and a different approach to tower transactions is needed to facilitate transactions.
Richard Ltaif from TAWAL, Saudi Arabia’s newly formed carve-out from operator stc, explained that the value proposition for operators is three-fold.
– Firstly, towercos must recognise that MNOs are struggling to sustain and increase market share and fear losing touch with their customers, and that is what is driving decisions around passive infrastructure.
– Secondly, MNOs recognise that low tenancy ratios represent a missed opportunity to consolidate parallel infrastructure and decommission to lower costs instead of rolling out dual or triple infrastructure in countries such as Kuwait and Saudi Arabia.
– Thirdly, operators face balance sheets which are not as healthy as they once were in a period where 5G investments are required by regulators and expected by customers.
With MNOs looking at lowering their costs and freeing up capital for 5G investment, the opportunity of an acquisition may prove attractive to generate capital.
A history of tower transactions, joint ventures and towerco activity in MENA
Why haven’t we seen more transactions?
Many common reasons underlie the lack of transactions within MENA, however in many cases the causes remain country-specific. In the region, MNOs are often either government-backed or cash rich. And even outside telecoms, the idea of a handing over assets on a sale and leaseback basis is uncommon. These issues are passing, as governments move to make mobile operators more arm’s length. At the same time balance sheets are worsening and ARPUs are coming under pressure, and so the need to reduce opex means operators are being forced to look at divesting their assets.
MNOs are still moving slowly, even if some carve-outs are coming to fruition and sale and leasebacks are completing. Iyad Mazhar of TASC Towers said that the emergence local champions like TAWAL or the entry of independent towercos like IHS Towers wouldn’t lead MNOs to completely exit the passive telecom space. This has been the case even in Kuwait, where Zain has retained a small portfolio of towers even while signing a SLB deal with IHS Towers for US$130mn earlier this year. In Saudi Arabia thousands of strategic towers are retained by stc. MNOs may be more likely to seal the deal if they can retain some key strategic tower assets or hold a stake in a joint venture or independent towerco.
Whilst governments in many countries are publicly opening up to outside investors and companies, one could claim that it is the regulators that are slowing things down. Regulators in several markets have lacked clarity on whether passive infrastructure should be licenced and what the licence conditions should be. It is this uncertainty that some believe is the primary cause of deals within the region falling through.
Richard Ltaif of TAWAL explained that engaging with the regulators and being transparent from the outset is key to successful entry in any market. For TAWAL, a towerco less than a year in existence, they have achieved significant developments to date including helping create efficiencies on maintenance and in particular on land rent. As Richard Ltaif stated it’s about and educating the MNO and regulator on the value that can be unlocked. Yet whilst towercos can bring huge tangible operational efficiency and uptime, how does one convince an MNO or regulator that the savings of a towerco are real?
Rather than focusing on how much capital can be released, towercos and MNOs are to be better served by focusing on agreeing the right service level agreement (SLA). Providing a high level of availability and reducing opex creates the initial incentives for a sale and leaseback. SLA improvements can also include helping reduce the cost of power, even where there is good power availability across MENA countries. Towercos have proven that SLAs drive performance improvements, and this is winning round regulators and MNOs to SLB deals.
While 5G demand is driving MNOs to consider monetising their towers, 5G is also becoming a reason for delayed transactions. MNOs now need greater visibility on their portfolio before deciding whether to own or lease 5G macro and micro sites. However, once a strategy is settled, increased levels of infrastructure sharing will allow risk and cost sharing for further 5G rollouts.
With the emergence of carve-outs like TAWAL and edotco, we consider the question; how do independent towercos now compare as a monetisation model?
As discussed by Akshay Grover from iSON Tower, 100% SLB deals remain an option, however they are unlikely to be the most common structure in the short-term.
Grover said there are varying models that may work to increase towerco investment. One viable option is that one MNO within the country leads a towerco formation, like TAWAL. A second option would entail competing MNOs sharing rollout plans with a shared captive towerco. Whilst this model could create real independence, the misuse of shared information would be an issue holding back most operators. A third option is a consortium involving MNOs backed by sovereign wealth funds, government-backed pension funds or international investors. Although this is not a structure we have seen yet, it was viewed as a possible future monetisation model for towers outside the independent towerco mainstream.
Allowing an international towerco to purchase 100% of an operator’s assets seems to be an unlikely outcome even if it we believe it would be the most desirable one. However, the transactions realised so far, and the dynamism of discussion on alternative structures for deals at this year’s TowerXchange Meetup MENA means we expect the pace of transactions in MENA to pick up.
When it comes to investment, towercos need to have an alignment with local regulators. The Zain/IHS Towers deal in Saudi Arabia is a clear example of a failed transaction primarily due to regulatory challenges.
In many parts of the world where the tower industry has emerged, governments have played a role in regulating and driving infrastructure sharing. Broadly speaking MENA’s MNOs have not been good at sharing infrastructure (outside notable sharing hotspots like Egypt). Governments, with digital economy and economic development policies, are increasingly turning to their regulators to encourage or mandate infrastructure sharing to facilitate those plans.
The International Digital Infrastructure Alliance (IDIA) is working hard to pull together an industry framework and help create investible tower regulatory regimes in MENA. One of its primary goals is to educate government stakeholders about the benefits of infrastructure sharing.
In a recent interview with the CEO of the IDIA Chuck Green, TowerXchange asked about the regulatory and taxation “red flags” that would represent inhibitors to towerco investment, which have sadly previously been too common in MENA. According to Chuck Green the principle inhibitors to investment in towers included; high total licencing and permitting fees and taxes; non-existence of import duty or income tax incentives; inefficient, time-consuming permitting approval processes; differing agendas of local authorities and national regulators or telecoms ministry, resulting in inconsistency and exaggerated regulatory intervention, cost and delay; and restrictions on foreign ownership, particularly if capped at 49.9%.
The future of the MENA towers
Now towercos are honing in on the key value case for tower transactions in MENA, and if MNOs and towercos are seeking outside investors, is capital readily available in the MENA region?
In some countries, like the GCC states, the availability of local debt remains good, with banks becoming more familiar with the towerco model. As elaborated on by Gulfraz Qayyum from Citi the towerco model is one that is set and proven, allowing MNOs to attract capital from capital markets and banks, however this comes with issues around foreign exchange risk and repatriation.
MNOs may not be crying out for cash investments in MENA, however they are increasingly interested in carve-out models like edotco and TAWAL.
The ambitions of international investors combined with towerco and operator growth plans will see the MENA tower market move forward in the coming twelve months. Furthermore, once more towercos are carved-out and regulatory and security issues are addressed, long-term investors will be more confident and ready to take a share of these developing markets, it is now simply a matter of time.