Read this article to learn:
- Why the deal heralds a new age of African M&A
- Details on the Helios Towers/Free Senegal transaction
- An introduction to the Senegalese market
- What the deal means for Helios Towers’ capex in West Africa
- How the deal may affect Helios Towers’ financials
Following 2016’s wave of M&A deals, there have been few transactions of scale in Africa, but that is now changing. Helios Towers has agreed on a deal to acquire 1,220 towers in Senegal through a sale and leaseback transaction with Free Senegal, the second largest mobile operator in Senegal, backed by a consortium of investors including NJJ, the founder of the Iliad S.A. group Xavier Niel’s private holding company, Teyliom Group and Axian Group. This deal is part of a strategy to move beyond Helios Towers’ current 7,092 towers, and closer towards 12,000 towers, as well as aiming to go from five to eight geographies over the next five years. Here, TowerXchange will analyse the deal and present exclusive comments from Kash Pandya, CEO and Tom Greenwood, COO of Helios Towers.
On August 12th, Helios Towers announced it had inked a deal to acquire 1,220 towers from Free Senegal for €160mn (US$189mn). This represents an enterprise value of €178m (US$210m), including an estimated €18m (US$21mn) of taxes and capitalised ground leases. The deal also includes a deferred consideration of €40mn (US$47mn) and a capex plan worth €30mn (US$35mn) for the development of 400 committed build-to-suit towers (BTS), over the next five years. Helios Towers and Free Senegal have entered into a 15 year Master Service Agreement for leasing and energy services on the acquired sites and the sites to be built in the future.
The deal is expected to close before the end of Q1 2021, subject to the usual closing conditions and regulatory approvals.
Free Senegal is the West African country’s second largest mobile operator. The deal marks the entry of Helios Towers to its sixth market, adding Senegal to its operations in Congo Brazzaville, DRC, Ghana, South Africa and Tanzania, and will take their site count from 7,092 to 8,312 (8,712 after including the 400 committed build-to-suit).
The 1,220 sites will make Helios Towers the largest independent towerco in Senegal and the company is expected to initially deliver run-rate revenues of €32mn($38mn) and run-rate adjusted EBITDA of €16mn (US$19mn). The EBITDA margin for these sites is 50% which is lower than that obtained by Helios Towers on its other assets (54%), but higher than the run rate EBITDA margin of past acquisitions.
Tower valuations are always an imprecise metric. At an enterprise valuation of US$210, TowerXchange calculates a per tower value of US$172k, however, the delayed consideration, planned build-to-suit capex, capitalised ground leases and tax costs of the deal make a comparison with older deals more difficult.
The timing of the announcement is not a surprise, in June 2020 Helios Towers issued US$750mn of new senior notes, retiring some shorter duration notes and raising new debt, improving its financial position and bringing its dry powder up to US$450mn. About two-fifths of this dry powder has now been deployed.
Commenting on the transaction, Kash Pandya, Chief Executive of Helios Towers said: “This agreement is aligned perfectly with our 2025 strategic ambitions, broadening our footprint within the African tower infrastructure market. We are acquiring a market-leading independent position in Senegal with long-term contracted revenues and a clear path to value creation through additional organic tower development, uplifts in the tenancy ratio and improved operational effectiveness, all built on the foundation of 15-year contracts. We look forward to working with Free Senegal and the other MNOs over the coming years to further develop mobile infrastructure in Senegal.”
Mamadou Mbengue, Chief Executive of Free Senegal added: “We are very pleased to partner with Helios Towers through the acquisition of our passive infrastructure portfolio and new long-term service agreement. The transaction will allow Free Senegal to further expand its network mobile coverage in Senegal by partnering with the leading towerco in the region. We look forward to working closely with them in the future as a service partner of choice as we both look to further improve mobile connectivity and infrastructure for the Senegalese people and aligned with the digital plan for the Country ‘Senegal 2025’.”
Figure 1: Helios Towers’ towers in six markets as of Q2 2020
Figure 2: Recent tower deals in Africa
The Senegalese market
Similar to Helios Towers’ other markets, Senegal has a young, growing and increasingly urbanised population with high GDP growth. Speaking with TowerXchange, new COO Tom Greenwood explained the attraction: “Senegal is a very attractive market from a macro, telecoms and towers points of view. The country ticks all the boxes for our acquisition strategy. In terms of macro characteristics, Senegal benefits from a low inflation environment and a currency pegged to the Euro by the French central bank. The population of 16mn is growing at 3% a year and GDP is predicted to grow at 5% CAGR through to 2022.”
Figure 3: Market share of Senegal’s three MNOs
Figure 4: Ownership of Senegal’s 4,045 towers
Tom continued, “from a telecoms point of view there are three operators: Orange, Free and Expresso. Even the smallest operator has a 20% market share which is very healthy. And from a towers point of view, Helios Towers is the only active independent towerco and we have first mover advantage. 70% of our sites are urban and alongside 4G densification, there is still basic 2G and 3G roll-out taking place.”
Senegal is located in francophone West Africa on the Atlantic coast. There are 17.9mn mobile connections in the country according to the latest figures from ARTP Senegal. These are split between 9.9mn with Orange, 4.4mn with Free and 3.6mn with third-placed Expresso.
First placed operator Sonatel, in which Orange has a controlling stake, had reportedly looked into a sale of its towers previously but talks failed, reportedly due to workforce resistance. According to Herve Suquet, CTIO of Orange MEA, Senegal is not included in Orange’s current ESCO pipeline, and so their towers may remain an attractive acquisition target for Helios Towers.
Interestingly, Senegal’s number three MNO had previously signed a deal to sell its towers. In 2016 local towerco Al Karama Towers announced the acquisition of 450 towers from Expresso Telecom. Since then, the total number of Expresso sites has swelled to 625 but the deal is yet to close, leaving an opportunity open should Helios Towers want to also expand inorganically in Senegal.
The potential for lease up in a three-player market is acceptable for a towerco, and the option for the entry of a fourth MNO provides some upside. There have been reports that a joint venture between South Korea’s SK Telecom and Middle Eastern firm CKG Group had applied for a fourth MNO license in the country, in a bid to access Senegal’s nascent LTE market. There were also three ISP licences issued in 2017.
4G growth in the country has been limited so far. Expresso is yet to launch its 4G after receiving a licence last year, and the COVID-19 crisis disrupted its planned March launch. Free Senegal received its 4G licence only in December 2018, shortly after Sonatel launched its 4G network in September 2018. The growth of 4G offers a promising source of growth for lease-up and new site development for Helios Towers.
As recently as late 2018, TowerXchange estimated that Senegal had little more than 3,000 towers in the country, but since then all three operators have added sites. Expresso grew from 450 in mid-2016 to 625 today. Free Senegal has grown to its pre-sale count of 1,220 sites from as few as 800 in mid-2017, whilst Sonatel has added 400 sites since mid-2018. Helios Towers’ build to suit pipeline of 400 towers over five years is well within Senegal’s historic pattern of growth.
Who is Free Senegal?
Free Senegal was previously owned by Millicom. Since the beginning of 2016, Millicom has exited Chad, Ghana, Senegal, Rwanda, and the Democratic Republic of Congo. At the time of the planned Senegal exit, the company’s annual report said that Senegal was one of its “less profitable businesses that lacked scale” and that significant amounts of capex would be required to improve profitability.
The Xavier Niel-led consortium that acquired Tigo Senegal and rebranded it Free Senegal, believed that the investment required to upgrade to 4G and gain market share would be worth it. They have now raised much of the required capital from their sale to Helios Towers and found a partner to grow their network.
The original sale of Tigo Senegal was to be to Wari Group, a Senegalese technology company owned by entrepreneur Kabirou Mbodje, for US$129mn. In early 2017, a surprise bid by the alternative consortium saw Millicom tear up their deal and sell to NJJ, Telfiom and Sofiya.
NJJ is the private holding company of Xavier Niel, the founder and main shareholder of Iliad, the parent company of Free in France. Niel also has controlling stakes in seven other MNOs under various brands. The Teyliom Group is the investment-arm of Senegalese businessman Yerim Sow, who also owns a minority stake in MTN Cote D’ Ivoire. Sofiya is backed by the Madagascar-based Axian Group which owns Telma and TowerCo of Madagascar, among other financial and commercial interests.
Xavier Niel-linked businesses have engaged in several SLBs recently, although this may not have been clear due to the different names under which the businesses trade in different markets. Since May 2019, and including this deal in Senegal, Xavier Niel-linked businesses have raised €3.16bn through tower transactions in Ireland, France, Italy, Switzerland and now Senegal. This is an organisation with extensive experience dealing with towercos that should now understand the model well.
In May 2019, through the brand Iliad in France and Italy, and the brand Salt in Switzerland, a sale of 10,700 sites to Cellnex was agreed; a deal which has since closed. Agreeing to a 20-year term, with a 10-year potential extension built in, Cellnex’s initial cash outlay was €2.7bn. The deal breaks down as €1.4bn for a controlling 70% stake in Iliad’s 5,700 French site portfolio, €600mn for 100% equity in Iliad’s 2,200 sites in Italy, and €700mn for a controlling 90% stake in Salt’s 2,800 site Swiss portfolio. In May 2020, eir in Ireland agreed the sale of 650 sites to Phoenix Tower for €300mn.
In common with many SLBs of recent years, the deals in all five markets include build to suit commitments between the towercos and the MNOs. In the France, Italy and Switzerland deal Cellnex anticipates deploying a further €1.35bn to realise a substantial BTS programme of up to 4,000 sites. Figures were not released for the eir BTS commitment, but it is rumoured to be for up to 800 sites over the next eight years. Including the 400 sites in Senegal, these businesses have committed to a pipeline of 5,200 BTS sites over the next four to eight years.
Revenue and growth potential
Helios Towers’ 2019 Annual Report showed contracted revenues of US$2.9bn with an average remaining contract life of 7.2 years. The 15 year deal with Free Senegal has a revenue run rate of US$38mn and will increase Helios Towers’ revenues by 8% on a pro forma basis, as well as substantially increasing average duration of contracted revenues.
Until this deal, Helios Towers has secured the vast majority of new contracted revenues from so-called Tier 1 MNOs. The big five African operators (Airtel, Tigo, MTN, Vodacom and Orange) make up 82% of contracted revenues. Additionally, a further 17% of contracted revenue is with Africell and Viettel, two other multinational MNOs. Adding Free Senegal to its portfolio will increase its reliance on this somewhat less credit-worthy segment but thanks to the CFA Franc’s peg to the Euro the proportion of hard currency revenues in the portfolio will actually increase from 59% to 63% on a pro forma basis.
In terms of diversifying Helios Tower’s portfolio away from the perceived riskiness of the DRC and Tanzania, Senegal performs well. Kash Pandya is familiar with Senegal from his time with Aggreko, and described Senegal as “more developed than DRC in terms of infrastructure. It sits somewhere between Rwanda and Tanzania in terms of general development and education levels. In many ways it is similar to Ghana, our other West Africa market. The population is young, with a median age of 18 and with 4,500 subscribers per tower, there is lots of investment needed to roll-out 4G.”
In a note published on the 13th August 2020, Jefferies is bullish about the deal for Helios Towers and the broader wave of African M&A following the Free Senegal deal, saying “After a period of M&A mud-trudging (another feature of the coronavirus), Helios finally celebrated a thawing of the pipeline with yesterday’s news of a major site acquisition from Free Senegal. To our reading, this is Helios executing M&A to order: new market entry building regional footprint; the acquisition meets all investment criteria and marks significant progress against the long-term strategic ambitions; the acquisition provides further revenue diversification and increases the group % of revenue in hard currency (to 63%, from 59%); and the acquisition is immediately accretive to earnings. Management has spoken of being at over 12k sites by 2025 (from 8.3k pro-forma today) – we’ve the sense the M&A pipeline comfortably gets them there (and surely further) – replicate the Senegal terms and the market will readily support management on the journey.”
Figure 5: Free Senegal site details
Helios Towers in Senegal
There is substantial upside for Helios Towers to deploy its Lean Six Sigma philosophy in Senegal to push cost out of their new operations. By the end of 2019, almost half of Helios Towers’ employees had been trained in Lean Six Sigma.
As in other markets, Helios Towers will focus on developing a local team to lead the opco. Helios Towers plans to put in one or two individuals from existing markets with the right cultural understanding. 100% of staff in Africa are African and 97% of staff in opcos are from those countries. Helios Towers plan the same for Senegal.
Helios Towers also has well established operational partners and will look to work with those operators able to work in Senegal. But where existing partners are not able to fulfil Helios Towers’ demands they will find new local partners.
Through the Lean Six Sigma approach in 2019, Helios Towers found ways to reduce diesel generator run-time by nearly 40% on optimised sites, improved the depth of discharge of their batteries by nearly one-third, and improved solar performance in Tanzania and DRC by 16%. Applying these lessons to Senegal should see significant reductions in costs, and boosts in EBITDA and net income rapidly. The grid is very good in Senegal by African standards with around 21 or 22 house of grid per day. This means that the gaps in coverage can be covered by battery technology, and in some cases diesel gensets.
The tenancy ratio on Free Senegal’s sites is currently 1.0x, and therefore there is substantial upside potential in Senegal for lease-up on existing sites with Expresso Telecom and Orange-backed Sonatel as both are investing in 4G.
Lease-up on planned BTS sites should also be healthy. The suburbs of Dakar require substantial coverage investments, and densification will be required for all three networks as they roll-out 4G. The deal includes planned capex of US$35mn which must include both energy equipment upgrades and new site build. With Helios Towers’ experience and healthy demand for new sites, this planned spend should produce a healthy return. Tom Greenwood suggested that should Expresso and Sonatel turn to Helios Towers for BTS, they could reach 2,000 total sites in Senegal over the next five years.
Tom Greenwood told us that lots of towers are ready for second tenants, with little upgrade work needed, adding that “without a towerco, local mobile operators rarely like to share and this is evident in Senegal. There are a few co-locations on Free Senegal sites, but not many. That is great news for us. Our conservative base case is to grow our tenancy ratio by 0.1x each year over a five year period. We expect significant uptake once local MNOs realise the advantage of having a towerco deploy capex or manage operations for them.”
Are we seeing a resurgence of M&A in Africa?
Since 2016, there have been few SLBs (see Figure 1). For some time there has been increased talk of a resurgence of M&A in Africa. This deal may mark the beginning of a new wave of deals.
Kash Pandya explained Helios Towers’ M&A philosophy, highlighting that there are good opportunities outside the big five African MNOs. “We have an active team pursuing M&A, strengthened by our recent appointment of Tom in the new position of COO. In my view, the pulse of M&A has increased this year and coming out of lockdown, we expect things to become freer, leading to more opportunities to execute M&A. When entering a market, there are markets without the big five MNOs, where there are still three or more healthy operators, with low penetration and with a pegged and stable currency. Our entry into Senegal will push us up to c.70% of EBITDA in hard currency, bringing security for investors. That is the kind of positive dynamic we look for in the markets we enter.”
Barriers to M&A are also slipping away. Last year, Airtel Tanzania put out a notice for expressions of interest in 1,400 towers but progress on the deal seemed to stall. On July 1st 2020, Tanzania removed the local listing requirement for telecoms operators, which opens the way for these towers to be sold to whichever towerco can submit the most competitive bid. Vodacom’s parent company Vodafone has explored an alternative strategy, carving out and looking to list a minority stake in its portfolio. In South Africa and at Safaricom Vodacom has been proactive in operating like a towerco; whether they look to crystallise the value of these towers in South Africa, Kenya or other markets through a similar strategy or a SLB remains to be seen.
The Free Senegal deal also shows that there is increasing interest in doing deals with Africa’s Tier 1.5 MNOs. There are many MNOs in Africa which are too risky to do deal with, with revenue bases too small and unsteady market shares. However, there are also increasing numbers of smaller creditworthy MNOs who will now be able to tap towercos for SLBs to release capital and find a passive telecom infrastructure partner.
Should Africell, Viettel or even Globacom want to monetise their towers they may find a more welcoming environment than before. And should local conditions improve perhaps even TMcel in Mozambique or Unitel in Angola could find a willing partner.
Helios Towers also announced two small roll-up acquisitions for 80 sites in Q2 in South Africa and Congo B. There are also another 19 additional sites expected to be acquired later in the year, which shows that towercos are taking advantage of their relatively strong financial position to roll-up smaller portions of towers.
Helios Towers’ acquisition of Free Senegal’s 1,220 towers will be subject to regulatory approvals in each country. The deal is targeted to close in Q1 2021, with a 100 day set-up plan in motion by Helios Towers.