MobiNil announces deal with Eaton for acquisition of around 2,000 towers at a value of US$131.15 million

First North African tower deal could spark more activity in a thus-far dormant MENA market

Read this article to learn:

  • The drivers and details for the MobiNil/Eaton deal
  • The shape of the Egyptian telecoms market and appetite for tower sharing
  • The towerco landscape in Egypt and North Africa
  • The impact a deal of this nature will have on the rest of the region
  • Exclusive snapshot interview on the deal with Eaton CEO, Terry Rhodes

Breaking news

Monday 25 July: After the failure to meet the 21 July deadline for conditions laid out in the sale of MobiNil’s towers to Eaton, Orange has decided against extending the deadline and effectively cancelled the agreement to sell the portfolio.

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Congratulations to Eaton Towers on securing 2,000 highly coveted towers from MobiNil in Africa’s second largest tower market! Commentators who once cast Eaton as the laggards of the ‘Big Four’ African towercos have long since amended their view, and this latest deal, combined with the imminent close of acquisitions from Airtel in six countries, gives Eaton impressive scale and diversity.

Despite being rocked by regime change and the events of the Arab Spring, Egypt is a strong mobile market and one which has great potential for growth. With three (possibly soon to be four) MNOs in the market and a history of tower sharing, albeit mainly bilateral swaps, there has been much speculation about why independent towercos don’t have a strong presence in the country already.

The deal

MobiNil stated they have sold their stake in their tower subsidiary Egyptian Company for Mobile Tower Services to Eaton Towers for 1 billion Egyptian pounds (US$131.15 million). The agreement encompasses the purchase of approximately 2,000 towers with a 15 year leaseback contract for the operation and maintenance and also for the additional build-out of new sites. The announcement concludes a lengthy process which was begun in 2013 and run by Lazard.

Eaton Towers

Eaton Towers has recently raised US$350 million in new equity resources from existing and new shareholders, on the back of which they have been able to agree the deal for the purchase, leaseback and management of over 2,000 MobiNil towers.

Eaton’s fundraising brought in new equity from their controlling shareholder, Capital Group Private Markets, existing shareholder Development Partners International (DPI) as well as new shareholders in the form of Standard Chartered Private Equity and a consortium led by Ethos Private Equity, comprising Ethos Fund VI, Hamilton Lane and HarbourVest, which contributed US$150mn of the US$350mn of new equity.

Terry Rhodes, CEO Eaton Towers said: “We are very pleased that our existing and new shareholders support the strategy and vision to create a market-leading, independent, pan-African tower company. We are delighted to sign the first purchase and leaseback tower deal in Egypt. Egypt is the second largest mobile market in Africa and we will invest over $200 million to provide world-class shared infrastructure to help the Egyptian operators provide better coverage and data services to their customers.

Once the MobiNil deal and the agreements with Bharti Airtel for six countries signed and announced last September are completed Eaton Towers will be operational in eight countries, representing the most diversified portfolio of shared infrastructure on the African continent.

Overview of the Egyptian market

With GDP per capita of $6,696, Egypt represents a strong market compared to much of SSA. With GDP growth estimated at 12.7% (Source: Delta Partners analysis), a population of 84mn, SIM penetration of 114% and mobile broadband penetration of 33% (Source: GSMA Intelligence, Q4 2014), plus strong existing infrastructure in the country, the potential for telecoms growth and towerco profitability are good.

In the short term the political situation and social unrest have not been good for the country’s economy and many political governance decisions have been put on hold until the (currently postponed) general election can take place. For a dynamic market like telecoms, this has been restricting growth and preventing the market from moving forward to a certain extent.

However, despite the lack of political interference, the relative calm of the last 12 months has meant that businesses have been able to implement changes and the economy has progressed. Many Egyptians are hopeful that 2015 will be a year when the economy is able to achieve its potential.

MNOs in Egypt

The Egyptian market boasts three Tier One operators with strong international pedigrees, presenting a great opportunity for reliable and creditworthy tenants for a towerco entering the market.. 3G coverage is currently fairly extensive, with most operators focusing on capacity upgrades ahead of a potential 4G auction once the political situation is more stable.

Vodafone, with around 40 million subscribers, holds 41.5% of market share. MobiNil (over 90% owned by Orange) has 34 million subscribers and 35.5% market share and Etisalat, the third operator, still boasts an impressive 22 million subscribers and 23% market share.

TowerXchange believes that Telecom Egypt are also about the enter the market, as an MVNO at first, although this could be reviewed as 4G auctions are held in the next couple of years. This will undoubtedly present an opportunity for independent tower owners in the country, although the timescales for market entry remain unclear, with our sources suggesting that nothing will happen before the next general election, which remains postponed ‘until further notice’. Once the new MVNO enters the market it seems likely that all four operators will need to compete on price, a fact which will lead to the re-evaluation of balance sheets and may well trigger more tower sales in the country.

The towerco landscape to date in Egypt and North Africa

Thus far, the North African market seems to have followed the Middle Eastern model of keeping a close hold on proprietary networks, rather than following the SSA model of significant tower divestments. The most likely reason for this is the political turmoil caused over the last three to five years by the Arab Spring events. In addition, operators in the region have had to deal with urgent requirements for network rollout, licensing requirements, competitive scenarios and difficulties dealing with governments or regulatory authorities. Recent political turmoil during the Arab Spring had reduced investor confidence and raised issues regarding direct investment schemes and exit strategies.

However, now that the North African markets are returning to normal and stability is resuming, Egypt in particular seems to have some of the key ingredients for a strong independent tower market, including strong data growth, MNOs with international experience of tower sharing and divestments and a new market entrant who will need to build up network capacity quickly.

With an estimated 19,000 towers in the Egyptian market, the Eaton deal will shift the dynamic greatly, acquiring ~10.5% of the total towers in the country.

Tower ownership in Egypt

Tower-ownership-Egypt

The broader impact on the market 

TowerXchange believes that other operators in Egypt will follow MobiNil’s example and that we might expect to see another sizeable tower divestment from either Vodafone or Etisalat once the deal is closed as they aim to avoid ‘last mover disadvantage’ and take cash out of towers which would otherwise be at risk of being stranded on their balance sheet. MobiNil has retained around 4,000 towers, so of course have the potential to divest further assets. TowerXchange anticipates that deals in the Egyptian market will also motivate consideration of consolidation in other North African countries, particularly the bigger markets such as Morocco and Algeria.

Exclusive interview with Terry Rhodes, CEO, Eaton Towers

TowerXchange: Congratulations on your latest deal Terry! What attracted Eaton Towers to invest in Egypt?

Terry Rhodes, CEO, Eaton Towers:

My first involvement with Egypt was as a shareholder with Vodafone in 1998 when they first entered the Egyptian market. So I have followed the Egyptian market as it has grown from nothing to getting on for 100mn customers. It is the second largest market in Africa, so it is a great opportunity to be the substantial first tower company. Of course it would have been easy to pull out during the political unrest, but we and our shareholders are taking a long term view which sees Egypt as a very important market.

TowerXchange: Why did MobiNil choose Eaton?

Terry Rhodes, CEO, Eaton Towers:

Over the last 2 years Mobinil, with Lazards as advisers, have run a detailed evaluation and negotiation process, which Eaton Towers won.

TowerXchange: Can we confirm the deal structure: 100% equity, pure sale and leaseback?

Terry Rhodes, CEO, Eaton Towers:

The Egypt deal is 100% purchase of the company into which MobiNil had put these 2,000 towers.It is 15-year sale and leaseback.

TowerXchange: Did MobiNil retain any towers and why?

Terry Rhodes, CEO, Eaton Towers:

Eaton Towers has bought about a third of the MobiNil towers. They are in three geographic areas: Delta, Upper Egypt and Red Sea where there is very good growth potential. So it does not include, for example, all the rooftops in Cairo.

TowerXchange: Why is country and counterparty diversification so important in the emerging market tower industry?

Terry Rhodes, CEO, Eaton Towers:

What differentiates Africa from say India is that it is a continent with more than 50 countries. So this means we can build scale and diversify political and currency risk  across a number of countries. Eaton Towers will be in eight countries with the best diversified portfolio.

TowerXchange: Is your new capital going into an SPV devoted to the Egypt transaction or is it at Group level? 

Terry Rhodes, CEO, Eaton Towers:

New equity is all going in to Group company, alongside existing shareholders. Then some of this will be used for Egyptian SPV.

TowerXchange: With the imminent Airtel close and MobiNil announcement, is the ‘land grab’ phase of growth coming to an end for Eaton? Have you reached ‘scale’?

Terry Rhodes, CEO, Eaton Towers:

We will have over 7000 towers in 8 countries so we will have scale – but we will still be looking at new opportunities in existing and new markets in Africa.

My commentary on the Eaton-MobiNil deal, by Kieron Osmotherly, Founder & CEO, TowerXchange

Egypt represents a substantial, sophisticated and balanced mobile market; a country where stability appears to be improving and capex programmes resuming.

Prior to the Arab Spring, Egypt’s operators had previously tried to establish a joint venture tower initiative, but it proved too complex. Nonetheless, these past negotiations are indicative of the pre-existing culture of infrastructure sharing in Egypt, always helpful to a new entrant towerco.

It should be noted that there is a long runway for growth of the fledgling Egyptian tower industry; this transaction transfers a little over 10% of the country’s towers to its first international towerco investor. Although several local tower builders are licensed to provide passive infrastructure sharing services in Egypt (MobiServe, ALKAN, EEC and HOI-MEA), they are most likely to become subcontractors rather than competitors to Eaton Towers, who will be in prime position to absorb any further towers which come to market and to secure build to suit opportunities in the country.

Whilst this transaction includes only Mobinil’s towers in the densely populated Delta, Upper Egypt and tourist-friendly Red Sea regions, it minimises Eaton’s exposure to the continuing unrest on the Sinai peninsula, but it does not bring tower companies into the rooftop-dominated but attractive Cairo market.

At US$65,575 per tower, at first glance this looks like a very low cost market entry into Africa’s second largest mobile market compared, for example, to Nigeria where the recent wave of three major of tower transactions were bunched around the US$200k per tower mark (the actual average cost per tower across the Etisalat, Airtel and MTN tower sales in Nigeria was US$207.3k). However, we understand that MobiNil structured the deal to focus more on opex than on maximising cash released. And the tower construction costs in Egypt are significantly lower than in Nigeria and the rest of SSA.

While it’s taken a long time to close Egypt’s first tower deal, it will be worth the wait – this is one of the most important tower transactions since TowerXchange started analysing the market three years ago.

Why is this deal so critical? Two reasons; one, this deal brings Eaton Towers to ‘scale’. Eaton may well acquire more assets, but they don’t need to buy more assets – after a year or so of integration of assets, the prospective acquisition of Eaton by a strategic investor in 2016 would represent a fast track entry into African towers via a balanced, diverse eight country portfolio. Alternatively, by 2017 Eaton Towers would have two years of “cleaning up the assets”, creating efficiencies and trading at scale and could be ready for IPO.

The second reason this deal is so important; this is the first MENA tower divestiture, inaugurating a new addressable market for the tower industry where we expect to see one or more subsequent processes commencing very soon, potentially involving the highly investible Saudi Arabian market.

Eaton Towers will be joining key stakeholders from the Egyptian, MENA and SSA tower industry at the upcoming TowerXchange Meetup Africa & Middle East on 19-20 October 2016, Sandton Convention Centre, Johannesburg