The scale of Saudi Arabia’s mobile market

Saudi Arabia is the Middle East’s largest economy (GDP reported as US$683.8bn at December 2017; Source: World Bank’s World Development Indicators Database) and is the Middle East’s largest country in terms of landmass, and third largest in terms of population (32.9mn citizens as of December 2017; Source: World Bank’s World Development Indicators Database). With 43mn subscribers, mobile penetration sitting at 132% and mobile broadband penetration at 89% (Source: CITC Q2, 2018) and some of the highest data usage per capita globally, the sheer scale of the market leads it to being considered the Middle East’s most important telecoms market.

Figure 1a: Total mobile subscriptions in Saudi Arabia (2014-2018)

Figure 1b: Total mobile broadband subscriptions in Saudi Arabia (2014-2018)

There are three mobile network operators in Saudi Arabia and two MVNOs. Saudi Telecom Company is the country’s largest mobile network operator with approximately 45% market share. The operator is 70% owned by the government’s Public Investment Fund, 7% by the General Organisation for Social Insurance and 6.77% owned by Saudi Arabia’s Public Pension, with the remaining shareholding free floating on the stock exchange.

Mobily (Etihad Etisalat Co), in which UAE headquartered Etisalat has a 27% stake, has the second largest market share in the Kingdom, accounting for approximately 35% of Saudi subscribers. The operator launched commercial operations in the country in May 2005.

With 8.0mn subscribers (19% market share), Zain Saudi Arabia is the country’s third largest operator having launched commercial operations in August 2008. The MNO is 37% owned by Kuwaiti headquartered Zain Group (which also has mobile operations in Kuwait, Iraq, Jordan, Lebanon, Sudan and South Sudan and a minority stake in Moroccan operator, INWI) with 21% shareholding held by a Saudi consortium and the remaining 42% free floating on the Tadawul stock exchange.

The two MVNOs, Virgin Mobile and Lebara have just 1% market share.

Figure two: MNO and MVNO market share in Saudi Arabia

The tower landscape

Saudi Arabia has an estimated 35,400 towers with Saudi Telecom Company having the largest portfolio (figure three). Infrastructure sharing in the Kingdom has to date been very limited, with fewer than 2% of sites believed to have more than one tenant. In the major cities, Riyadh and Jeddah there has been some infrastructure sharing as part of MNO densification plans to meet growing data usage, whilst in some of the country’s holy sites where access to land is limited, infrastructure sharing has arisen out of necessity. These infrastructure sharing arrangements are typically under bilateral commercial agreements and thus far have only covered passive equipment. With little infrastructure sharing a high degree of parallel infrastructure has developed; 95% of Zain and Mobily’s sites are reported to overlap.

Around 50% of sites are understood to be on government owned land, with 35% of sites on private land and operators owning the land on which about 10-15% of their tower portfolios sit. MNOs have reported significant upward pressure on lease rates from municipalities and landlords, which is not only having an impact on their bottom line but is also adding to workloads as the operators look to renegotiate.

In terms of power requirements, around 90% of of sites are on-grid with an extensive and reliable grid infrastructure across much of the country. What’s more, electricity prices in the Middle East are substantially lower than those in other regions, with some reports suggesting them to be one fifth the level of the global average. With increasing pressure on the economy from declining oil prices however, subsidies relating to electricity prices are gradually beginning to be withdrawn which will have an impact on site opex. Off-grid sites are generally those in more rural and remote areas although reports have emerged that some sites lack grid connections as a function of their lack of key permits. Such sites are reliant on diesel generators 24/7 with low fuel prices meaning that hybrid solutions have not been widely deployed. With the cost of diesel being low, the highest costs for off-grid sites relate to fuel delivery which can be significant for certain regions.

Figure three: Tower ownership by Saudi Arabia’s MNOs

A history of stop-start transactions in Saudi Arabia: 2011-2017

As early as 2011, Saudi Telecom Company and Mobily entered into discussions surrounding the potential formation of a tower joint venture into which they would pool their existing portfolios in a bid to reduce passive infrastructure related capital and operating spend. The pair were understood to be considering selling off a 49% stake in the projected US$2.5bn venture but talks stalled and plans surrounding a joint venture were shelved.

In late 2014/early 2015, Zain appointed Citigroup to study the potential for a tower sale across its operations in multiple markets. Shortly after, it was reported that Mobily had issued a tender for advisory services to look at options for its tower portfolio, with TAP Advisors winning the contract.

Over the course of 2016, expressions of interest for the two tower portfolios were invited, with a May deadline being set (Zain also inviting bids for their Kuwaiti tower portfolio). Mobily’s larger tower portfolio (approximately 80% bigger than that of Zain) was viewed as the more attractive of the two by bidders, although the potential to acquire two portfolios had a positive effect in pushing up the valuation of both portfolios (a towerco or investor which acquired both sets of assets would own approximately 50% of the country’s total tower stock). The deals reached an advanced stage with commercial and technical due diligence completed. Names linked to the transactions included IHS Towers, Digital Bridge, TASC Towers, edotco, Providence Equity Partners and Towershare plus local investors and conglomerates including Saudi Aramco, Al Rahji Group and Al Zamil Group. Mobily received three binding bids, reportedly at terms they were happy with.

Around the same time, Saudi Telecom Company hinted that they too may consider a sale of their assets, before approaching Mobily to reopen discussions around the formation of a joint venture. Whilst one of Mobily’s principal drivers to sell towers had originally been to reduce their debt burden (the operator reported substantial accountancy errors in 2014 leading to their profits for the year being revised down from SAR219mn to a loss of SAR913mn in Q1 2015), the appointment of a new management team enabled the operator to refinance its debt at a more attractive rate, thus reducing their pressure to sell.

Mobily abandoned their sale process in favour of continuing joint venture discussions with STC, in a bid to reduce costs and improve EBITDA. The two parties signed an initial three month agreement to study the joint venture in August 2016.

This move put a spanner in the works for the Zain deal. A potential joint venture between Saudi Telecom Company and Mobily could consolidate as much as 70% of the country’s towers into a single pair of hands; Zain’s tower portfolio, representing just 30% of the country’s tower stock and up against a strong competitor, suddenly became less attractive to potential acquirers, decreasing the potential value. In December 2016 however, Zain entered into exclusive negotiations with a consortium involving TASC Towers and local conglomerate, ACWA Group with a potential deal value being reported around US$500mn.

Joint venture discussions between Mobily and Saudi Telecom Company were extended with the operators putting out an RFP for an advisor to oversee the JV formation in early 2017. The contract was awarded to Standard Chartered but not long into the process joint venture plans were called off, with reports emerging that STC was not keen to share ownership, a stance which put Mobily off. As such, the second attempt to form a joint venture once again fell apart.

Talks between Zain and the TASC Towers – ACWA Group consortium dissolved, with the potential acquirers reportedly failing to raise the necessary equity for the deal. Advisors, Citigroup, remarketed the deal, attracting the attention of Towershare who had entered into discussions with Zain regarding their much smaller Kuwaiti tower portfolio. Towershare brought IHS into the deal with the two parties submitting bids for both Zain’s Saudi Arabian and Kuwaiti towers. On 6 August 2017 it was then announced that Zain had entered into exclusive talks with with the two parties, with the negotiations “superseding all prior arrangements”.

Figure 4: A timeline of tower sale and joint venture discussions in Saudi Arabia

A first tower deal completed in the Kingdom: January 2017 STC acquires GO sites

Whilst all eyes had been on a first sale and leaseback transaction between the Kingdom’s operators and a towerco, as well as on talks of a joint venture, one tower transaction that flew beneath the radar was Saudi Telecom Company’s acquisition of the towers belonging to operator GO Telecom (Etihad Atheeb Telecom). Reports as to the number of towers acquired vary from several hundred towers up to around 1,000. Saudi Telecom Company played down the deal, telling reporters that the SAR230mn (US$61mn) purchase which was financed through internal resources, would not have any material impact on financial results or their tower portfolio. Whilst no advisors were appointed by either party to run the deal, those close to the matter observed that the towers had received a decent valuation, given the financial stress that GO Telecom was under, providing a first benchmark for tower transactions in the region (albeit a transaction between two MNOs rather than an MNO and a towerco).

Q1 2018: Saudi Telecom Company creates Communication Towers Co. Ltd

During the first quarter of 2018, STC established Communication Towers Co. Ltd., a fully owned limited liability Company, with a share capital of SR 200 million. According to STC’s Q1 presentation “Communication Towers Company will be responsible for owning, constructing, operating, leasing and commercialising telecom towers”.

The operator’s total tower portfolio is reportedly 16,400 sites although it is as yet unclear as to whether their full portfolio will be managed by the entity which is yet to commence commercial operations (pending the award of necessary licenses from the relevant authorities).

STC is known to have employed the services of various consultancy firms to study the formation of its new towerco with both Delta Partners and Analysys Mason brought in to advise on the matter. The operator’s preferred model for their towerco has been to retain full equity, whilst enlisting the services of a towerco management partner to get operations up and running for the first couple of years. STC issued an RFP for a towerco management partner, and whilst various towercos from across the globe took a look at the deal on the table, no offers were received due to STC’s reluctance to cede any equity in the venture.

There have been several management changes within STC since Communication Towers was established, with Jeremy Sell most recently appointed to the position of Chief Strategy Officer (Sell having previously served as Ooredoo’s Head of M&A and CSO from 2006-2015, during which time the operator sold their portfolio of towers in Indonesia). Whilst insiders suggest that some at STC retain hopes of securing a towerco management partner without ceding equity, the towerco continues to explore all its options. Reports have emerged that the STC expects to commence commercial operations before early 2019, with progress in securing key licenses having reportedly been made.

Regulatory barriers to towerco activity

The Saudi telecoms market is regulated by the Communications and Information Technology Commission (CITC) – a well established institution which manages spectrum auctions, the Universal Service Fund and all other aspects governed by the telecommunications act.

Whilst discussions surrounding towerco activity in Saudi Arabia have been going on for a number of years, limited dialogue with the CITC meant that very little progress had been made on regulatory issues prior to the Kingdom’s first deal being announced. With no previous experience of towerco activity in the market, the regulator and government have remained cautious, particularly with regards to the transition of ownership of towers into independent and foreign hands. Concerns over national security and who controls and has access to towers have been at the forefront of the CITC’s reservations regarding towerco activity in the market, although towercos have been keen to point out that access is already granted to a range of contractors and subcontractors currently managing the assets.

In recent weeks, reports have emerged of significant regulatory progress on the towerco issue, with the the finalisation of CITC’s towerco licensing regime expected to be imminent. Such a step forward will light the touch paper on towerco activity in the market, paving the way for STC’s Communication Towers and Zain’s tower sale to IHS as well as further towerco activity in the country.

November 2018: Zain announces deal with IHS Towers

On 28 November, Zain Saudi Arabia announced that it had reached a deal with IHS Towers for the sale and leaseback of its passive infrastructure. The deal, valued at of SAR2.43bn (US$647.7mn) covers the sale and leaseback of 8,100 towers for a 15 year period with the option to renew for five years and also includes the building of an additional 1,500 towers over the next six years. The deal is subject to approval from the CITC as well as lenders.

Commenting on the news, Bader Al Kharafi, Zain Vice-Chairman and Group CEO; and Vice-Chairman of Zain Saudi Arabia said, “The sale of Zain KSA’s impressive tower network is a highly positive move, as it creates shareholder value by helping the company reduce its debt position, as the proceeds will be used to reduce the company’s Murabaha facility. Both the Zain Saudi Arabia board of directors and Zain Group executive management are confident that we have chosen the right partners in IHS, a company that possesses high caliber expertise with sound operational experience in diverse markets.”

Al Kharafi continued, “We recognise and appreciate the efforts made by the Kingdom’s CITC 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 proactiveness also allows new investors to enter the market, creating job opportunities. These efforts by the CITC that complements our deal with IHS, enhances Zain KSA’s mission of playing its contributory role to achieving the Kingdom’s 2020 National Transformation Program and the 2030 Economic Vision ambitions.”

Al Kharafi concluded, “Zain KSA has implemented a transformation program in the Kingdom for some time now, advancing its efforts to become a digital lifestyle provider. The deal unlocks capital and resources, allowing the operator to focus on its core operations and further invest in and deliver the latest ICT technologies to meet the ever-increasing demand for reliable broadband access and data consumption. It also provides Zain KSA additional impetus to focus on the delivery of more data monetisation initiatives and customer enhancing services to offer customers the best data experience in the Kingdom.”

With a portfolio of over 23,000 towers spanning Nigeria, Cameroon, Côte d’Ivoire, Zambia and Rwanda (figure five), IHS Towers is EMEA’s largest independent towerco. Privately owned, IHS’ investors include MTN (with a 29% stake), Wendel, the IFC, FMO, ECP Private Equity, AIIM, GIC, KIC, Investec and Goldman Sachs. IHS commenced operations as a tower builder in Nigeria in 2001 and since then has grown into one of the biggest players in the global tower industry (read TowerXchange’s 2017 interview with IHS’ Executive Vice Chairman and Group CEO, Sam Darwish).

The company is very much positioning itself to be a front runner in the burgeoning Middle Eastern tower industry, having also reached an agreement with Zain Group to acquire their portfolio of 1,700 Kuwaiti towers for US$165mn back in Q3 2017 (with the deal expected to close imminently).

Figure 5: IHS’ global tower portfolio

Growth in the Saudi Arabian market

Whilst 4G coverage stands close to 100% in Saudi Arabia, significant densification is required in the Kingdom to meet the growing data usage of citizens as well as the ICT targets of Crown Prince Mohammed bin Salman’s Saudi Vision 2030. The country has also laid out ambitious plans to bring broadband access with download speeds of 10Mbps to 70% of households in rural areas by 2020, an agreement for the third phase of which having been signed between the Ministry of Communications and IT and Saudi Telecom Company in late November.

The Zain deal includes the build of 1,500 new towers by IHS over the next six years in a bid to improve coverage and capacity, with Zain’s tower portfolio having also grown by several hundred sites between when exclusive negotiations began in late 2017 and today, demonstrating the requirements for new build in the country.

Saudi Arabia is very much positioning itself to be a frontrunner in the move towards 5G and as such, one can expect that towercos in the Kingdom may play a significant role in the rollout and management of small cell networks, as well as macro towers, as we have seen in other markets across the US, Europe and Asia.

Decommissioning is also likely to play an important role in towerco activity in the country, with significant parallel infrastructure understood to exist due to limited infrastructure sharing between operators to date.

Knock on effects for the tower industry in other MENA markets

Considered by many to be MENA most important mobile market due to its scale and wealth, a tower sale in Saudi Arabia is likely to have knock on effects for tower transactions and towerco activity across the region as the whole with a benchmark now being set for such processes. Tower transactions have previously been explored in Egypt, Bahrain and Jordan only for the sale processes to fall apart (read more in TowerXchange’s analysis of the MENA tower industry), but with deals agreed in both Kuwait and now Saudi Arabia, one can expect momentum to build.

Should the deals prove successful, Zain is likely to explore tower sales in its other markets and other operators are likely to follow suit; Omantel, for example, are expected to formally announce a tower sale process in early 2019. The creation of a regulatory framework for towerco activity in a market as important as Saudi Arabia is also likely to serve as a guide for other regulators across the region and hopefully ease the way for further tower sales should they come to market.

Given the major changes underway in MENA’s tower industry, TowerXchange will be hosting a VIP only Meetup for MNOs, towercos, regulators, investors and select supply chain companies on 29-30 January 2019 at Le Meridien Hotel and Conference Centre in Dubai. 250 executives are invited with Zain Group’s CSO Kamil Hilali and IHS Towers’ management team joining other industry leaders including Etisalat International’s CTO, Hatem Bamatraf and Saudi Telecom Company’s new CSO, Jeremy Sell. To find out more and to enquire about joining please visit https://www.towerxchange.com/meetup/meetup-mena/