The end of schmuck equity in Africa

MTN Group selling down its stakes in JVs with American Tower in Ghana and Uganda mark the end of an era

Read this article to learn:

  • Details of American Tower’s joint ventures in Ghana and Uganda
  • Background on joint ventures in African telecom towers
  • Implied tower valuation benchmarks
  • Impact on tower markets in Uganda and Ghana

In addition to announcing the closure of its Eaton Towers’ acquisition, on the 2nd January 2020 American Tower announced it had agreed terms to buy-out MTN’s minority stakes in its joint venture towercos in Ghana and Uganda. American Tower will pay approximately US$523mn for MTN’s 49% stakes in each of the joint ventures. The transaction is expected to close in the first quarter of 2020, subject to regulatory approval, and will result in a one-time impact for American Tower of approximately US$65mn in 2020 from the payment of previously deferred cash interest related to joint venture debt. The deal will mark the end of mobile operators retaining an equity stake in their towercos, with the practice now dying out in Africa.

No schmucks

There is a long history of MNOs retaining equity in their towers after a sale and leaseback. In the U.S. in the early days of the industry, Verizon kept an equity stake in its towers after its sale and leaseback to Crown Castle. Because no mobile operator CFO wanted to look foolish if they sold their towers too cheaply, this equity share acted as a hedge. Chuck Green, then CFO of Crown Castle, called it “Schmuck Equity.”

African MNOs were also in no mood to be taken for schmucks. MTN, Vodacom and Millicom retained “Schmuck Equity” when selling their towers. Vodacom and Millicom exited their stakes in Helios Towers, and MTN first moved much of their equity from stakes in towerco country opcos to group level holdings. The American Tower-MTN joint ventures in Ghana and Uganda were the last two country-level joint ventures in existence.

In 2010 in Ghana and in 2011 in Uganda, MTN’s sale and leasebacks with American Tower were structured so that MTN retained a 49% economic interest in their towers, even as they relinquished operational control to American Tower. In 2010 American Tower acquired 1,856 towers for US$218.5mn. In 2011 American Tower did the same in Uganda, where it acquired 962 towers for US$89.3mn.

In 2014 MTN Nigeria agreed a sale and leaseback with IHS Towers in which it sold 8,850 towers for US$984mn. In this joint venture MTN passed management of the towers to IHS Towers but retained 51% of the economic interest. In February 2017 MTN exchanged its 51% interest in its Nigerian towers for an additional shareholding in IHS Holding Limited. As a result of the transaction, MTN’s economic interest in IHS Group increased from approximately 15% to approximately 29%. The transaction enabled both MTN to simplify their capital structures and diversify its tower infrastructure exposure. That original US$984mn transaction has translated into a fair valuation of US$1.6bn, according to its 2018 annual report. No schmucks at MTN!

Although towers are an important operational component of MTN’s business, the investments in existing tower companies have run their course, and realised a healthy return, but are not viewed as long-term strategic holdings for MTN, hence its sale to American Tower. Because IHS Towers remains a privately held company it is more difficult to currently realise MTN’s US$1.6bn stake in IHS Towers; indeed MTN may have been one of the stakeholders pushing IHS to explore an IPO, which they have considered a couple of times in recent years.

Transactions between Millicom and Helios Towers tell a similar story. In 2010 Millicom sold 1,581 towers to Helios Towers for US$108mn in Ghana, but retained a 40% equity stake. In the DRC Millicom sold 521 towers for US$41.5mn, and kept a 40% equity stake. And in Tanzania they sold 1,200 towers for US$81mn and again retained 40% equity in the joint venture. The average price paid for a tower in these deals was US$70k, but because Millicom kept 40% of the equity in those sites the deal valued the towers at US$116k per site, and Millicom’s stake in the towers at US$92.2mn.

In 2015 these joint ventures were reorganised into a 22.83% group level shareholding of Helios Towers. Similar to MTN’s stake in IHS Towers, Millicom had been unable to realise its investment while Helios Towers was privately held. However, Helios Towers’ IPO in October of 2019 gave Millicom the opportunity to sell down its stake, if it wants to after its lockup expires. Helios Towers IPO’d at 115p per share for a market capitalisation of US$1.45bn, which would value Millicom’s stake at US$331mn. No schmucks here either, especially now Helios Towers is trading around 150p per share.

While MTN and Millicom retained stakes in their joint ventures – in Nigeria MTN even had a majority, non-controlling ownership – they relinquished control of their towers, and that is what is most important in realising value in a telecom tower. Substantial economic interests in towers can be paired with independent management with the right governance, with MNO owners’ board representation restricted so as to avoid interference with the efficient and non-discriminatory management of the towers.

The increase in tower value over the lifespan of the joint ventures is facilitiated by the independent management of the towers, and driven by fundamentals such as creating additional value through:

– Lease up of existing towers to additional tenants

– Selling additional space to existing tenants (“amendment revenue”)

– Building-to-suit additional towers

– Deepening margins through investment in operational efficiencies

As part of an Asset Realisation Programme, MTN is selling non-core assets and simplifying its capital structure over a three year period, hoping to raise at least 15bn Rand (US$1.1bn). The sale of its JV stakes to American Tower for US$523mn take it half way to its total

Uganda and Ghana

As part of an Asset Realisation Programme, MTN is selling non-core assets and simplifying its capital structure over a three year period, hoping to raise at least 15bn Rand (US$1.1bn). The sale of its JV stakes to American Tower for US$523mn take it half way to its total.

The unwinding of MTN’s stake in ATC Uganda and the acquisition of Eaton Towers by American Tower leaves American Tower the preeminent cell site owner in Uganda. Now Eaton Towers has been acquired, American Tower will have a portfolio of around 3,090 towers in the country. We lack precise numbers, but approximately 190 towers have been built in total by Eaton Towers since the deal was announced in May, and this implies around 75 sites have been built in Uganda since then.

In Ghana, the acquisition of Eaton and the unwinding of the joint venture helps to simplify one of Africa’s more diverse telecoms sectors. Including sites built by Eaton Tower since our last market update in May 2019, we believe American Tower now owns 3,820 sites in Ghana.

Ownership of Ghana’s towers

Ownership of Uganda’s towers

Tower valuations

In 2011, when the MTN’s sale and leaseback joint venture deal with American Tower was first stuck, each tower was valued at US$230.8k in Ghana and US$181.9k in Uganda. We do not have a breakdown for today’s valuation of the towers in Ghana and Uganda, but we can work out a rough valuation using the publicly available figures. The new US$523mn transaction covers now 1,590 sites in Uganda and 2,347 towers in Ghana American Tower owned prior to the Eaton deal closing. The US$523mn purchased 49% of the equity in these sites, valuing them at US$279k per tower. This is somewhat less than the US$325k paid per site for the Eaton Towers’ sites.

A simpler future

The end of MTN’s joint ventures marks a small but significant change in African telecom towers. The discussion about who should deploy capital into passive telecom infrastructure seems to have been decisively won by independent towercos. The move also reflects a broader trend towards simplifying capital structures. Earlier rounds of tower sales and investment in Africa had more complex structures, and these are now being simplified. IHS Towers has refinanced its Nigerian bonds and brought all its towers in the country under one opco, whereas before they were split. Helios Towers is now publicly traded. And American Tower is now running independently in seven countries in Africa. 

Mobile Network Operators are now more comfortable with others deploying capital into their networks on their behalf where it makes sense – both towercos and ESCOs. Airtel Africa is now public, but retains towers in five markets where they may want to raise capital and, with no background of forming joint ventures, we can expect any future sales to be a straightforward sale and leasebacks. There remains a questions mark about Vodacom’s future strategy. Vodafone has embraced the carve-out towerco model in Europe, but the strategy at group level towards the degree of retained control or economic interest has yet to be fully clarified. However, both Orange and now MTN are extending the opex model pioneered by towercos to their energy assets by embracing the ESCO model in Africa. And even rural sites are now being deployed through a partner, with Africa Mobile Networks deploying capital into rural sites for mobile operators in ten countries.

 


Tower valuations in Africa

With Eaton Tower’s acquisition by American Tower and the purchase of MTN’s towerco equity, we have a couple of data points to draw on to help us value Africa’s towers. Unfortunately, a tower is not just a tower, and each data point points us in slightly different direction. Eaton Tower’s US$1.85bn sticker price values each site at US$325k while the MTN-American Tower deal values each site at US$279k.

There are a number of factors which impact a tower’s valuation, some potential factors which may explain the difference in valuation; perhaps the Eaton towers had a higher tenancy ratio, or were leased at a higher lease rate, or had more structural capacity, or had a longer remaining tenor of leases and ground rents. There may also have been some additional value in Eaton because it was a company acquisition which included people and processes. Certainly Eaton was worth a premium because it came with a new BTS pipeline, with right of first refusal on Airtel sites in five markets. Perhaps American Tower and MTN had a pre-agreed price. Or perhaps it could simply be that Eaton negotiated a higher premium as a function of having greater control over the destiny of the asset. Ultimately, we just don’t know why the per tower valuation was different. There are so many variables here that only those close to the deals could give a comprehensive answer.


 

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