What we know about the Zain and Mobily tower sales in Saudi and Kuwait

Formerly nascent Middle Eastern tower market springs into life

Read this article to learn:

  • What assets are for sale
  • Is there a glass ceiling on potential tenancy ratios in KSA and Kuwait?
  • Benchmarks for valuing these assets
  • Prospective buyers
  • Could one acquirer consolidate both the Zain and Mobily portfolios?

Multiple sources have now confirmed the commencement of tower sale processes by Zain (in the Kingdom of Saudi Arabia – KSA – and in Kuwait) and by Mobily (Etisalat’s opco in KSA), totaling almost 16,000 towers. While we’ve seen tower sale processes start and stop before in the Middle East, the many people TowerXchange have spoken to about these processes are more bullish about their prospects of completion.

Who is selling, what are they selling and where?

The deadlines for expressions of interest were in May 2015, and TowerXchange understands that multiple parties have expressed an interest in acquiring 9,200 Mobily towers and 5,000 Zain towers in the Kingdom of Saudi Arabia. Zain has also sought expressions of interest in acquiring 1,600 towers in Kuwait. It seems Zain have dropped South Sudan from the process, which is unsurprising given that those particular assets seemed unlikely to attract a bidder given current instability in the country.

TAP Advisors are running the Mobily process, while Citi are running the Zain process.

Whilst it seems clear that the intent is to promote the sale and leaseback of towers, rather than secure a manage with license to lease deal, it is not yet clear whether either Zain or Mobily are seeking to retain equity in the assets for sale.

What potential tenancy ratios could be achieved in these countries?

That’s the big question. With no established Middle Eastern tower market to compare with, it’s even more difficult than usual to forecast prospective tenancy ratios.

Tenancy ratios are reportedly on track and generally growing at around 0.2 per annum in SSA, where towercos are primarily active in markets with four, five or more active licensed MNOs. However KSA, Kuwait and most of the other MENA markets are home to only three MNOs. This is both good and bad news; while there are obviously less prospective tenants per tower, prospective tenants are generally more credit worthy than in SSA, and the spectre of MNO consolidation is greatly reduced. And of course there are always non-traditional MNOs to top up tenancy ratios.

The big question in KSA is how market leaders STC might respond to the entry of independent towercos – will STC co-locate? Would they consider selling their own towers?

The big question in KSA is how market leaders STC might respond to the entry of independent towercos – will STC co-locate? Would they consider selling their own towers? In June 2011, STC and Mobily entered into discussions to spin off towers into a captive tower company, although agreement was not reached, indicating that STC had an appetite to consider a more organised form of infrastructure sharing within this decade.

In both KSA and Kuwait, the 3G rollout is mature and the LTE rollout is well under way, limiting amendment revenue to capacity upgrades.

While we don’t know what the glass ceiling on tenancy ratios might be in KSA and Kuwait, but suspect it may be lower than in SSA, what we do know is that there is still a substantial runway for tenancy ratio growth – there has not been significant bi-lateral infrastructure sharing, so the prevailing tenancy ratio is in the 1.1-1.2 range.

Key data points (Q4 2014)

 Saudi-data-points

What might the towers be worth?

There are few meaningful benchmarks for what a Saudi or Kuwaiti tower might be worth.

The recent sale of 2,000 MobiNil towers to Eaton Towers worked out at an average cost per tower of US$65,000, in a deal described by MobiNil’s CFO Kais Ben Hamida as “not solely focussed on opex reduction (but also) driven by our objective to reduce debt.” If the MobiNil benchmark is for a relatively balanced MENA tower deal, media reports speculating that the Saudi towers alone could fetch a combined valuation near US$3bn, suggest a cost per tower North of US$200,000, a valuation closer to those seen in premium SSA markets. With high ARPUs, healthy EBITDA and relatively reasonable debt levels in the Middle East, MNOs don’t seem to have a pressing need for capital to drive tower valuations much above replacement cost. As with any tower transaction, the seller is likely to define the balance of the transaction, especially with no pre-existing tower market and leaseback rate to limit the acquiring towerco’s options in terms of lease rates.

Is there a premium to be paid for first mover advantage? As with any tower transaction, if Zain or Mobily can close a deal several months before the other, their towerco counterparts would have a head start on securing the finite number of co-locations to be found in the market.

How do these markets look through the lens of the investor?

These look like wealthy, high penetration, mature markets, relatively stable but with finite growth opportunities. The Saudi Riyal is dollar pegged, reducing FX risk, unlike the Kuwaiti Dinar. With population coverage at 97% in KSA and 100% in Kuwait, any organic growth is going to be driven by capacity rather than coverage.

Saudi and Kuwaiti towers looks less like the high growth, high risk SSA tower markets, and more like the lower growth, predictable cash flow tower markets in Europe.

Who might be interested in Saudi and Kuwaiti towers?

There is no shortage of capital, both Arabic and International, interested in this opportunity, and a financial buyer rather than a strategic is a distinctly possible outcome in these processes.

While there are no established towercos in the Middle East, TowerXchange suspect IHS, Eaton Towers, Helios Towers Africa and at least one of the US publics, most likely American Tower, will take a long hard look at the opportunities, particularly in Saudi. While diversification of country and counterparty risk is critical to Africa’s three PE-backed towercos, it remains to be seen whether any of the three would have the appetite to create further complexity by entering a new region whilst they remain in the midst of integrating ~10,000 recently acquired Airtel African towers. Taking for granted that American Tower will almost certainly be interested, perhaps the next most likely bidder from Africa might be IHS, whose portfolio of assets in Nigeria, Cameroon, Cote d’Ivoire, Rwanda and Zambia is certainly valuable, but scores relatively highly for country risk. Offsetting that country risk against a more stable portfolio in Saudi, or South Africa, might attract a more diverse range of investors to a future IPO.

Could one acquirer consolidate both the Zain and Mobily portfolios, thus minimising parallel infrastructure and maximising efficiencies?

These opportunities would seem to be an excellent fit with Towershare’s desired footprint, although it remains to be seen how their recent announcement of the acquisition of 4,500 Warid Towers in Pakistan will affect their leverage and digestive capacity. A consortium featuring TASC Towers, who have built towers in Jordan, and serial tower investors Square1 Infrastructure (active in the US, Myanmar, South Africa and Nigeria) may also participate in the process. Neither Zain nor Mobily will be short of suitors for their towers as they progress the process to the next phase.

‘Natural monopoly’?

Could one acquirer consolidate both the Zain and Mobily portfolios, thus minimising parallel infrastructure and maximising efficiencies? The towerco business is often described as a healthy ‘natural monopoly’, and it is that is looking increasingly like the shape of several SSA tower markets (e.g. Helios Towers Africa in Tanzania and DRC, IHS in Rwanda, Zambia, Cameroon and Cote d’Ivoire). However, it’s not yet clear whether the Saudi regulator would permit a the same bidder to acquire both the Zain and Mobily portfolios, nor whether a single towerco or infrastructure fund would have the appetite to make such a financial investment in an unproven tower market.

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