Read this article to learn:
- Details of the deal between Zain and IHS
- Deal in the content of former failed transactions
- What the deal means for Kuwaiti market
- IHS’s ambitions for the MENA region
On 12 February 2020, further to receiving regulatory approval from the Communication and Information Technology Regulatory Authority (CITRA) and support from Kuwait Direct Investment Promotion Authority (KDIPA), global leading international towerco IHS Towers completed the sale and lease back deal of 1,620 telecommunication towers from mobile network operator Zain in Kuwait.
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Zain began studying the potential to sell its tower portfolios back in 2015 and on 10 October 2017, Zain Kuwait announced that it had reached a deal with IHS Towers for the sale and leaseback of its tower portfolio in the country. Zain reportedly received 15 bids for their Kuwaiti portfolio. The operator undertook a rigorous processes to narrow this down to five shortlisted bidders before finally settling on the deal with IHS Towers.
The transaction marks the first large scale sale and leaseback (SLB) tower transaction in the Middle East by a mobile network operator to a pureplay independent towerco.
A new operating company, called IHS Kuwait WLL (IHS Kuwait) has been formed by both parties, however IHS will own the majority of IHS Kuwait and will have operational control of the entity, while Zain will retain a minority interest.
Figure 1: IHS Towers’ tower portfolio
In Q3 of 2019 IHS Towers announced a successful refinancing deal of its 2021 bond raising a record US$1.3bn, the largest issuance ever by an African corporate. The SLB deal with Zain is reported to have cost IHS US$130mn which roughly equates to $80,000 per site. When first announced, the deal was expected to be for US$165mn. When compared with previous SLB deals globally, price per tower is relatively low. However, deal structure hints at a rational, sustainable leaseback rate which bodes well for mutual satisfaction and the potential for more deals in the region.
For Kuwait market leaders Zain, the tower sale has been motivated by the need to reduce opex and maximise operational efficiency in future lease terms, and the need to restructure balance sheets in the face of declining ARPU and the cost to rollout of 5G across the region. Zain has retained >100 sites and has sold only its passive physical infrastructure to IHS Kuwait, who will be responsible for owning, maintaining, managing, marketing and expanding the passive telecommunication infrastructure previously owned by the mobile network operator.
Zain Group revenues increased by 26% in 2019 to US$5.5bn, with net profit increasing by 10% to US$715mn, while EBITDA has increased by 40% to US$2.4bn. The commercial rollout of 5G commenced in 2019 in both Kuwait and Saudi Arabia by the operator and throughout 2019, Zain Group invested over $1bn in capex, predominantly in expansion of Fiber-to-the-Home (FTTH) infrastructure, spectrum fees, 4G upgrades and additional sites across its markets and 5G rollout investment. Zain’s Digital Strategy is driving both need for capital, and an increasing preference for a lean operating model.
Deal in context of prior failed transactions
Historically there have been a number of different factors which have held back the proliferation of sale and leaseback transactions and towerco activity across the MENA region. There has been no overriding financial pressure to monetise tower portfolios and many of MENA’s MNOs have focussed more heavily on improving and growing top line revenues than reducing costs. As such, the efficiencies generated by infrastructure sharing and outsourcing to towercos had not taken centre stage on board room tables. This may all be about to change, both due to declining ARPUs and the cost of 5G, and also because we have seen both the first landmark SLB, and the formation of the first carve-out towerco (stc’s TAWAL) in the region. Several MNOs in the region are also understood to be studying tower sales or carve outs closely, attracting the interest of towercos and investors in this hitherto untapped market.
However a fundamental challenge remains the lack of clear regulatory frameworks for towercos and infrastructure sharing across many regions in the Middle East and North Africa. Kuwait may have become a benchmark for other countries in having a clear structure and the support of the regulator – which is critical to the success of further SLB and tower transactions in the region.
Figure two: A timeline of tower transactions, joint ventures and towerco activity in MENA
IHS setting up operations in MENA
It is evident that Zain choose IHS due to their operational experience in a range of diverse markets. Sam Darwish, Chairman and Group CEO at IHS recently told TowerXchange “Investing in the Middle East is another important step in our growth strategy to apply the expertise and capabilities that we have developed over the past 18 years to additional global markets.”
Given the success and expertise of IHS Towers on a global scale, the towerco is well position to share know-how and best practice with MNOs in the region. Duplicating their success in other markets in MENA will be a key for the towerco. Sam Darwish, Chairman and Group CEO explained IHS will be introducing “Network Operating Centres to optimise solutions, radio-frequency planning teamwork with specific operators, as well as innovative tower solutions e.g. in-building solutions, street furniture antenna and camouflage towers in urban areas, the roll-out of fibre to support MNO customers’ digital solutions and a myriad of green energy solutions”.
What does the deal mean for Kuwait?
There are three MNOs in the Kuwaiti market where intense price competition has driven data costs down drastically, putting pressure on the country’s operators. Decreasing ARPU has made justifying investment in rolling out new sites tough, with each MNO focussing on implementing cost optimisation initiatives to enable 5G roll-outs where mobile 5G-networks are imminent.
The entrance of a towerco will provide a more cost effective means to expand networks in a market where infrastructure sharing has been limited to date. There are approximately 4,020 towers in the Kuwaiti market with significant parallel infrastructure existing. We expect Build-to-Suit (BTS) to play a significant role in IHS’ business model in the country. Sam Darwish Chairman and Group CEO, IHS recently told TowerXchange “the lessons we are bringing to this market first and foremost include helping MNOs become comfortable with the tower sharing model”.
Having reached and failed to overcome regulatory hurdles in Saudi Arabia, it would seem the wind has turned for IHS who look set to be a key player in the emerging MENA tower market. The independent towerco has worked hard to enter the Middle East region for some time and needless to say has invested a considerable amount of human resource and capital to get to this point.
As the roll-out of 5G services continues across the MENA region, IHS are poised to help MNOs achieve their objectives. In a previous interview Sam Darwish informed TowerXchange “we are well-placed to serve the increasing demands of a tech-savvy, data hungry population.” This deal is not only a landmark moment for Kuwait and the MENA region but also for IHS in demonstrating their commitment to the region and solid growth in their global portfolio.
For Zain Group one can expect their tower divestment strategy to spread to other markets. The operator retains an appetite to monetise its Saudi sites and remains focused on its digital growth strategy. Vice-Chairman and Group CEO, Bader Al-Kharafi, Zain commented “Zain is mobilising resources to capitalise on the enormous opportunity that 5G technology provides, creating vast opportunities in the value chain proposition in numerous industries, especially with regard to Enterprise (B2B) services to government and businesses of all sizes. We believe 5G will push the telecom sector to a new and exciting phase of growth.”