An outline look at the specialised tower company business model – previously published in Project Finance International (issue 518, December 2013)
Recent years have seen the emergence of bespoke telecommunications towers operators in Africa. As operators look to reduce costs and accelerate expansion into rural areas, this has led to an opportunity for the specialised tower company business model to develop and flourish. The model itself is not new; there is an active towers market in other jurisdictions such as the US, India and Indonesia. In addition large operators such as Telefonica and Vodafone have instigated active infrastructure sharing and outsourcing in western Europe. However, it is only recently that the model has found acceptance with mobile operators across Africa as increasing competition results in downward pressure on returns. Now seemingly accepted, the model is set for a huge expansion across the continent.
There is a need for more towers infrastructure across the continent
Towers make up a substantial proportion of capital investments for telecoms operators and, in emerging markets, most of their operating costs. Under the towers model, operators dispose of their towers to specialised tower operating companies, by way of sale or long lease, and license back space on those towers to install and operate their frequency and transmission equipment.
The licensing is a non-exclusive arrangement, enabling the tower companies to “co-locate” other operators on those same towers. The higher the co-location ratio the better for the towers companies (and their financiers), as this drives up revenues from the same base costs.
Not only is this a cost-saving measure for the operators, in terms of both capital expenditure and operational expenditure, it also enables them to focus on their core business model of acquiring and servicing customers, and expanding network coverage and services in the midst of ever-increasing competitive pricing pressures – average revenue per user (ARPU) has fallen dramatically across Africa over the past 10 years – without having the distractions and complexities of operating passive assets.
For new operators without a towers network or for those looking for expansion, the model enables them to develop and expand their networks on a significantly expedited basis. All of this not only benefits the operators but also their consumers.
Tower companies also offer a “build to suit” service, by which they construct new towers for an operator, with operator input into location, specifications and timing. Again, this brings equal benefits to operators.
There are also environmental upsides, which help command government support for the model. The towersharing model means fewer towers are required to service the needs of the operator group in any country, which has positive implications for the overall carbon footprint of the telecoms infrastructure. In particular, given the unreliability of electricity grid supply across Africa, towers are typically powered by noisy and acrid-smelling diesel generators, so a consolidation of the market in this regard also has significant benefits on the ground.
The potential for towers companies in Africa is huge. Africa has a rapidly growing population, and in particular a young population, and is a populace that is acquiring increasing spending power on the back of strong economic growth. With demand for mobile phones and penetration rates continually rising, particularly given the unreliability of fixed lines, there is a real need to develop the supporting infrastructure for mobile networks.
All the major network operators appear to support the model. Several, including MTN, Orange and Vodafone/Vodacom, have already finalised multiple deals with tower companies across various jurisdictions, and others such as Etisalat and Airtel are actively considering their portfolios and the potential for deals. To date, tower acquisitions have been on a single country basis, except for IHS’s recent acquisition transactions with both Orange and MTN in Côte d’Ivoire and Cameroon. However, it is inevitable that operators and tower companies will soon look to enter into portfolio, multi-jurisdictional transactions in order to further extrapolate the benefits of partnering across the continent.
Mobile advances across the continent are also driving the need for more infrastructure as the demand for network and capacity grows. The mass adoption of mobiles in Africa is not simply about communication. Handsets are now being used for applications as diverse as mobile banking, healthcare and e-learning.
All of this has been achieved with the 2G and 3G mobile technologies available today; however, countries such as Ghana, Rwanda and Gabon are now looking to roll out fourth-generation (4G) networks based on Long Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMax) technologies, which increases the need for infrastructure support. Site densification required for 3G and 4G coverage, capacity and data traffic will require investment in telecoms infrastructure across Africa, which is already straining to meet levels of consumer demand for 2G voice services.
Further, operators are now seeking to access the rural population across Africa. Until recently, operators have focused on the primary urban areas, with their high population density. However as the market becomes crowded and the rate of increase in mobile penetration slows in these areas, operators are eyeing the greater potential in rural areas – for example, approximately half of Nigeria’s 170m population live in rural areas, which gives an indication of the size of the potential market.
Developing and financing towers infrastructure is not without its risks and difficulties. A number of tower disposals and associated financings have successfully closed across Africa in recent years, but there are some key fundamentals to ensuring the success of the model across the continent.
Political stability is critical both from a sponsor and a lender perspective. Key areas of concern include religious fundamentalism, incidences of nationalisation, and stability of tax and royalty regimes. The towers model has expanded rapidly in 2013, with transactions opening up the less mature markets of Cameroon, Côte d’Ivoire and South Sudan, in addition to the more established markets of Ghana, Nigeria and Tanzania. This trend looks set to continue as sponsors and their lenders take advantage of the growing desire of operators to offload their infrastructure portfolios.
Operational factors include government openness and whether there is an existing regulatory regime for the towers model. Specific passive infrastructure licensing regimes are in place in many jurisdictions, such as Ghana, Nigeria and Uganda, but in others such as Rwanda and DRC there is no existing framework, so detailed discussions with regulators and ad hoc consents are required; and this has an impact on the timing of transactions. The clarity and consistency of the regulatory regime in these respects has a direct impact on the ease of doing business in the relevant jurisdictions. Equally, the royalty and tax regime has an impact on the economic viability of the business.
The key fundamentals behind a successful business model for network operators are equally crucial for tower companies, as they underpin the operator demand for further infrastructure. A large and growing population, with increasing affluence and an open culture, is at the heart of mobile expansion.
There is increasing public and regulatory pressure on all those involved, both operators and tower companies, to reduce tower energy consumption and pollution, particularly given the reliance upon diesel generators for power in Africa. There is increasing development of power infrastructure across Africa, but the rate of development is still not sufficient to have a fully reliable supply (and certainly sufficient capacity to meet demand) and some countries are clearly further behind than others in this regard. Other solutions need to be explored, including fuel cells and solar powered towers, but these come with concerns around economic viability.
Operator consolidation, active network sharing and technology integrating equipment are making it more difficult for tower companies to generate revenues, so they need to consider other ways to drive efficiencies. One such way is to use energy management companies to provide power and fuel supplies at a predictable cost. While such companies are not always beneficial for improving earnings margins, they do offer a stable pricing regime that is of fundamental importance to operators. Tower companies can instead themselves look to drive efficiencies in the power supply – these need not be limited to technological advances; they can include simple improvements in execution such as monitoring of electricity or fuel consumption, equipment upkeep and configuration, and reduction of leaks. Tower companies could also look to commodity hedging to control rising fuel costs.
The fundamentals for the tower market in Africa exist. There are now four well-established primary tower companies – Eaton Towers, Helios Towers (including both Helios Towers Africa and Helios Towers Nigeria), American Tower and IHS, each with expertise in providing the towers solution. There is acceptance among the major commercial network operators of the benefits of the sharing model. There is a need for more towers infrastructure across the continent, and the opportunities for expansion of the model across Africa are vast.
If the hurdles can be overcome in each jurisdiction, with these fundamentals and the growth seen to date, it seems inevitable that the towers model is set for dramatic expansion across Africa.