Tower assets in Africa: Move now before it’s check-mate - AUGUST 2010

8/8/2019 Tower assets in Africa: Move now before its check-mate - AUGUST 2010

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August 2010

The Delta Perspective

Tower assets in Africa: Mov

now b for i s c ck-maAu ors Joao Sousa - Partner

C ris Da a - Principal Dimi ris Lioulias - Manager D l a Par n rs In lli nc Uni

Key hIghLIghtS

Significant value still exists in the tower business in Africa, both in terms of

sharing and selling of towers, especially in markets where new licenses are tobe issued and/or additional network expansions are expected. The likelihoodof increased tenancy ratio, relatively constant rental prices and constraints inbuilding new towers further enhance the attractiveness of a market.

Operators must act soon or risk being left out in the cold with assets whose

value is declining and with a higher cost base than competitors.

However, the tower business game plan is not the same for every player!

Small players need to either sell now or accelerate efforts towards attracting

tenants on their network.

Large players need to consolidate the tower space in their markets in order

to secure higher tenancy ratios. Also, they need to close a deal each timethere is a new entrant in the market. Ultimately, once they have goodtenancy ratios and a good idea of their own future network requirementsthey should consider selling the towers to capture all relevant capital gainadvantages.

Tower companies (or private equity funds ready to invest in them) must

have a large portfolio of towers to be successful, i.e. they need to buy big

and be aware of the maximum tenancy ratio they can achieve.

For a successful foray into the tower space, relevant players have to assess each

markets tower potential by analysing Addressable Demand and AccessibleSupply.


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Tower market in Africa isheating up

Millicom Ghana has sold its towers in Ghana to Helios Africa. However, as

part of the deal, Millicom Ghana (operating under the Tigo brand) will retainminority interest in the entityMillicom is expected to formally launch its tower sale process in Tanzania

and DRCCell C, South Africas third-largest operator, is close to finalising a tower-

sharing agreement under which it would sell some of its tower facilities andthen lease them back. The operator is reported to be in discussions withtower companies such as Eaton Telecom.Several CDMA players in Nigeria are shopping for their tower assets

Despite the above activity, there has been an absence of a large multi-operatorpan-regional tower carve-out. In our prior predictions, we had expected to seethe emergence of some type of merged InfraCo model in Africa involving someof the regional heavyweights. However, indications of operational and dealcomplexity led some players to be more opportunistic in their approach and acton a country-by-country basis.

For the moment, the entrance of Bharti Infratel through the acquisition of ZainAfrica, promises to be the most compelling competitive story in the African towerspace. Bharti Infratel is likely to launch tower companies across 8-12 countriesover the course of 2010-2011.

In the Delta Perspective last year (Tower sharing

in Africa: Collaborating in Competition), we statedour expectation that during this year significanttower carve out activity would take place. Whilstno pan-regional deal has yet been closed, there hasbeen significant deal activity in 2010 across severalmarkets.


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Meanwhile, MTN Group seems to be the next most advanced operator likely tocarve out its assets. However, they will potentially partner with someone who canhelp them operationalise a new towerco entity to capture and maintain controlof their assets. Such carve-outs could likely occur in stages across their countryfootprint and could potentially exclude certain countries.

While we have yet to see a ground breaking tower deal, large operators arebeginning to realize that tower sharing is a strategic way to secure value. Afirst wave of tower sharing deals has materialised, and more are in the processof being negotiated. This, in many cases, is a precursor to the carving out oftower assets, as higher tenancy ratios make them more valuable. The recentagreement between MTN and Telkom for tower sharing in South Africaexemplifies this logic.

Aside from the network operators, Helios Africa, American Towers and EatonTelecom are the most active parties looking to acquire tower assets. They havebeen exploring investments in African markets and tower portfolios, eachwanting to become the leading African tower consolidator over the next two tothree years.

While most telecom groups have subscribed to the concept of tower sharing,some large groups are still sitting on the sidelines in terms of potential carve-outsor asset sales. However, once Bharti, Millicom, MTN and possibly Vodacom maketheir moves, the remaining pan-African groups will be in a precarious situation asthey would have lost first-mover advantage, and would need to determine theirlong-term tower strategy.


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Impact of Bharti, Millicom,MTN and Vodacom

The tower landscape is set to drastically change. In the short term, Bharti Infratelis expected to launch tower operations in 4 or 5 countries. Millicom is expectedto carve out towers in 3 countries, MTN is on the verge of implementing itsAfrican tower carve-out strategy in 2 countries and Vodacom/ Vodafone is stronglyconsidering its options in 3 countries. In the next 12 months, the vast majority ofAfrican countries are likely to have experienced some form of a tower deal.

EXHIBIT 1: EXPECTED TOWER LANDSCAPE EVOLUTION ACROSS THE CONTINENT

Source: Delta Partners analysis


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In each of the individual markets where these four operators execute carve-outs,the remaining mobile operators will need to decide what to do with their towerportfolios. In most markets, these four operators are either positioned as marketa leader, which means that the remaining operators are unlikely to be towerconsolidators. Therefore smaller operators may need to consider selling theirassets to remain competitive. In such a scenario, time will be of essence as assetvalue will decrease depending on how long the small operators take to make adecision.

Time-to-market in transacting a tower carve-out or asset sale is important forthree reasons:

Demand for towers from potential consolidators only exists until the big

deals in the market have transactedCurrent tower valuations will factor in demand for space due to data related

network expansion (3G and LTE)Potential for new licenses (mobile and fixed wireless) is still a possibility in

many countries and will be factored into tower valuations, especially for thelargest tower portfolios

The message is clear: Operators must execute theirtower strategy soon because the cost of inactionor delayed implementation is high.

Some regional operators have not placed tower strategy at the top of theiragenda because they feel it is not a critical lever to gain competitive advantagein a growing market but they are wrong. Tower sharing is a significant tool tomitigate margin squeeze as operators address the lower end of the customerpyramid and potentially the only way to make rural network roll-out profitablein most African countries. This in effect means that operators do not necessarilyneed to sell their towers to capture value. However, once one or more players in amarket move towards tower sharing, the remaining players must get in the gameto remain cost competitive.


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Considerations for operators uncertain of thetower business potential

Operators, who are uncertain of the value potential represented by tower sharing,should consider three questions - and their relevant value implications:

Do I want someone else on my towers?

Do I manage my towers by myself?

Do I sell my towers?

As Exhibit 2 suggests, there is value to be extracted in all three options. However,operators have to try to capture at least two of these three value levers, if theyare to realise a significant part of the value upside.

Despite, the below value drivers and their positive impact on operations, operatorsare often concerned about two potential threats:

Risk of market share loss, if they facilitate the expedited entry of a new

competitorLoss of network control and related quality issues

EXHIBIT 2: STRATEGIC QUESTIONS AND VALUE IMPLICATIONS FOR OPERATORS ASSESSINGTOWER BUSINESS POTENTIAL

1 Potential of capital gains upside depends on premium that can be achieved and on cost of capital of potential buyer, i.e. if local funds available, then cost of capitaldecreases and valuation increasesSource: Delta Partners analysis


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As previously explained in the first Delta Perspective on Towers (Tower sharingin the Middle East and Africa: Collaborating in competition), the market shareloss is a very short term consideration, which will in turn be mitigated by thefinancial benefits offered by tower sharing. Moreover, the market share loss

concern can best be compared to the prisoners dilemma situation, especiallyin the case where more than one large network is present in the market. Unlessa solid agreement can be achieved with all existing operators for excluding newentrants access to their networks, then it is highly likely that one of them willenter into a network sharing or national roaming deal. Those operators who areslow to react will end up with both loss of market share and loss of an additional(high margin) revenue stream.

On the other hand, the operational concerns of network quality can be addressedby selecting experienced third parties as outsourcing partners and agreeing oncomprehensive SLAs.


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Tower deal attractiveness:Mark and pla rs d namics

Does all of the above then mean that tower deals

are value generating in every situation? Perhapsnot, a worthwhile opportunity for tower carve outsis not evident in every market and for every player.

Market related dynamics

A market is considered attractive for the tower business when there areexpectations of new licenses to be issued and/or expectations of additionalnetwork expansions. Markets are considered even more attractive when theseconditions are coupled with tenancy ratio increases, relatively constant rentalprices and constraints in building new towers (e.g. Ghana).

However, new licenses do not automatically translate into higher tenancy ratios.Especially in cases where these licenses refer to 3G and LTE concessions, eventhough the number of antennas grows, a large number will be collocated withoperators existing GSM network infrastructure, limiting the potential for a hightenancy ratio.

Likewise, for capacity expansion, especially in urban settings, the flexibilityto collocate (i.e. the ability for a Towerco to extract additional tenancy ratiosfrom that player) is very limited due to restrictions imposed by radio planningrequirements.

Lastly, if network expansion is focused towards rural areas, building new towerscould cause a Towerco to struggle as tenancy ratios will be low.


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Player related dynamics

The different players in the tower market should follow a different game plan tocapture the value potential.

For the leading players in a market, owning larger networks is likely to translateinto higher tenancy ratios; especially in the case a new player enters the market.New entrants will choose to share towers with the market leaders both toleverage the leaders widest network reach and to tap into potential volumediscounts. Moreover, leading operators can enhance their value propositiontowards these new entrants by offering highly attractive national or regionalroaming agreements.

Finally, leading operators should ideally decide to sell their assets when they havea very good view of what their future network will look like so that they ensureappropriate contract terms and SLAs are put in place. If for example operatorsdo not properly assess the requirements imposed on the network by increasedmobile data demand, this could lead to a situation where mass replacement ofmicrowave transmission with fibre may be needed. The resulting dependency onthe Towerco to perform this replacement in a timely and cost efficient mannermay be more than any operator would be prepared to accept. Such a situationis exacerbated in the case where there is only one Towerco in the market and islikely to behave in a monopolistic manner.

For smaller operators, the game plan will include taking advantage of the capacityconstraints of large players, especially in urban areas, and attracting new entrantsto their own towers. However, given the size of the larger players networksand the relative benefits of sharing with only one operator, the demand thatthese small players can attract is limited. However, in cases where large operatorshave not started renting their towers or carving them out, small operators have awindow of opportunity to attract rental income and also benefit from an attractivevaluation for their tower assets should they decide to sell quickly. Additionally, ifsmall operators sell to a large Towerco, they can leverage the Towercos scale toenhance their own network performance and reach.


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As for the tower companies, leveraging operational expertise and managerial bestpractice will be part of the sales pitch to attract newcomers as tenants. However,they will have the best chance to achieve an advantageous deal if they have afirst-class portfolio of towers to address the needs of such new entrants. Thisis something tower companies can best secure by acquiring the tower portfolioof a market leader. In addition to this, should the opportunity arise, Towercosought to increase their portfolio by buying out small players and by building newtowers.

It is therefore crucial for all players to properly assess the tower business potential

within the context of each individual market. In order to achieve that, it isimportant to analyse the following:

Accessible supply of towers

Addressable demand for new towers (not the same as demand for new

antennas)

The following section outlines a comprehensive methodology to help playersinterested in the tower space to properly assess the size of the opportunity anddevelop their strategies on tangible, analytics-based recommendations.


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Delta Partners view is that in order to come up with an accurate assessment ofmarket potential of towers, an analysis must be done that takes into accountboth addressable demand and accessible supply. It is these two drivers whichultimately influence the competitive dynamics and pricing within the towerindustry of a given market.

Addressable demand is defined as the demand for towers or Points of Service(PoS) in the market. The demand is adjusted to take into account that some ofthe consolidated PoS demand may never actually hit the market. For example,operators who have their own carve outs (e.g.: Bharti Infratel) will likely self-fulfilmost of their demand. Only a residual share of their PoS demand would affect thesupply/demand dynamics of the market.

On the supply side, we only take into account Accessible Supply. Similarto Addressable Demand, we only include the tower slots which are actuallyaccessible to the market. To estimate accessible slots, we take the total towerslots in the market and subtract those which are already used along with thosewhich are reserved for specific future demand (e.g.: slots reserved for 3G forexisting 2G clients).

Assessing market potentialfor towers

The driver for value creation in the tower business isincreasing the co-location ratio. However, the keyproblem is determining the market potential so asto fairly value an operators towers.


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EXHIBIT 3: METHODOLOGY OF DERIVING MARKET POTENTIAL



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Tower fair share: K driv rfor co-loca ion po n ial

Delta Partners contends that in the long run, the best way to understand howmuch addressable demand a tower player can capture should be based on theirmarket share or fair share of the accessible slots in the market. This is becausetower slots are essentially a commodity where pricing tends to be quite similarand service levels tend not to vary among competitors. Therefore, all things beingequal, tower slots competing for demand should win on average, a proportion

equivalent to their fair share.

The main strategic implication of the fair share concept is that size is key. Onlythe big players will win in the market and therefore consolidation will take place,leaving the small operators with little choice but to sell their portfolios.

Once the total tower demand and supply dynamicsare understood and quantified, the next keyquestion is regarding the co-location potential ofany given tower portfolio.

EXHIBIT 4: OUTLOOK FOR TOWERCOS

1 Site sharing indexSource: Delta Partners analysis


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Factors affectingAddressable Demand andAccessible Supply

Overall, Delta Partners expects addressable demand for Points of Service(PoS) to grow between 6-10% across African markets during the next five years.However, there are several market forces which could impact both demand andsupply, positively or negatively.

At the same time, the impact of market forces will also be evident on accessiblesupply.

EXHIBIT 5: FACTORS AFFECTING DEMAND AND SUPPLY



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ConclusionPath forward for mobile operators

For large pan-regional operators who hold leading positions across severalmarkets, our view is that they should aim at forming a towerco spanning multiplecountries and potentially try and include other operators as well.

This offers the greatest value creation potential while not limiting long term exitoptions. However, such a solution requires considerable effort and coordinationand could slow down the process - as it appears to have done so far.

In order to be successful in any market, large operators need to consolidate theirtower space as much as possible in order to increase the fair share and secureattractive co-location ratios. This trend has become apparent in more developedtower markets such as India, where major consolidation is under way - examplethe recent merger of Reliance Infratel and GTL. If the large operators are not yetready to sell their towers, they should at least share them.

In our view, smaller telecom groups or those with lower market shares, need tolook to sell their assets now and gain first-mover advantage. We see no clearbenefit in them holding onto their towers in the medium to long term. Smalleroperators can look to merge their towers into another Towerco, retaining anequity stake if they want to participate in some of the financial upside.

Path forward for equity investors

Given the current selling price of towers in Africa (upwards of US$150,000 pertower) and expected competition to gain high fair share, we forecast that it will bedifficult to earn equity returns above 25% in most markets. The opportunity may liein marginal markets where political or economic instability presents higher barriersto entry and lower entry valuations. Beyond the obvious valuation considerations,equity investors should also consider the need for an established managementwith experience and on-the-ground presence to physically run operations.

The key point for equity investors is to become part of a platform which can operatein difficult African environments and has the track record to win deals. Companieswith experience in Managed Services can be excellent potential partners even ifthey have limited previous experience in owning towers. Finally, it is importantto realise that market size alone is not what will drive returns, instead achievinggreater scale (i.e.: high fair share) is what best guarantees success.


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Delta Partners is the leading TMT advisory and investment irm in emerging markets. With more than 160 pro essionals the

irm operates across 50 markets in the Middle Ea st, A rica, Eastern Europe and Emerging Asia. Delta Partners provides three

ynergistic services: management advisory, corporate inance and investments rom its o ices in the UAE, Bahrain, South A rica,

Spain and Singapore.

Advisory: Delta Partners advisory pro essionals partner with C-Level executives in tel ecom operators, vendors and other TMT

players to help them address their most challenging strategic issues in a ast-growing and liberalising market environment in over 50

markets.

Investments: As a und manager, Delta Partners manages a $80M private equity und, targeting investment opportunities in

the TMT space in high growth markets. The ocus is the Middle East, A rica, Eastern Europe and Emerging Asia. Delta Partners

private equity und leverages the frms unique TMT industry expertise to create value or its investors throughout each stage o the

investment cycle, rom deal sourcing to supporting port olio companies in driving value extraction.

Corporate Finance: Delta Partners provides corporate fnance services and has been involved in several buy-side and sell-side

telecom transactions in the region. As true industry specialists, the frm o ers a di erentiated value proposition to investors

nd industry players in the region. Delta Partners actively leverages i ts close link to its private equity arm to access the investor

ommunity as well as top-level fnancial talent.

Delta Partners delivers tangible results to its clients and investors through its exclusive sector ocus on telecom, media and

technology, and a unique approach to services, combining strategic advice and a hands-on pragmatic approach.

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Tower assets in Africa: Move now before it’s check-mate - AUGUST 2010

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