All along the cell towers

Towards the end of September 2011, African tower management firm Eaton Towers secured equity funding worth $150m from Capital International Private Equity Funds (CIPEF), a private equity investor focused on emerging markets. The investment came almost a year after Eaton secured its first customer, Vodafone Ghana, and will be used to build up its tower portfolio in existing and new markets.

Tower sharing is a slow moving market. During our first interview, Harper said he anticipated that the sales cycle would be long winded, given that it had taken two years from the inception of the company to get its first contract underway. Although the concept of tower sharing had already taken off in more established markets, there was considerable reluctance from African operators to hand responsibility of their infrastructure to a third party.

Once the deal is in place, all the manual labour and process a company like Eaton has to go through regarding the towers, generators and security needs to be addressed. Challenges include the securing of land leases, the building of compounds, applying security and arranging refuelling for the power sources.

“The biggest trend over the last 18 months is that at the start of this timeline, operators were new to the idea of tower sharing and hadn’t got their heads around what they wanted to do as far as sharing is concerned,” says Harper, who in a previous incarnation was director of strategy for the Vodafone Group. “But now we’re seeing all the big operators come out with some sort of plan in the tower sharing space, so they are now pursuing discussions with us and other tower companies.”

Activity in this area was given momentum by Vodafone Ghana, which signed a ten-year contract with Eaton in late 2010. Eaton took over the operations and co-location management of 750 telecom towers for the Ghanaian operator and is also developing the existing infrastructure and building new towers. Over the life of the contract Eaton expects to invest up to $80m on upgrading and improving the existing towers and on improving Vodafone’s coverage in Ghana.

“It’s a very long, complex process,” Harper says. “The operators are under a lot more financial pressure. There’s pressure on margins and lots of growth in data traffic, coverage and services, which puts extra pressure on economics, forcing operators to add more base stations. You have to build out networks while cutting down capex for new builds and opex for running them.” One option for operators is to look at tower sharing. According to Harper, the passive tower infrastructure, that is the property, security, generator, and the tower itself, makes up 50-60 per cent of the operating costs for an operator. “So one of the ways to tackle these issues is to sweat the assets and share the infrastructure. Operators can share between themselves or increasingly, can talk to people like us and bring in specialists focused on this business. This approach is finding more favour, as operators realise it’s a specialist business and it’s best not to leave it as a sideline activity carried out by an internal team.”

Harper says that Eaton has identified four different types of operators: The first type is the operator that has made the decision that network coverage does not have the same strategic importance as it did years ago.

And as most operators in a given market have pretty even coverage they see it as a way of driving down operating costs. Second are the operators interested in selling towers as a way to raise cash in the short term. A third group comprises carriers that are not interested in selling as they don’t need cash and don’t see any advantages in selling, but that may need someone to come in and professionally manage the towers and market them to increase their tenancy ratio. Finally there are those operators with a significant strategy advantage, those that have more coverage than their rivals, and they don’t want to give that up.

Eaton is not the only organisation to have identified the African tower management opportunity and there are three principal actors in the African sector: Eaton, Helios and American Towers. And given the lengthy sales cycles involved and the high prices such deals command, it’s surprising to discover that competition isn’t as cutthroat as one might expect.

At the time of its deal with Eaton, Vodafone Ghana, the country’s third largest carrier, said it expected to benefit from cost savings and significantly reduced capital expenditure, while co-location and sharedinfrastructure facilities sold to other mobile operators would generate revenues from separate long-term contracts. Eaton has since added MTN Ghana, Millicom (Tigo), Zain and Kasapa to its client list in the country, while rival tower firms Helios and American have also started up business in the market.

In December 2010, MTN embarked upon a tower sharing venture with American Tower, establishing a Ghanaian joint venture, TowerCo Ghana, 51 per cent held by American and 49 per cent held by MTN, with the operator as the anchor tenant, on commercial terms, on each of the towers being purchased. The transaction involved the sale of up to 1,876 of MTN Ghana’s existing sites to TowerCo Ghana for an agreed price of up to $428.3m. TowerCo Ghana will also build at least an additional 400 sites for both MTN Ghana and other wireless operators in Ghana over the next five years.

Millicom, which operates as Tigo, on the other hand, has a relationship with Helios, to which it sold 1,020 towers in Tanzania in December 2010. As a result of the transaction, Tigo received around $80m in cash up front and retained a “significant minority interest” in Helios.

It’s a market that sounds intensively competitive, but Harper explains that the reality is more the opposite. “There are two dimensions to competition,” he says. “At the time when we’re chasing business, to take over an operator’s towers, there’s a lot of competition between the management companies. But once a portfolio is established there’s less direct competition as, usually, only one of the three management companies will own a tower in the area an operator wants to put a base station. So it’s not the cutthroat competition you would expect as the natural home for a new base station is typically on an existing tower.” Aside from the addition of the other Ghanaian operators to its client list following the Vodafone deal, allowing Eaton to expand its business by building up the tenancy ratio, over the last year the only other deals to be confirmed have come from Helios and American.

And they are few and far between. The reason for this is the long sales cycle, Harper says, adding that 12 months is proving to be “normal” for a deal to come to fruition.

“We’ve got three or four deals bubbling under and hopefully will be able to come out with those soon,” he says. “But the operators have to go through an internal valuation and due diligence because these deals are very big deals. They are quite typically, some tens if not hundreds of millions of dollars, with a lot of detailed information that needs to be put together about the existing tower and property portfolios the operators have. They also need to understand their own internal operating costs for a tower portfolio, and how they can find savings through a deal with somebody. And for us as the purchaser, we have to go through the due diligence process and make sure we’re comfortable with what we’re buying,” Harper says. Some towers are old and not fit for purpose, while others may be very cheaply and poorly built.

But with the cash injected by Capital International, Eaton is now able to put a plan in to place to start building up its own towers. The company is careful about choosing its opportunities. Harper said that Eaton would not go into very difficult areas in Africa because there’s enough to be done in more stable and attractive markets. For the model to exist, a tower firm needs multiple operators typically three or four as minimum. The opportunity in Africa is that many markets have six or seven operators, with low penetration and growth still going on. “We’re in discussion with operators in east and west Africa and we’re seeing quite large opportunities beginning to emerge,” Harper says.

“But we’re also in the early stages of building a small tower portfolio in South Africa. We’re not buying one from an operator at this stage, although discussions are ongoing, but actually building our own.” Naturally, there is more competition among the players when building a new tower in a new location, but there is also an advantage to be had in getting their first. As Harper explained, the tower management firms almost complement each other when it comes to coverage provided by existing towers, yet increasingly there is demand for new buildouts, which in South Africa particularly is being drive by 3G deployments.

“We’re definitely seeing 3G developments in many market we operate in. Data applications are growing in Africa quite significantly,” he says. “Typically you need equipment in the 2100-2300MHz band and if you’ve got an existing 900MHz or 1800MHz network for voice you need to add new installations to accommodate 3Grollout, and you probably need new towers to accommodate this.”

Eaton Towers will be attending AfricaCom, in Cape Town, November 9-10