Are catalysts in place to see tower company success in Africa?

Across many emerging markets today, there is a heightened focus on efficiency in spending as operators pursue strategies to achieve capex and opex savings in their operations. For emerging market operators, many of whom are in the process of further network rollout; rural expansion and its associated higher capex per erlang is forcing through alternative solutions to keep down their costs per minute. Tower spin-offs and leasing from independent third-party tower companies is one such option, increasingly making the headlines. This form of network sharing not only limits the absolute cost of coverage in rural areas but also improves the economics enough to make it viable.

Devine Kofiloto is a consultant with Deccocon, an independent consulting business focused on emerging markets

With the number of operators across the region looking to further extend network rollout into semi-urban and rural areas, the demand for tower sites in the medium-term is expected to be high. Coupled with national regulators increasing concerns over the environmental impact of the proliferation of towers (which in some cases has prompted the placing of restrictions on new tower constructions in some cities in some countries such as Ghana), the conditions look set on the demand side for the emergence and growth of third party tower operators.

That said can it be assumed that this heightened focus on cost-cutting by mobile operators, to keep their capex spending in check and national regulators concerns over the environmental impact of the proliferation of towers, will serve as the main catalyst to drive the growth of tower companies across the African region, as we have seen in India and the US? What could potentially hold back third-party tower sharing and the subsequent materialisation of the growth of independent tower companies?

Likely bottlenecks

The sharing of passive infrastructure elements such as sites and towers through bartering and co-sharing is already prevalent among some operators today and tends to happen on an ad-hoc basis. This cooperation, where it exists, is generally most likely to be among operators with comparable market share in a given market. Some market observers are of the opinion that area coverage today is highly overrated, and the reality is that in markets/regions were national network coverage is on average low, it still remains a strategic competitive advantage. Two large operators in a market might deem it tactical to enter a sharing agreement to keep out an independent tower operator and hence deny new entrants or a rival with a smaller footprint the advantage of rapid network rollout.

Generally speaking, for an independent tower operator’s business model to be viable, maximising yield per tower is a key consideration. Meaning it is paramount that it brings in multiple operators to take up a lease on the same tower. The average occupancy rate might be in the range of 2.5 – 3.5 operators on one tower. Bearing in mind the anchor tenant usually gets given the choice of location and radio height, tower companies are likely to face challenges in attracting other lessees or tenants, for whom the existing location and radio height might not fit with their network planning. The recent deals signed by independent tower companies, Helios Towers and Eaton Towers, with Millicom and Vodafone respectively in Ghana, will be interesting cases to follow and see how these tower companies are able to offer the same towers to new lessees on non-conditional terms.

One other key consideration behind the argument of outsourcing towers to independent tower companies is the efficiency consideration, which is the desire to maintain an asset-light balance sheet and focus on the core business of selling airtime. An operator’s existing towers can be spun-off, sold to an independent tower operator and leased back, creating a cash injection. However, this is not without its concerns. Though the obvious rationale is towards optimising capex, deferring capex into opex (tower leasing) could have a dilutive effect on EBITDA and subsequently lower it, potentially affecting a key valuation metric.

There is undoubtedly good reason to believe that independent tower companies can achieve cost savings for mobile operators in managing their towers. However there are inherent market challenges that could impact the pace and size of their much predicted market growth across the region.

Devine Kofiloto is a consultant with Deccocon, an independent consulting business focused on emerging markets and providing research and consulting services across the many verticals within the TMT space

www.deccocon.com