Read this article to learn:
- Detailed insights into Zain’s Kuwaiti tower sale including implications for BTS, power provision and the acquiring parties
- Zain’s vision for further tower transactions
- Attitudes of MENA’s major operators towards tower sales and infrastructure sharing and where the next tower transactions could be expected
- Potential key players in the future MENA towerco sector
On 10 October it was announced that Zain had entered into an agreement to sell and leaseback its 1,600 Kuwaiti towers to IHS Towers, in partnership with Towershare, for US$165mn. The transaction is expected to close in the first quarter of 2018 and upon completion will mark the Middle East’s first tower transaction of scale. TowerXchange analyse the transaction and the knock-on effect this is expected to have on further transactions in the region.
Zain and IHS’ announcement that Zain have agreed the sale of their Kuwaiti tower portfolio to IHS represents a landmark transaction in the global tower industry. To date, over 99% of Middle East’s towers sit on MNO balance sheets and whilst there have been a number of stop-start processes over recent years, the news represents the region’s first tower sale to be agreed.
News of Zain’s interest in divesting their Kuwaiti towers emerged back in 2015 when they appointed Citigroup to examine a potential tower sale in two Gulf countries. Later in 2015, then CEO, Scott Gegenheimer confirmed the company was opening a process for a sale of both their Saudi and Kuwait towers and in March 2016 it was announced that they were narrowing down potential bidders.
In Kuwait, it is understood that interest was received from 15 parties, with Zain Group undergoing a rigorous processes to narrow this down to five shortlisted bidders before finally settling the deal with IHS Towers and Towershare. The transaction will result in the formation of a new entity which will be consolidated by IHS, and which will acquire and manage Zain’s assets, with Zain retaining a non-controlling minority stake in the venture.
The deal has been approved by Kuwait’s Communication and Information Technology Regulatory Authority (CITRA), and is still subject to other regulatory and statutory approvals, and is expected to close in the first quarter of 2018.
For Zain and the MENA region as a whole, the transaction is indicative of a shift in mindset towards passive infrastructure outsourcing and sharing. For IHS, Africa’s largest towerco, which owns over 23,300 sites in five Sub-Saharan countries the move adds a new flavour to their portfolio; adding an investment grade market to their existing profile of countries which have significant sovereign risk. For Dubai headquartered Towershare, who recently sold their Pakistani business to edotco, the transaction signifies an important step in establishing their position as a leading MENA-centric towerco with major ambitions in the region.
The mobile market and infrastructure sharing in MENA
The World Bank definition of MENA incorporates 20 countries extending from Morocco in the West to Iran in the East. Population size, geographical land mass, GDP, mobile penetration and ARPU varies drastically country to country although common threads tie the region together. In the majority of markets, there is a strong Arabic influence, a central role of government in the business sector, similar climates and a common set of MNOs with a presence in multiple countries.
Historically, many of the operators have been reluctant to share infrastructure, with incumbent players in particular having viewed their networks as a source of competitive advantage. With many MNOs having enjoyed high ARPU, healthy balance sheets and relatively simple operating environments, the motivations that have led their counterparts in other geographic regions to divest their towers have not been concerns. As a result, over 99% of the region’s towers remain on MNO balance sheets and infrastructure sharing has been limited.
As data demand continues to explode across the region prompting operators to invest in improving network capacity, and competition continues to rise from OTT players, the attitudes of MENA’s MNOs towards infrastructure sharing is starting to change.
The Kuwaiti mobile and tower market
Kuwait is a developed mobile market with a mobile penetration rate of 188%, ARPU is one of the highest in the region (although has steadily been decreasing) and LTE coverage is almost complete. Zain is the leading operator in the country with 38% market share, with Viva (owned by Saudi Telecom Company) and Ooredoo having 32% and 30% market share respectively (see figure one).
Figure one: Mobile market share in Kuwait*
There are an estimated 3,500 towers in Kuwait, with Zain possessing the largest tower portfolio, owning approximately 1,600 sites. To date, the number of shared sites across Kuwait is minimal and significant parallel infrastructure exists.
The mobile market is regulated by Kuwait’s Communication and Information Technology Regulatory Authority (CITRA) which was established just two years ago, taking over responsibility from the Ministry of Communications.
Zain’s operations and motivations to divest their Kuwaiti tower portfolio
Zain has a commercial presence in eight countries, operating in Kuwait, Bahrain, Iraq, Jordan, Saudi Arabia, Sudan and South Sudan. In Lebanon, the Group manages ‘touch’ on behalf of the government. In Morocco, Zain has a 15.5% stake in ‘INWI’.
Similar to other operators in the region, Zain has continued to face increasing economic and political challenges across many of its markets; challenges linked to currency fluctuations, a decrease in oil prices, civil unrest, the introduction of new taxes and increasing competition.
In a bid to meet growing data demand, the company has been investing heavily on expanding 3G and 4G networks across its markets, resulting in a capex spend for 2016 of US$635mn (excluding Saudi Arabia). Such investment has yielded good returns, with group data revenues growing 6% in 2016, and data representing 23% of the group’s consolidated revenues.
In spite of this growth, total 2016 revenues were down 4% compared to 2015 figures and whilst Zain Group posted a 3% year on year growth in EBITDA, the company has placed a strong emphasis on rationalising costs and capital expenditure and increasing operational efficiency in a bid to protect their margins.
A strategy involving tower divestment frees up capital to invest in other areas of the network, whilst sharing sites with other MNOs, helps to keep a handle on operating costs. In Kuwait, the sale of their 1,600 sites has raised $165mn in capital, an amount equating to approximately one third of their forecast capex for 2017.
Figure two: IHS Towers’ portfolio of 23,382 sites
Spotlight on the winning bidders and their appetite for Zain’s towers
IHS is Africa’s largest independent towerco with a portfolio of over 23,300 towers across five markets (figure two). The company has experience of acquiring major tower portfolios, having completed transactions with MTN and Etisalat amongst other deals (figure three).
The acquisition of Zain’s Kuwaiti sites brings a new dynamic to the towerco’s portfolio. Whilst IHS’s sub-Saharan African markets are about ensuring power uptime and rolling out new macro-sites, Kuwait is a much more developed and operationally simple market, more akin to the towerco markets of Europe and North America.
Diversification of the towerco’s geographical footprint may make the company more palatable to potential investors; IHS’s existing portfolio has a heavy Nigerian bias, a market which has gone through a particularly challenging time in the past 12 months. A deep recession coupled with a dramatic currency devaluation has hit the telecoms sector hard, with Etisalat’s exit from the country following a failure to meet loan repayments the latest in a long line of woes. The addition of an investment grade Middle Eastern flavour to IHS’ portfolio could well help balance out some of the concerns about such a high concentration of business in one country.
Figure three: A history of IHS’ major tower acquisitions
Independent towerco Towershare had developed a portfolio of 700 towers in the Pakistani market, held under their subsidiary Tanzanite; a portfolio which was built from the acquisition of WiTribe assets and the rollup of several smaller local towercos. In 2017, Tanzanite looked set to exponentially grow their Pakistani portfolio, being tipped as the frontrunners to acquire 13,000 towers from Jazz, VEON’s opco in the country. Whilst the tower sale process was ongoing, one of the other competing parties in the transaction, edotco, made an offer to acquire Tanzanite for US$88.9mn; an offer which was subsequently accepted by Towershare.
Headquartered in Dubai and managed by a team which previously ran one of the leading telecom equipment vendors in the MENA region, Towershare has been very much positioning itself to become a leading player in an emerging MENA tower industry. Towershare bring strong local relationships to the partnership with IHS, creating an attractive party to whom Zain felt comfortable divesting their towers.
Speaking on their decision to award the towers to the IHS – Towershare partnership, a spokesperson for Zain said “We believe they are a formidable team with a sound track record, financial capabilities, knowledge of the region and finally, good chemistry within the team which is crucial for this long-term relationship. They both possess high calibre expertise with sound operational experience in diverse markets. Both entities have ambitious teams that are focused on expanding their operations across the Middle East and Africa.”
What do we know about the deal structure?
IHS are understood to have fronted and bought the assets with Towershare acting as a regional partner and Zain retaining equity in the new entity. The division of equity between IHS, Towershare and Zain has not been disclosed. With Zain’s retention of residual equity reducing the capital requirement to purchase the towers, and IHS having significant liquidity on their balance sheet, IHS has not had to raise new capital to finance the transaction. Zain’s retention of equity is for financial upside exposure only, with no access to strategic or competitive information, thus guaranteeing the independence of the new towerco entity.
The deal is understood to involve a build-to-suit commitment over the next three to five years and whilst no details of decommissioning plans have emerged, consolidation is expected in a bid to bring efficiencies to the portfolio. Whilst there has been no discussions of the towerco entity expanding beyond the ownership and operation of macro-sites, Kuwait’s plans to become a leader in the rollout of 5G could create a potential role for the towerco entity in small cells and DAS rollout to meet densification requirements.
The new towerco entity will take over power as a service and whilst the vast majority of sites are on-grid, Zain had previously been investing in energy efficiency initiatives in a bid to control energy costs and reduce carbon emissions.
Figure four: The number of site locations used by Zain Group across its different markets (inclusive of owned and shared sites)
Could we see more tower sales from Zain?
Zain are known to be exploring the sale of their 8,000 towers in Saudi Arabia. The opco originally entered into exclusive negotiations with TASC Towers earlier in 2017 but the two parties failed to reach an agreement. On 6 August 2017, the Board of Directors, decided to enter into exclusive talks with IHS and Towershare on the matter, with the period of exclusivity being granted until the end of September. No material developments have been announced since the expiry of this period but talks are understood to be ongoing with sources suggesting the parties are close to reaching an agreement.
Once the transactions in Kuwait, and hopefully in Saudi Arabia, are closed, TowerXchange’s source at Zain explains that the MNO will look at both deals and examine lessons learned with a view to examining potential tower processes in other markets. Whilst definitive tower counts for Zain’s other markets are yet to be obtained by TowerXchange, an indication of the relative scale of their portfolios can be obtained by the number of sites used by the operator in each of its respective markets (see figure four).
Could this have a knock on effect on other MNOs in the region?
Whilst no other tower transactions of scale have been completed in MENA, several of the region’s MNOs have experience working with towercos in other geographies, whilst others have started to embrace infrastructure sharing strategies more readily;
Etisalat, with a presence in the UAE, Saudi Arabia and Egypt and a share in Maroc Telecom had previously sold their Nigerian towers to IHS before exiting the market. The company’s Saudi Arabian opco, Mobily, had initiated a process to sell its 9,600 sites before abandoning the transaction to study the formation of a towerco joint venture with Saudi Telecom Company. Plans for the joint venture have currently been shelved but should Zain reach an agreement to sell their towers in the market, one can imagine that tower strategy will once again move up the boardroom agenda. Whether this could lead to a tower sale however remains in question; Etisalat’s experiences in Nigeria are thought to have left the team wary of divesting their towers and being unable to make lease payments.
Ooredoo, with a MENA footprint in Qatar, Kuwait, Oman, Iraq, Palestine, Tunisia and Algeria had previously outsourced new build to towercos in Myanmar. The operator is particularly keen to explore infrastructure sharing strategies, especially in its more challenging markets and has entered into discussions with operators in several jurisdictions (although an absence of towercos in such markets means relationships with the latter have not been explored). Ooredoo had reached an agreement to carry out active sharing with Djezzy in Algeria, only for the plans to be blocked by the regulator. It is thought however that active sharing may be permitted for the rollout of 4G in the country. Whilst no tower processes have been discussed in MENA, Ooredoo may well be receptive to discussions in the market.
Orange has a long standing history of working with towercos across multiple sub-Saharan African markets. Whilst the company has not completed a sale and leaseback transaction of its own, Orange has inherited towerco relationships through the acquisition of Tigo in the DRC and Airtel in Burkina Faso (both of which who had sold their tower portfolios), has entered into manage with license to lease (MLL) arrangements with IHS in Cameroon and Cote d’Ivoire and has a footprint in further markets where towercos are present. In 2016, Orange reached an agreement to sell 2,000 of its ~6,000 Egyptian towers to Eaton only for the deal to time out, with regulatory roadblocks proving insurmountable at the time. The MNO is now putting a heavy focus on examining partnerships with ESCOs, with an RFP known to have been issued in Egypt. In MENA, Orange also has a footprint in Jordan and Morocco although no plans around tower sales have emerged.
Saudi Telecom Company, with a presence in Saudi Arabia, Kuwait and Bahrain (operating in under the Viva brand in the latter two) had explored a tower sale in Saudi Arabia before examining the aforementioned joint venture with Mobily. With talks surrounding the joint venture having stalled, reportedly due to Mobily dragging their heels, it is uncertain whether STC may reconsider a tower sale instead. The entrance of IHS and Towershare into the Kuwaiti market will expose STC to towerco activity and potentially influence their view point on further working with such parties.
In Iran, number one and number three operators, MCI and Rightel, have joined forces with domestic towerco, Fanasia, to form a new towerco venture, Iranian Towers. Iranian Towers will manage all new site rollout for the two operators, with a long term vision that an undisclosed number of the two’s tower portfolios will be transferred into the entity.
In addition to such multi-country operators there are host of other MNOs with a presence in one or more markets whose ears may be pricked up by the news of towercos and infrastructure sharing coming to the region. As the first wave of towers start to transition into towerco hands, further activity may start to emerge as MNOs look to bring efficiencies to their networks.
Which towercos could have an interest in the MENA region?
Through the acquisition of Zain’s Kuwaiti towers and entrance into exclusive negotiations regarding the operator’s Saudi Arabian portfolio, both IHS and Towershare have signalled their intent to take a leading role in MENA’s emerging tower industry.
Eaton Towers, Africa’s fourth largest towerco, had made an offer for Orange’s Egyptian towers and remain committed to the country, but have expressed less of an interest in the more developed Middle Eastern market. Helios Towers Africa, SSA’s third largest towerco, have also expressed similar apathy towards the Middle East, seeing their business model as being one focussed around macrosite rollout and power provision. Publicly listed American Tower, who also have a robust footprint in Africa, in addition to portfolios across Asia and the Americas, could represent a further candidate, although certain Middle Eastern markets may be off limits given the nature of US relations in the region.
Names linked to the previous sale processes in Saudi Arabia include Digital Bridge (who have investments in towercos Vertical Bridge, Andean Tower Partners and Mexico Tower Partners as well as small cell player ExteNet systems), Providence Equity Partners (who have money at work in India’s Indus Towers, Brazil’s Grupo Torresur and Indonesia’s KIN) and TASC Towers (who had previously entered into exclusive negotiations with Zain KSA). Quippo International (whose team was behind India’s Viom Networks, recently sold to American Tower) have also been linked to the Middle Eastern market, as has Turkcell’s captive towerco, Global Tower, who has stated its ambitions to explore opportunities beyond its home markets.
In Egypt, infraco licences were awarded to Alkan, Mobiserve, EEC and HOI-MEA, with only the latter having chosen to build and retain a portfolio of sites. TowerXchange has also been made aware of a managed service provider in at least one other MENA country who has ambitions to become the first towerco in their market, whilst a handful of tower builders, such as Saudi Arabia’s ACES and Al Babtain are retaining sites. One could expect further build-to-suit towercos starting to emerge; companies which would establish their footprint in a given country and thus have operational experience should a tower process arise.
The announcement that Zain has reached an agreement to sell and leaseback towers in Kuwait represents a major milestone in the opening up of the MENA tower industry. With the operator also in advanced discussions regarding a divestment in Saudi Arabia and TowerXchange having been made aware of one other tower sale process being kick started in MENA, the tides are very much turning in what, to date, has been the market the least penetrated by the towerco business model. TowerXchange anticipate further developments starting to emerge throughout 2018 and eagerly await news in what is set to become a very interesting market place.