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The AfricaNext Tower Co-Location Report

The AfricaNext Tower Co-Location Report

Table of Contents

Market Study
Published: June 2011
Pages: 40
Tables: 23
From: GBP 166.00  Buy Now!
Research from: AfricaNext
Sector: Networks & Infrastructure

Just over a year ago Bharti Airtel snapped up the African assets of Zain, and almost immediately announced a series of measures to improve the profitability and viability of its newly acquired properties; one of which was to be the setting-up an Infrastructure Company that would manage these essential assets - and achieve significant cost-savings by allowing other operators to use the same cables and towers.

And this seems a highly practical and sensible way forward. After all, this idea of sharing networks and infrastructure isn't new as African operators have signed roaming agreements with their competitors to allow them access to parts of the territory they would not other wise be able to reach, as happened in Tanzania, and is currently being done by Telkom in South Africa to allow its 8ta offering to be 'national' by piggy-backing on MTN's network.

But it was Telkom, whilst on the one-hand showing how the shared infrastructure model can work for all parties, was also showing the flip side last week when its sale of its Nigerian Multi-links business failed due to it trying to walk away from an existing deal it had struck with Helios in 2008. Worse, when it went - inevitably - to court, the court found that the arrangement was alive and well, and being performed!

Over the past two years, the African telecoms market has witnessed at least seven transactions involving the sale (or outsourcing) of cellco tower assets to stand-alone tower companies. In late 2010, the USA�s second largest tower company, American Tower Corporation (ATC) announced that it would acquire the 1,400 towers of South African third mobile operator Cell C.

The ATC-Cell C deal followed similar transactions, with Millicom selling its towers in Ghana, DRC and Tanzania to Helios Towers Africa, and Vodafone Ghana outsourcing the operation of its towers to Eaton Telecom.   We see these transactions as yet another indication that (some) African mobile markets have reached maturity stage.

The great thing about the tower co-location business case is its operational leveragability, but this is balanced by considerable risk in the ability of tower operators to generate acceptable returns in the African context.   This report seeks to answer eight specific questions, as it pertains to the African tower co-location business:  What are the catalysts? What is the opportunity? Where is the opportunity? What�s the economic model? Can the model work in the African context? How are tower assets valued? What�s the operator business case for tower outsourcing? What�s the balance sheet case?

> African market dynamics appear to favor the emergence of a robust third party tower business. By our count, there were around 75,000 cell site towers in Sub-Saharan Africa in 2010. 

>We estimate that about 8,500 (or 15% of all) towers in sub-Saharan Africa are shared in some fashion, on sites managed by operators themselves or by a third party provider. Of those towers. 

>We estimate 2010 annual tower rental revenue at about $300m.

>On the basis of the above characteristics, we believe the third party tower opportunity is limited to fewer than ten markets in sub-Saharan Africa. 

>The tower play operational economics look fantastic � when the model works. Cash flows are annuity-based, steady and predictable.  The deals are long term, the business has high potential for operating leverage and barriers to entry are high - There is nonetheless considerable risk in the model. 

>The outlook for the African tower business will hinge on the ability of third party tower companies to drive tenancy rates. On that front, we are mostly skeptical.  

>Tower valuation in African transactions has been mostly consistent with transactions in other parts of the world, if at the high-end of the range. African towers do not come cheap. Capital market valuation of tower assets is a lot more varied.  

>Our analysis suggests that the CapEx case is arguably the most compelling in outsourcing tower site management. operational cell site.  

>We find direct OpEx savings appear to be mostly moderate.  

>Perhaps the greatest benefit of selling tower assets (other than the CapEx gains) is the balance sheet impact. 

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