Towers a growth industry in Africa, AP

Virtually a week doesn’t go by without media reporting or speculating on telecom tower outsourcing activity. While the telecom tower industry is relatively mature in the North America, it is seeing rapid growth in other global markets, particularly in Asia Pacific and Africa.
For example, Indus Towers in India now boasts that it has the largest tower portfolio in the world with over 110 thousand towers. Helios in Africa and Bersama in Indonesia are examples of other companies that are also seeing significant growth opportunities in their respective markets.
The business model for tower outsourcing is rooted in real estate investment principles. Most tower transactions are based on upside opportunities being derived from adding multiple tenants to the tower sites.
Careful due diligence is crucial as tower companies evaluate investment opportunities. This is illustrated in Exhibit 1 where the internal rate of return (IRR) of a tower transaction is predicted to increase from -4.8% to 14.3% for average collocation rates between 1.0 to 2.5 tenants per tower.
Exhibit 1: Tower collocation potential plays critical role in tower valuations
Source: Tolaga Telecom Tower Financial Analysis 2013
The tower collocation rates are dictated by several important factors including the following:
· Telecom tower infrastructure is specialized and typically has between three and five potential customers in any particular market. Complex zoning issues and implementation costs create lock-in opportunities for towers, particularly those that have high network traffic and are not located near competitive structures. Historically only a small percentage of towers have been decommissioned even in markets where significant consolidation amongst service providers has occurred.
· In some markets, such as in Western Europe, operators have already built out independent tower infrastructure across their respective network footprints. With each operator having overlapping coverage, the opportunities for collocation are truncated but might occur as the result of network overlays, such as for 4G.
· While data traffic volumes are driving the need for additional base stations, the sites that are being built for this purpose tend to have lower transmission power requirements and are not necessarily compatible with existing tower infrastructure. This has driven interest in alternative architectures, such as neutral host distributed antenna systems (DAS) and small-cell implementations. Tower companies have been investing in DAS systems; however the underlying business model dynamics, while profitable, are somewhat different to traditional tower sites.
· The demand for capacity on tower sites is dependent on a variety of factors including the radio configuration requirements of the deployed technologies. Conventional macro-cell sites are normally configured with three sectors and require one transmit and two diverse receive antennas. These can be implemented on three separate antennas, or combined into multiple poles within the same antenna.  Overlaid technologies operate in different frequency bands and potentially have slightly different coverage and capacity demands. Traditionally these overlays have been implemented with separate antennas, which increase collocation rental opportunities for tower companies. However, more recent advancements in wideband antenna technology have enabled operators to consolidate their antenna equipment and reduce their tower rental costs. This consolidation will potentially be offset in the future with advanced multiple-in-multiple-out (MIMO) diversity architectures that require many more antennas.
The profitability of a transaction for a tower company obviously depends on the transaction price. For the case study in Exhibit 1 a transaction price of $400 million is assumed for a portfolio of 200 towers. 
From the perspective of an operator selling its tower portfolio, the value proposition depends on the transaction price relative to ongoing tower rental costs, and operational expenses that are passed from the operator to the tower company.
This value proposition can be evaluated in terms of the estimated cost of capital for the operator relative to alternative sources of funds. In Exhibit 2, the effective cost of capital for the case study tower transaction is evaluated over a range of transaction prices.  If the transaction price was $320 million, the effective cost of capital would be 7.8%. For transaction prices of $400 and $464 million, the effective cost of capital is 4.9% and 3.1%, respectively.
Exhibit 2: Effective cost of capital is an important consideration when operators sell their towers
For the tower industry to continue to thrive, it is important that mobile operators, tower companies and their investors have a clear understanding of the impact of industry dynamics on profitability. These dynamics include global considerations, such as the shift to LTE and 4G, and local market conditions, such as operator positioning and legal and regulatory conditions. Once understood, these factors must be related to longevity of investments and likely lease up rates for tower companies, and the appropriate transaction price for mobile operators.