Behind the glowing phone screens which provide us with endless access to information, entertainment and connection lies a hidden digital infrastructure that is now getting far greater attention from investors and corporations – given the growing demand for telecommunications in Africa.
Every mobile connection requires data to travel through our devices and to the supporting infrastructure of mobile telephony towers, fibre, data centres and under-sea cables to all corners of the world.
As demand continues to grow in Africa, every component of this value chain must grow in parallel. Given some of the fiscal constraints facing the continent, a significant share of the necessary capital has come from private investors and corporations.
The mobile network operators (MNOs) have in the past typically invested a large proportion of their revenues in the required infrastructure. The likes of MTN and Telkom, for example, spend on average between 14% – 18% of their revenue in capital expenditures to both expand and maintain their infrastructure. This high expenditure is compounded by the fact that rapidly evolving technology requires new equipment, denser coverage and more bands of spectrum.
Historically, this has been a drain on their cash flow and shareholder returns. To try and enhance their returns, MNOs have begun to spin-off parts of their passive infrastructure such as the mobile towers in order to lower their capital expenditure bill as well as monetise and improve efficiencies in the management of these assets.
In so doing, African MNOs are catching up to the global trend of separating out passive infrastructure to unlock value. MTN has led the way on the continent by selling their towers to independent tower companies. Telkom has also recently announced that it is seeking investment in Gyro, its tower and data centre portfolio.
A quick look at the company valuations of some of these infrastructure players reveals a large divide. Listed tower companies and data centres often trade at eye-watering valuations at far higher levels than MNOs. A sale of these assets can be an efficient mechanism to release cash for growth and provide an uplift to MNO valuations.
In addition to the mobile tower deals, we have seen massive investment in fibre, data centres and undersea cables. Besides the large MNOs, South African private fibre network operators such as CIVH have deployed large amounts of capital to fund the roll-out of fibre to the home.
South African data centre businesses such as Teraco have expanded their operations in line with demand from the hyper-scalers and corporates on the continent. We have also seen deep investment in undersea cables from large-scale Internet players like Facebook.
Private equity investors have also homed-in on this trend, and we have seen a flurry of activity in this space. Actis recently invested in Octotel, the third-largest fibre network in South Africa. Teraco, one of the largest data centre operators, was sold to Berkshire Partners – and they have recently embarked on a multi-billion rand expansion plan in South Africa.
In the towers space, Helios Towers successfully listed on the London Stock Exchange (LSE) and American Tower Corporation acquired Eaton Towers, with both companies being sold by private equity funds. All these deals had the hallmarks of great private equity deals with strong growth in the underlying assets, strong value add and ultimately excellent returns. With global private equity funds holding onto uncommitted capital of around US$1.7trillion, there is certainly plenty of capital to deploy in this space.
While mobile penetration has increased rapidly across Africa, Internet penetration remains low at around 39% compared to the rest of the world – which has approximately 63% Internet penetration.
With a population of 1.2 billion people, there is vast potential for growth in the telecommunications sector. The deal flow and investor demand are testament to the sound underlying secular trends in the sector. While concepts such as the fourth industrial revolution are bandied about, telecommunications are indubitably the foundation for moving us into the next technological era.
Artificial intelligence, data analytics, cloud computing, e-commerce, and autonomous vehicles are simply not possible without connectivity. The space is certainly shaping up to be a beacon for investment on the continent, and one that will deliver a success story for all stakeholders – including consumers and investors.
The cliché that data is the new gold may be getting tired, but in Africa the story is just starting.
>>>The writer is Head of TMT Advisory at RMB
