New Partnership to advance Telecom Co-location in Africa

It has been reported on various business newswires (Reuters et al) that a group of investors have committed to pool US$ 350 Million in equity commitments to build a pan-African mobile telecoms tower company: Helios Towers Africa (HTA). This is the brainchild of Helios Investment Partners: an Africa focused Private Equity manager that has already legitimised the co-location business with its Nigerian portfolio company: Helios Towers Nigeria (HTN). Helios Investments managed to convince investment heavyweights, such as Soros Strategic Partners (yeah the “financial alchemist” himself), the famed Rothschild banking family and Albright Capital Management LLC (an investment firm led by former US Secretary of State Madeleine Albright), to serve as co-investors in the company.

Truth be told, I have been quite impressed by the antecedents of Helios Investments and the quality of its investments. Some of the firm’s portfolio companies (in which it holds significant stakes) include First City Monument Bank (FCMB) in Nigeria, Equity Bank in Kenya and the entire African operations of Portugal Telecom. Furthermore, the firm – according to its website – has over US$ 575 Million in fund commitments, which should make it one of the largest PE fund ( if not the largest) in Sub-Saharan Africa (ex-South Africa). It's quite refreshing to finally see a PE fund with the scale and access to the significant resources needed to make a meaningful impact.

Furthermore, I think co-location and managed infrastructure is set for a really serious boom in various African markets (Nigeria inclusive). This is bound to occur as the mobile telephony markets in Africa move beyond the pioneering, build-as-fast-as-you-can stages into a stable and possibly maturing market in which margins begin to thin. Truth be told, practically all affluent and middle-class Africans living in non-conflict areas already have a cell phone service, this means that new mobile customers will tend to be largely lower-income and/or rural people. This will likely bring down the Average Revenue Per User (ARPU) – a key measure of profitability for telecoms companies – across board.

Telecoms companies will therefore be seeking ways to cut down on their operating costs to remain profitable and the outsourcing of cell towers and other passive infrastructure is a “low hanging fruit” in this regard. Recent moves by Zain Nigeria is indicative of this trend as the company has gone further to outsource the management of its core network infrastructure to Ericsson as part of various cost cutting measures. It is not hard for me to imagine the same company selling its cell sites to 3rd parties and expanding its footprint to less lucrative rural areas in Nigeria through co-location providers such as Helios. This trend will very likely spread to other African countries such as Ghana, Cote D’Ivoire and Cameroun that have had GSM services for a while and there should be rich pickings for Helios Towers Africa in each country.

I believe Helios’ strategy of incubating a scalable business that enjoys first mover advantage serves to acknowledge a fundamental difference between private equity investing in frontier markets and that of developed markets. While PE investing in developed countries is increasingly reliant on complex financial engineering and leverage for returns, PE investing in frontier markets like Africa should be based more on identifying underserved, profitable business models and applying world class practises in managing them. Therefore, most successful deals will be “debt-lite” due partly to underdeveloped debt capital markets and the inherent high risks involved in operating in Africa. To put financing risk on top of that – in the form of a highly leveraged acquisition – will be like sitting on a keg of gun powder and lighting a match.

I think PE investing in Africa is set for strong growth in the next decade as the established exotic regions such as India, China and Brazil begin to mature and more closely resemble western markets. Seeing hard nosed capitalists like George Soros and the Rothschilds begin to take investment positions in Africa indicates that the so called “smart money” is beginning to take African growth prospects seriously and may transform African PE sector from being the sole domain of quasi-charitable development firms such as the IFC, ADB etc that have long dominated investments in the sector.