IHS, a company that builds and rents out mobile phone towers, is raising money in order to double its business within the next year, reports the Financial Times.
- Deal terms: $200mn in equity with Citi as lead bookrunner.
- Use of funds: Bring portfolio of 850 towers to 2,000.
- Addressable market: IHS estimates $50bn and 50,000 masts for the African tower market. Voice penetration is reported at 60%, although the CEO of IHS thinks it’s more like 45%-50%. Data services are practically nonexistent.
- IRR for existing PE backers >20%.
- Other deals in the space: France Telecom in Uganda, Etisalat in Nigeria, Orange Telecom in Kenya, Mobiserve Holding in Egypt.
The mobile space has been one of the more high profile successes in less developed countries. In Afghanistan, a country of 29mn people, there are 15mn wireless subscribers and, quips one visiting businessman, “My cell service is better [in Afghanistan] than in the Bay Area.” At TED, Paul Romer showed (video at bottom) a picture in which African students had access to cell phones, but no access to electricity.
What is most notable about the telecommunications industry is its ability to attract customers in poor war-torn areas. In 1998, cell phone users were 2mn. By 2002, there were 30mn cell phone users. In 2009, one report pegged new subscribers at 96mn across Africa, 89mn in China, and 128mn in India.
However, what is most exciting about the mobile phone space is the ability to piggyback new innovations. In places where the minimum sustainable turnover did not cover capital costs for brick-and-mortar banking, mobile banking developed instead. One consultancy, Juniper Research, estimates mobile banking will hit $22bn in Africa by 2015. In fact, mobile banking is one industry where it seems less developed countries have leapfrogged the developed countries. With the recent introduction of services like Google Wallet, it is only now that the United States is laying the groundwork for a banking system that was envisioned over 15 years ago.
Going back to the mobile towers specifically, to get a better idea of the terminal value of the African tower companies, one could look at more mature markets. The United States, which has a population of around 300mn and mature levels of mobile penetration, has three main large mobile tower operators. While their operations are not 100% in the United States and every market has its own peculiarities, we are just using this as a back-of-the-envelope calculation to get the right order of magnitude.
As of this writing, a quick look at Bloomberg pegs American Towers with an Enterprise Value of $28.0bn, Crown Castle with an Enterprise Value of $18.7bn, and SBA Communications with an Enterprise Value of $7.4bn (Enterprise Value combines market capitalization and net debt, which takes both equity holders and debt holders into account). That would mean that for every 300mn in mobile customers, you would have at least $54.1bn worth of mobile infrastructure companies.
On a continent of 1bn people, the aggregate Enterprise Value of the tower companies would be $180bn, assuming the terminal value estimate is for roughly the same maturity level of mobile tower service in the United States today. Give some margin of difference for varying economies of scale and competitiveness and you’re essentially looking at an undiscounted terminal value of $150bn to $200bn for the market. Again, we are just using this as a mental exercise to get us thinking about the right order of magnitude.
Admittedly, multiples in the tower space are high with the expectation of multifold data demand increases caused by the eventual introduction of high bandwidth activities, such as laptop/tablet tethering, video streaming, and video conferencing. Nevertheless, one could argue that the multiples of the mobile tower companies in the less developed countries should be higher because they have increasing incomes from a lower base and, correspondingly, a minuscule level of data usage compared to users in developed countries. In other words, you’ve still got a lot more room for growth in the less developed countries.
Whatever the outcome of the mobile tower industry, it will be interesting to see how the continuing growth of telephony will affect the continent in the decades to come.