Mark Jennings, investment principal of the Investec Africa Frontier Private Equity Fund, sees opportunities in telecommunications on the African continent, despite the significant growth the sector has enjoyed over the past decade.
The phenomenal growth of mobile telecommunication has been touted as one of the great investment opportunities on the African continent over the last ten years, and those who capitalised on it have generally enjoyed a great return on investment.
The numbers speak for themselves. According to research by AT Kearney, there were 17 million mobile connections in Africa in 2000 – a penetration rate of approximately 2%. By 2011, this had grown to 642 million mobile connections, or a penetration rate of 65%. This presented investors with opportunities to get exposure to many of the high-growth mobile network operators who expanded their operations across Africa.
These operators include South Africa’s MTN and Vodacom, Zain Telecom (originally Celtel and now Bharti Airtel), Orange, Millicom and Orascom. Initially achieved off a very low base, the growth has been more moderate in recent years, as can be expected in a market that has grown so rapidly.
It doesn’t mean, however, that there is no more opportunity. The African continent is one of the most rapidly growing economic regions, with the telecommunications sector continuing to offer promising prospects. Investors just need to look beyond the obvious.
We believe one of the most exciting opportunities lies in the very fact that growth has slowed for voice services for mobile operators. After ten years of healthy expansion, operators active in Africa are under pressure to reduce operating costs. Increasing competition has resulted in declining average revenue per user, which is forcing companies to seek greater cost competitiveness. Capital expenditure is also under pressure and towers represent a significant capital expenditure item for an operator. With the increasing competition companies are looking to focus on their core competencies, including the development of new products and services, and to outsource areas to other companies where these can be done at lower cost and/or with better quality and speed.
This has led them to increasingly outsource activities relating to infrastructure. As part of the rapid expansion over the last decade, each operator tended to provide its own network infrastructure for the areas in which they were active. Telecommunication towers are the most obvious example of this. While they are indispensable to any network, the costs associated with establishing and operating them are substantial.
For a new generation of companies willing to relieve operators from this function of their business now considered by many as non-core, the management and operation of towers has proven to be a profitable enterprise, and the ownership of towers by independent tower companies is gaining momentum. In recognising this trend, the Investec Africa Frontier Private Equity Fund invested in IHS last year – an independent telecommunications infrastructure provider that builds and manages mobile tower networks owned by operators in Africa and that owns its own towers, either built or bought, on which it leases space to multiple operators. This is a model known as “co-location”. In addition to the benefits already mentioned there are important environmental advantages to the co-location model through fewer sites, fewer generators and less diesel used and transported.
IHS’ track record and performance over the last ten years – and its growth since our fund’s investment – is proof of our conviction in this opportunity. Since our investment in the company last year, they have grown from owning 270 towers in one country to owning close to 3,000 towers in three countries, in addition to managing around 3,000 towers. Their most recent milestone is the conclusion of an agreement with MTN to acquire its more than 1,750 towers in Cameroon and Cote d’Ivoire.
We believe this strong foothold in the telecommunications market positions IHS well to take advantage of future opportunities to expand its ownership of towers.
Furthermore, IHS is seeing a strong trend in the provision of new services beyond voice connectivity, such as data and internet which will create additional demand for towers. A recent article in Global Telecoms Business points out the potential for broadband data penetration in Africa, as advancement in this field has not matched the development of the mobile voice telecommunication industry. Tower sharing will play an increasingly important role in the way this area expands.
Investors should take heed of the fact that the mobile voice phone market in sub-Sahara Africa has grown by 61% per annum on average over the last ten years and we see no reason for this growth to end – just to take a different route. Those searching for growth would do well to look in the field of infrastructure outsourcing.