Restructuring the telecoms industry to achieve rapid broadband roll-out
PRESS OFFICE: RMB
Data demand is growing exponentially as consumers increasingly use smartphones, tablets and wearable devices to access information. Consequently, the need for high-speed data network capacity is also rising, requiring substantial capital expenditure in optic fibre connectivity and upgrading of 3G networks to 4G (LTE) networks. Consumer expectations for reduced pricing for increased data capacity means the industry needs to restructure to achieve capital efficiency. This gives rise to new business models for some of the larger players and the emergence of smaller players providing shared infrastructure. Restructuring of the industry requires innovative funding to allow new players to rapidly expand.
Ongoing mobile subscriber penetration with the increasing take-up of smart phones – expected by GSMA to grow from 27% in 2016 to over 50% of mobile subscribers in 2020 – and use of data rich applications such as YouTube and Facebook means that data usage in sub-Saharan Africa is expected to grow exponentially to 2020. In 2017 alone, South Africa’s two largest cell phone networks Vodacom and MTN grew their data revenue by 20% and 21% respectively.
The fast growth of the data market and necessity for extensive investment in network capacity, means operators need to be well capitalised to compete. While larger operators have the advantage of existing balance sheets and proven cash flows along with professional treasury departments which have access to bank or debt capital markets funding either locally or internationally, with margins under pressure their debt capacity is not unlimited. As such, these larger players have been looking to raise capital by selling off and leasing back their existing assets such as towers, and looking for ways to share roll-out of future infrastructure such as fibre.
Smaller operators battle to keep up with capital expenditure demands resulting in a need for different business models. One of the routes taken is consolidation with other similar players such as pan-African telecommunications operator Liquid Telecom’s purchase of Neotel with Royal Bafokeng. The result was the creation of the largest pan-African broadband network with access to 40,000 km of fibre networks.
In the case of Cell C, Blue Label Telecoms acquired 45% of the company, reducing Cell C’s debt by more than 70% and enabling it to increase its capital expenditure going forward. As a supplier and distributor to Cell C of prepaid products and virtual merchandise, Blue Label was able to identify ways in which it could offer synergies in the procurement chain, distribution network and products and services.
Other solutions have emerged with larger companies acquiring smaller ones to help boost specific parts of their business. For example, Telkom bought Business Connexion (BCX), a company focused on providing data centres and cloud-based services and which will help Telkom increase its service offering in the large corporate market and maintain margins.
The larger companies also have internal merger and acquisition teams which drive acquisitions, advised by investment banks and funded by shorter-term acquisition and debt from banks, such as the Tata sale of Neotel to Liquid Telecoms and the Blue Label acquisition of Cell C. These companies’ corporate finance teams also have the option of using bank corporate finance or equity capital markets teams to raise additional equity on stock exchanges through rights issues.
However, newer players in the shared infrastructure space have a more difficult time raising the substantial amounts of cheaper debt to roll out the shared infrastructure mostly because of small or non-existent balance sheets and limited historic revenues. Banks play a key role in providing large sums of capital to these players and have moved from looking at historic revenues to structures relying on contracted revenue from credit-worthy offtakers. In certain instances where contracted revenues are not possible, funding requires careful management of debt drawn based on the progress of network roll-out or growing financial performance. Where the industry is growing even quicker, funders may have to rely on the value of the assets being funded and shareholder support rather than waiting for proven cashflows. Several players such as fibre optic cable provider Dark Fibre Africa and IHS Towers have raised debt of over R5bn and US$800m respectively on this basis with new data-focused mobile network operator RAIN recently raising up to R1bn.
Rand Merchant Bank has been instrumental in structuring and arranging funding for many of the above players to help them achieve scale. Teams with product, sector and geographic expertise come together to bring unique funding solutions to its clients along the debt spectrum from senior debt to mezzanine and equity instruments.
Keith Webb is a senior investment banker at Rand Merchant Bank.