How the telecoms industry is adapting to consumers’ growing need for data
Consumers now expect to pay less for more data, so the industry has to restructure to remain viable
Data demand is growing exponentially as consumers switch to smartphones, tablets and wearable devices. Consequently, the need for high-speed data network capacity is also rising, and telecommunications providers are forced to spend substantial amounts on optic-fibre connectivity and upgrading 3G networks to 4G (LTE) networks.
Consumers now expect to pay less for more data, which means the industry has to restructure to achieve capital efficiency. This gives rise to new business models for some of the larger participants and the emergence of smaller providers of shared infrastructure. These new entrants need innovative funding to allow their operations to expand rapidly.
More mobile subscribers are acquiring smartphones (a segment expected by global mobile operators’ body the GSMA to grow from 27% of mobile subscribers in 2016 to more than 50% by 2020) and using data-rich applications such as YouTube and Facebook. This means data usage in sub-Saharan Africa is expected to grow exponentially until 2020. In 2017 alone, SA’s two largest cellphone networks, Vodacom and MTN, grew their data revenue by 20% and 21%, respectively.
The growth of the data market and the need to invest in network capacity mean operators have to be well capitalised to compete.
Data usage in sub-Saharan Africa is expected to grow exponentially until 2020
Larger operators have existing balance sheets and proven cash flows, along with professional treasury departments that have access to bank or debt capital market funding, locally or internationally. However, with margins under pressure, their debt capacity is not unlimited. As such, these operators have raised capital by selling off and leasing back their assets such as towers, and considered ways of sharing the roll-out of infrastructure such as fibre networks.
Smaller operators battle to keep up with capital expenditure demands, resulting in a need for different business models. One option is consolidation with similar companies, such as pan-African telecommunications operator Liquid Telecom’s 2017 purchase of Neotel with Royal Bafokeng. This deal created the largest pan-African broadband network with access to 40,000km of fibre.
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. As a supplier and distributor to Cell C of prepaid products and virtual merchandise, Blue Label could identify synergies in the procurement chain, distribution network, and products and services.
Other options include larger companies acquiring smaller ones to boost specific parts of their businesses. For example, Telkom bought Business Connexion, the data-centre and cloud-based services provider, to bolster its service offering in the large corporate market while maintaining margins.
Larger companies also have internal merger and acquisition teams to drive such deals, advised by investment banks and funded by short-term acquisitions and debt from banks. Examples include Tata selling Neotel to Liquid Telecoms and the Blue Label acquisition of Cell C. These corporate finance teams can also raise additional equity on stock exchanges through rights issues.
However, it is more difficult for newcomers in the shared infrastructure space to raise the substantial amounts of cheaper debt they need to roll out infrastructure. They have small or non-existent balance sheets and limited historic revenues.
Banks, which play a key role in providing capital to these companies, have moved from looking at historic revenues to considering structures relying on contracted revenue from creditworthy offtakers. Where contracted revenues are not possible, funding requires careful debt management based on financial performance or on the pace of network roll-outs.
In areas where the telecoms 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 cash flows. Companies such as fibre-optic cable provider Dark Fibre Africa and infrastructure provider IHS Towers have raised debt of more than R5bn and $800m (R9.5bn), respectively, on this basis. New data-focused mobile network operator RAIN recently raised up to R1bn.
Rand Merchant Bank has been instrumental in structuring and arranging funding for many of these companies to help them achieve scale. Teams with product, sector and geographic expertise come together to bring unique funding solutions to the bank’s clients along the debt spectrum, from senior debt to mezzanine and equity instruments.
This article was paid for by RMB.