Picture: BLOOMBERG/SUSANA GONZALEZ
Picture: BLOOMBERG/SUSANA GONZALEZ

Behind the glowing phone screens that provide us with endless access to information, entertainment and connection lies a hidden digital infrastructure that is now getting far greater attention than before from investors and corporations given the growing demand for telecommunications in Africa.

Every mobile connection requires data to travel through devices and to the supporting infrastructure of mobile telephony towers, fibre, data centres and undersea cables.

As demand continues to grow in Africa, every component of this value chain must grow in parallel. Given some of the fiscal constraints facing the continent, much of the necessary capital has come from private investors and corporations.

The mobile network operators have in the past typically invested much of their revenues in infrastructure. The likes of MTN and Telkom, for example, spend on average 14%-18% of their revenue on capital expenditures to expand and maintain infrastructure. This high expenditure is compounded by rapidly evolving technology requiring new equipment, denser coverage and more spectrum bands.  

Historically, this has been a drain on their cash flow and shareholder returns. To try enhancing their returns, mobile network operators have begun to spin off parts of their passive infrastructure, such as the mobile towers, to lower their capital expenditure bill as well as monetise and improve efficiencies in the management of these assets.

Large divide

In so doing, African mobile network operators are catching up to a global trend of separating out the passive infrastructure to unlock value. MTN has led the way on the continent by selling its towers to independent tower companies. Telkom has also recently announced that it is seeking investment in Gyro, its tower and data centre portfolio.

The company valuations of some of these infrastructure players reveal a large divide. Listed tower companies and data centres often trade at eye-watering valuations that are at far higher levels than the mobile network operators. A sale of these assets can be an efficient mechanism to release cash for growth and lift network operator valuations.

In addition to the mobile tower deals, there has been huge investment in fibre, data centres and undersea cables. Besides the large network operators, SA private fibre network operators such as CIVH have deployed much capital to fund the rollout of fibre to homes.

SA data centre businesses such as Teraco have expanded their operations in line with increased demand on the continent. We have also experienced deep investment in undersea cables from large-scale internet players such as Facebook.

Private equity investors have also homed in on this trend and we have seen a flurry of activity in this space. Actis recently invested in Octotel, SA’s third-largest fibre network. Teraco, one of the largest data centre operators, was sold to Berkshire Partners and has recently embarked on a multibillion-rand expansion plan in SA.

Vast potential

In the towers space, Helios Towers successfully listed on the London Stock Exchange (LSE), and American Tower Corporation acquired Eaton Towers, with both companies being sold by private equity funds. All these deals had the hallmarks of great private equity transactions with strong growth in the underlying assets, strong value-add and ultimately excellent returns. With global private equity funds holding on to uncommitted capital of about $1.7-trillion, there is certainly much capital to deploy in this space.

While mobile penetration has increased rapidly across Africa, internet penetration remains low at about 39%, compared with an average of 63% in other regions. With a population of 1.2-billion, there is vast potential for growth in the African telecommunications sector. The deal flow and investor demand are testament to the sound underlying secular trends in the sector. While concepts such as the fourth industrial revolution are bandied about, telecommunications is undoubtedly the foundation for moving us into the next technological era.

Artificial intelligence, data analytics, cloud computing, e-commerce and autonomous vehicles are simply not possible without connectivity. The space is certainly shaping up to be a beacon for investment on the continent and one that will deliver a success story for all stakeholders, including consumers and investors.

The cliché that data is the new gold may be getting tired, but in Africa the story is just starting.

• Varughese is head of technology, media & telecom advisory at RMB.

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