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.
Howwemadeitinafrica.com