Helios Towers plc (OTEL) Earnings Call Transcript & Summary

Thank you. Welcome, everybody. Good afternoon. We're pleased to take you through the detail of the acquisition we announced this morning regarding Omantel tower portfolio. Joining me on this call is the usual 3 of us. Joining me is Tom Greenwood, our Chief Operating Officer; and Manjit Dhillon, our Chief Finance Officer. I'm hoping that you have the presentation that we circulated on our website earlier today, and I'm on Slide 2 of that deck. Moving on to Slide 3, summarizing the acquisition we've -- announced an acquisition of 3,000 towers from Omantel supporting our entry into one of the fastest-growing markets in the Middle East, and that really helps us to open up into looking at other opportunities in that geography. Another transformational transaction, it takes our overall tower count now pro forma once we've closed these deals that we announced in the last few months and weeks to circa 15,000 towers, doubling our tower count since we IPO-ed in October 2019 and exceeds our vision that we articulated during the IPO. Further expands our geography and diversifies our customer base that we can talk about more in detail during Manjit's section. We've added a service agreement to our contracted revenue of 15 years, adding approximately $800 million of contracted revenue and strengthens our EBITDA in terms of hard currency, taking our total hard currency EBITDA to now 73%. And if you remember, when we IPO-ed, we were at 65% and the Airtel transaction move that needle further to 70% and now 73%, a nice positive trend in terms of the stability we have in our EBITDA earnings. We expect to close this transaction in the second half of this year and is immediately accretive to our earnings. Moving on to Slide 4. Well, this really shows the geography expansion we've sort of implemented over the last 18 months as the red countries demonstrates which were existing markets prior to IPO-ing, and having added Senegal and announced that transaction back in August last year, we expect to close this acquisition in the next few days. The Airtel transaction, which bought 4 markets, Gabon, Chad, Madagascar and Malawi and now into the Middle East with the Oman transaction, we're very, very excited about the opportunities that are in front of us in terms of inorganic growth over the coming years to continue to expand our geographic footprint. Slide 5, really just shows our movement in a relatively short period of time, 5 to 11 countries, well ahead of the 8 markets that we had targeted at IPO and 7,000 towers to circa 15,000 towers, outperforming the 12,000 target tower count we had set ourselves over a 5-year vision. I take the criticism on the chin that we underestimated what we could achieve. And so next time, we will make sure we do a bit more diligence on how we can deliver to the targets we set. What's next? Well, quite simply, we have to close and integrate these acquisitions, which we'll be working very hard to do over the next few months and then look beyond that over the next 5-year horizon on where we go next in terms of our business objectives overall. Now let me hand over to Tom, who's going to talk a little bit more detail about the transaction overview. Tom, over to you.

Thanks very much, Kash. And Hi, everyone. Hope everyone's well and keep doing well. So look, really excited to announce this transaction with Omantel and form a 15-year plus relationship with Omantel, which is a great business -- telecoms business in the Middle East to start our entry into the region. So really excited today to be announcing this partnership. On Page 6, we lay out some of the high level transaction overview details. And so you've probably seen the transactions just under 3,000 towers for a consideration of $575 million, which equates to an EV of around $615 million. And of course, the transaction comes with some build-to-suit commitments of 300 sites over next 7 years, which we'll be building for Omantel over that time. The portfolio today has a tenancy ratio of 1.2x and as with all of our transactions, we will be expecting and focusing to drive this tenancy ratio upwards over time, driving margin and earnings in the usual way. In terms of financial, day 1 run rate, financials, revenues of $59 million, EBITDA of $40 million, representing a 68% margin. The reason that margin is higher than some of our other markets is partly because of the power situation in Oman, which has a good grid. And so therefore, the power component, which we have in our other markets is a large component of OpEx and lease rate is less so in this market, so more akin to a more developed market on that footing. From a financing perspective, we have sufficient cash and undrawn debt lines to finance this transaction, and we'll be using those funding lines to do it. In terms of closing, we expect to close in the second half of this year, subject to customary completion conditions, including regulatory approval in Oman and also shareholder approval, and we will be holding an EGM in the coming weeks or month or so to do that. We do already have over 50% of shares with irrevocable approvals on this transaction for that meeting. Moving on to Slide 7. So this just looks at our usual acquisition criteria in terms of how this deal stacks up. Thanks to those points. So Oman is a country with 3% GDP growth. It's a country of 5 million people. So below our normal 10 million people threshold. But of course, it has a lot of other features that makes it very attractive. Most notably, the mobile operators in the market with Omantel being a market leader and Ooredoo being the current #2. And of course, Oman has just issued a third license to Vodafone that party which is starting effectively a greenfield rollout of that business now, having just received the license a few months ago. So that's an exciting opportunity from a telco perspective there. As usual, we like to aim to be #1 or #2 in the market in terms of scale. And in Oman, we will be the largest owner of towers and the largest independent tower company in the market, with a little over half the towers in the country. Of course, from a currency perspective, it's very attractive, being a pegged currency to the U.S. dollar and certainly we have low inflation position as well. From a growth point of view, the market is growing from a service perspective with about 3,000 points of service expected over the next 6 years in the market, according to independent research. And from a unique mobile subscriber point of view, the market is at 66%, which compares a bit higher to most of our other markets. But, of course, there is room to grow versus where the G7 countries are at 86% and 4G subscriptions are growing faster at about 6% rate, which is good for us. And of course, as usual, the most important part, this enhances our group returns. And we believe delivers significant value for the business and the shareholders. For all the reasons mentioned above, plus the geographic diversification point, which is a big part of our strategy. So moving on to Page 8. I thought it'd be useful to just show a quick comparison here between the African markets and the Middle East market. We do have quite a few comparisons. And as you can see from the first statistics at the top population, population growth, et cetera, Middle East has around 450 million people compared to 1.3 billion people. The growth rate of population in the Middle East is not as high as Africa's, 40% compared to 86% through to 2050. But this is still substantially higher than developed markets around the world. From a GDP per capita perspective, Middle East is significantly higher than Africa. And from a GDP growth perspective, Middle East is slightly lower than Africa at 6% versus 8% in Africa. I've mentioned the unique subscriber penetration on the previous page and the subs growth is consistent with that. As of the data usage, which is high growth over the coming years in the market. One very important metric that we look at is the number of towers in the markets that are still owned by mobile operators because, obviously, our thesis is that over time, more mobile operators will sell their non-core passive infrastructure assets to divest a non-core part of their business, realized cash and focus on the front end technologies and customer service of their business, exactly like a mantra for just on now. And in the Middle East, 81% of towers in the market are still owned by local operators. So that compares to 71% in Africa. So both regions are very much in the same ballpark here and really kind of the opposite to a lot of other places in the world where the vast majority of towers are already with independent tower companies. And so we do believe as well as the significant organic growth in the region for all the reasons I've just mentioned, we do believe that there could be some interesting inorganic opportunities in the region as well, which is very relevant for the next point on the mobile operators in the regions. And as you can see, there's actually huge synergies between the mobile operators who operate in both regions. So by entering the Middle East, we do really see this as a natural extension of Africa with huge customer synergies there. And then finally, we show the tower codes at the bottom. So in Middle East, now we have ourselves operating there, we have IHS as same as Africa. And also TAWAL, which is in Saudi Arabia as well as a few others in specific markets. Now moving on to Slide 9, just a quick clip at the portfolio. That we have acquired in some of these metrics, I've already mentioned. So we repeat it, but you can see the math of Oman there on the left-hand side. With a large density of power in the northern region around Mascat capital and surrounding cities. And in acquiring this network, we really do have a national live network and are able to service indirectly subscriber customers across the whole country. On the bottom left, you can see the site type and the location, so around 60% urban, 40% rural and close to 70% greenfield towers, 23% rooftop and 9% in-building solutions. On the right-hand side here, you can see the operator market share. So Omantel with 56%, Ooredoo with 44%. Obviously, this does not yet include Vodafone, who have not yet launched, but anticipate to launch the network very early in the new year. Also from a market perspective, a technology perspective, 2G, 3G, 4G prevalent in the market, 4G is still being rolled out, but really 5G is very much on the horizon in Oman. So this represents a more advanced technology market than most of our other markets, which is very exciting for us as a tower company because with 5G, that brings Omantel network densification, additional equipment on sites, all of which we can support our customers on -- from the towers and infrastructure perspective. So very exciting there to be hopefully involved in 5G rollout fairly soon. Moving on to Slide 10. And again, we covered some of this already. Manjit will cover some of the financial metrics in the next couple of slides. But just again, to look at the map and see the new markets, which we're entering at the moment, which represents 6 new markets. And Senegal is closing next week. So the launch team from Senegal are now moving to other markets. And as we've previously mentioned in other calls, we very much set our business up for this sort of expansion well over a year ago because we knew it was coming, which included the creation of various new roles across the business, including my role as the COO role and also a regional CEO structure to subsume the new markets as they come aboard. So that structure from a resource perspective that we set up is very much coming to the floor now, with the regional CEOs taking on the new markets as they come in. And the new markets team, which was a number of people that we identified throughout the business to lead setup the new markets. All are very much involved in the setup in these new markets right now. So the business is very much focused on both setting up the new businesses, but also keeping the existing markets performing very well. So we're very well set up for all of that. Moving on, I'll hand over to Manjit for the next few slides.

Thanks, Tom. Hello, everyone. Great to be speaking to you about another exciting transformational M&A deal for the company. I'll be going through the next couple of slides quickly before opening up for Q&A. So on to Slide 11, I'm really following on from what Tom has just been through. Here, we show that alongside our other M&A announcements, the Oman transaction further diversifies and increases our scale in terms of sites, revenue, EBITDA on a pro forma basis. Sites increases to 14,708, including committed build-to-suits. Revenues increased to circa $600 million, and our EBITDA increases to $313 million from $227 million for the full year 2020, so a 38% increase in EBITDA. Moving on to Slide 12. And here, you can see we further increased diversification in our customer base and also further strengthening of our hard currency mix. 90% of our revenues will come from our largest 7 Tier-1 customers. And through the 15-year contract with Omantel, our future contracted revenue due to increase by a further $0.8 billion and increase our contracted revenue to $5.4 billion, increasing the average remaining life to 9 years. This represents a very stable stream of earnings through contracted revenue with blue-chip operators to which we'll be adding incremental organic and inorganic revenue growth. Importantly as well, the Omani Riyal, as mentioned earlier, is paid to the U.S. dollar. And as such, our EBITDA in hard currency increases to 73%, further increasing our innate hard currency hedge, which is further supplemented by our contractual escalators with all of our customers with we've spoken about on previous calls. But in conclusion, we are really excited about the potential growth in the Omani market and the partnership with Omantel, which adds significant growth opportunities to the group, whilst further strengthening our robust business model. And with that, I'll pass back to our conference call to Emily to open up for Q&A.

[Operator Instructions] Our first question comes from Giles Thorne from Jefferies.

My first question concerns your returns and funding profile. Your cost of capital reflects your core region of operation being Africa and the type of unlevered IRR that you seek reflects the cost of operating in that region. And now today, we seem to have, albeit quite small, we need to have a little bit of dislocation because your software and risk profile is starting to change. And yet your cost of capital is not yet changing with it. So I'd be interested to know how you manage any compression in the spread between your unlevered IRRs and your cost of capital. Some comments there, I guess, one from Manjit, please. Second question, yes, the Middle East seems to be a very undeveloped tower co region, I can't really think of any M&A that's ever happened there. So I would be interested to know if this deal was a result of you kicking in doors for the past 2 years? Or was it opportunistic? Was this an outbound from Omantel and indeed, what was the competition for the asset, who else is at the table or trying to buy these sites? And then the last question is an obvious and simple question because I'm an obvious and simple person. It would be interesting to hear what your pro forma liquidity position and your pro forma leverage would allow you to do on the M&A front from here? And the -- I'm trying to get a sense of when we could expect another equity or equity-linked capital raise?

Thanks, Giles. I'll take it the financing ones, and I'll pass over to Tom for the process update. So with regard to our cost of capital, we've done some really good work over the last year to 18 months in terms of reducing our cost of capital quite significantly. An acquisition like this will only help that trajectory. I think we'll have significant opportunity to bring down our cost of capital in the future as well. We may look over time to doing some form of potential local financing, but that's not to be concerned yet. But certainly, we'll be looking at opportunities. And one of the things that we always do is actively monitor opportunities to strengthen the balance sheet, not only in terms of quantum, but also in the cost of capital that we have. So we've always done that and we'll continue to do so and we look at opportunities of reducing that in the short to medium term. In terms of the leverage profile, so we're at a very low leverage at the moment at 3x, which is below our 3.5x to 4.5x level. Depending on the closing of acquisitions, which will not all be at one point, they'll be spread over a period. We expect to slightly go above our top end of that range of 4.5x. So will be somewhere between 4.5 to maybe 4.8 or 4.9x. And what we would expect is to subsequently delever pretty quickly there afterwards. Now what we've always said when it comes to leverage is that while 3.5 to 4.5x is our broad target, it's more of a guide, and it's not an absolute. I mean it can be both below and above it for short-term periods. So really, as we start to close these, you'll see a little bit of an increase subsequently delevering and means that we've got opportunities then to relever and go after other opportunities as well. Tom, do you want to take the up process?

Yes, absolutely, yes. So on the M&A side of things. And yes, Giles, you're absolutely right. Yes, that's the Middle East has not seen many tower deals in the past, there may be 1 or 2, but that's it. So it's a market which potentially has a lot coming, we'll see. From this process point of view, it was a competitive process run by a bank. And so yes, that it wasn't preparatory process, which we found sort of one-on-one with Omantel. It was a formal process with the bank.

Tom, any color would be useful on how or why you want it beyond the basic dimension of price? And should we expect more Middle East deals, basic question?

Yes. Look, I think -- I guess it's -- sitting in a mist, see, it is always difficult to absolutely pinpoint, why these are the successful one. Look, I think we've got a really committed team base from a deal transaction point of view and an operational point of view, who are chomping at the bit to get going on the ground and do the setup and get to a quick closing. So I think that, that enthusiasm probably comes across in any deal situation. And we work with the partner, whoever it is to come to a decent outcome in the shortest time as possible. So yes, I can't really pinpoint it specifically, but I think that operational expertise, the operational excellence that we demonstrate in our other markets in terms of service delivery to our customers. I think that comes through. And I think that, that helps to build trust in mobile operators when they're deciding who to partner with because these contracts are extremely long. This is a 15-year contract at minimum and then renewals thereafter. And so any mobile operator selling their assets at least choose the right partner. And if you find a partner who can demonstrate operational excellence in challenging markets, more challenge -- far more challenging than Oman in some respect and also work well with each other through their process. And I guess that helps. It's not the deal and end of it, but it's half. So I think a combination of those things, I guess.

Our next question comes from Simon Coles.

My first one is given the deal in Oman, should we maybe expect you starting to pivot more towards the Middle East region versus where you've historically been focused? And then secondly, you've obviously done a lot of deals in the last month or so, or actually in the last 6 months with Senegal as well. And should we expect you to maybe take a little bit of a pause to integrate? Or is it still full steam ahead on the acquisition front? And finally, just diving into Oman. You said that Vodafone has a new telecom license. Are there any coverage requirements that they have to hit in the first few years or anything along those lines just so that we can get an idea of how quickly they might have to ramp up their network rollout and how many sites they might have to target in, say, the next 3 or 5 years?

Thanks, Simon. Let me take the first 2. And Tom, maybe you take the Voda question in Oman. Well, look, the Middle East geography is exciting for the reasons that Tom mentioned in his section. There's a large portfolio of channels, over 80% are still owned by MNOs. However, we don't prioritize outside of the markets we're now in and the geographies we're in. We look at opportunities as deals come along, and that's what we'll continue to do. Knowing full well that there's a huge amount of opportunity across Africa, Middle East for us. So there's no pivot to Middle East as such. Both geographies are as important to us. In terms of integrating M&A, again as Tom said during his section, we really looked at the execution of our strategy when we IPO-ed and structured our organization accordingly. So putting Tom's role in place, the regional CEOs, strengthening individuals within the markets we're in, localizing our staff, creating additional capacity that we can pull from our existing business. And the main aim for us is that not only do we use people to set up in new markets, but the most important aspect is to create the right culture that's consistent with our values and that culture is based around the deployment of Lean 6 Sigma and we'll continue to do that. And Oman is going to be no exception. We are very excited about the team we will be taking on in Oman from Omantel. And we will invest in that team with training, development and further resource from Oman over time. Tom, on the Voda rollout?

Yes. No, absolutely. Thanks, Simon, for the question. So yes, look, there are coverage requirements in the license which over time will qualify virtually for national coverage. So yes, it's a fairly standard license from that perspective. And obviously means that there needs to be quite significant point of service rollout for that new entity there. So yes, it's -- from that perspective, that certainly helps us as a tower company, get comfortable with the rollout requirements there.

Okay, great. Could I maybe ask a couple of follow-ups then. Sorry, Kash, but if I maybe put you on the spot, today you have 2 portfolios, 1 in Sub-Saharan Africa and 1 in Middle East with -- and they're broadly similar with similar sort of prospects where you have a preference Middle East, just if I listen to some of the earlier answers in the Q&A, it helps lower your cost of capital and those arguments? Or is it still really on its merits, and I understand if you don't want to answer that question. And then on the Vodafone rollout, is there anything -- is there any more color you can provide? Is it like there's 50% in the next 3 years coverage that they have to get to? Or just any more color would be really useful.

Yes. Look, I think it is on its preference in terms of the size and the quality of the markets we enter. While the cost of capital is important, we look at also the growth prospects of the particular market that we're evaluating and the opportunity with the MNO. Things aren't competition in that market, things like there are further rollouts over the next 5-year horizon, it's not only the first year returns we look at, we actually look at what's going to happen over the first 5 years, a rollout for our shareholders. So it is absolutely on its own merits. There's no moving from Africa to Middle East as a focus. Each country is as equal in terms of valuation and value proposition that we look at on that front. Yes. What was the second part? Well, Tom, did you get that? I lost the question.

Yes. No, it's just a follow-up on the data licensing. So Simon, yes, look, I'm not sure how public it is. So I won't comment on the exact numbers, but there is a glide path where it gets up to close to full coverage over time. But I guess to answer the question in a different way. From a -- and this is forgetting the regulatory side, which is looking clearly at the commercial side. If a mobile operator is launching in a new market and particular it's Vodafone who do things in a way to rollout fairly fast, usually. You'd want to be covering all of the major urban and suburban areas within a 24-month time frame or so, which would mean that you need over 50% coverage in that time what will be the kind of implied coverage, if you were looking at it purely from a commercial point of view and possibly quite substantially over half. So yes, it's a reasonably attractive potential rollout profile from that perspective.

Yes. I think our experience in Tanzania when a new entrant, Airtel came in, was very positive back in 2015. And so we're very excited about the 3 MNO market in Oman.

[Operator Instructions] Our next question comes from David Burns from Berenberg.

I have 3, please. Firstly, on the implied lease rate tenancy that seems slightly lower compared to recent acquisitions. Maybe you could just elaborate on that for a bit. And secondly, could you please provide us with how much remaining firepower you have for further M&A? And thirdly, and following up to my previous question, could you please give us any rough indication of the projected tenancy ratio growth, especially given the Vodafone opportunity.

Yes. Thanks, David. Sorry, your line was going in and out, but I think I caught all of them. So on the lease rate, yes. So look, the -- as I mentioned before, the power in Oman is generally very good, so the grid is good, which means as fairly low expense on fuel compared with our other markets. And so therefore, whilst in other markets the lease rates will potentially look higher because there's effectively a component in there, which covers the power costs. In Oman, the power, the grid power is very good. So the power costs are relatively lower than our other markets. And so therefore, you see the lease rate from a headline point of view effectively very lower. And then on the -- maybe I'll take the last one, David, which I think was on the tenancy ratio you mentioned. And then Manjit, you can answer the one on the liquidity dry power remaining. So look, from a tenancy ratio point of view, the network today is at 1.2. And we expect -- obviously, expect that to grow going forward. We would anticipate a annual tenancy growth of somewhere in the 0.05 to 0.1 range, probably towards the upper end of that range. So yes, that gives you a high level feel. Manjit, do you want to answer the other one?

Yes, absolutely. So as it stands today, the group has roughly around $1 billion worth of financial firepower, and that's through a combination of cash on balance sheet and also undrawn debt lines, which is sufficient for the acquisitions we've announced including Oman. Adjusted for all of that, probably left with over $100 million, which is more than enough for us in terms of day-to-day activities and keeping some buffer, et cetera. Importantly, though, we also have sufficient covenant capacity within our facility. So we can actually lever up as well further, should we wish to. So I would say the financial firepower and the covenant capacity means that we're not only sufficient for the existing opportunities we've got now, we've also got capacity for some more as well.

We currently have no further questions registered. So I'll hand back to your host, Kash Pandya, to conclude today's conference.

Thanks, Emily. Well, thank you very much, everybody, for joining, and we look forward to talking to you next week for our Q1 results update. Thank you.