IHS Holding Limited (NYSE: IHS), the parent company of IHS Towers, an emerging markets tower company focused on Africa and Latin America, completed its initial public offering (IPO) on October 14, 2021, raising gross proceeds of $378m, through the issuance of 18 million shares at a stock price of $21.00 per share. However, following less than 40 trading sessions since the company’s market debut, IHS Holding’s stock has fallen 36% to close at $13.42, as of December 6, 2021.
Through its IPO, IHS Holding only sold 18 million primary shares. While a contemplated 4.5 million secondary share offering by selling shareholders, including MTN Group (IHS’ largest shareholder), was ultimately pulled. Overall, IHS Holding’s IPO priced at the bottom of its $21.00 to $24.00 per share range, and existing shareholders elected to continue holding their stakes.
As of Q3 2021, IHS Holding’s total portfolio comprised 30.5k owned and managed tower sites. Specifically, these sites have a tenancy ratio of 1.51x, equating to 46.0k tenants with equipment on the company’s towers.
Below we review recent public commentary from IHS Holding’s second-largest shareholder Wendel Group, the potential rationale for IHS’ share price underperformance, and implications of IHS’ re-rated valuation for other publicly-traded tower companies.
IHS Discussion and Mark-Down – Wendel Group
Wendel Group, an investment company in France, has been a shareholder in IHS since 2012. Further, the group did not intend to sell any of its shares in IHS as part of the IPO. However, Wendel (EPA: MF), which itself is publicly-traded, has since faced pressure on its own shares, as well as sizeable mark-downs on its stake in IHS.
Ownership in IHS
Post-IPO, Wendel Group owns and manages 75.4 million shares in IHS Holding, equivalent to a 23% ownership stake, as follows:
- Owned: 63.0 million shares of IHS Holding, equivalent to a 19.2% ownership stake
- Managed: 12.4 million shares of IHS Holding, equivalent to a 3.8% ownership stake, held by Africa Telecom Towers (ATT)
Notably, Wendel Group plans to directly allocate the 12.4 million managed shares in IHS Holding to the Limited Partners (LPs) of ATT. As such, following liquidation of ATT, Wendel will directly own 19.2% of the shares in tower company IHS Holding.
Investor Day – Conference Call
During Wendel Group’s Investor Day on December 2, 2021, the company shared its view on IHS Holding, as “current valuation materially below expectations”. Further, Wendel’s management committee, including André François-Poncet (Group CEO), David Darmon (Deputy CEO), and Jérôme Michiels (Chief Financial Officer) provided additional insight into the ongoing dynamics of IHS Holding:
Jérôme Michiels – Chief Financial Officer
In terms of IHS Holding’s valuation, Michiels stated that “the current share price is much lower than our valuation in the latest net asset value before the IPO”. As shown below, Wendel took a €9.20 per share write-down on its net asset value (NAV) as of September 30, 2021, from a combined gain in Cromology (a completely separate investment) and loss at IHS Holding.
Overall, this implies that Wendel’s NAV per share loss from IHS Holding, in isolation, was greater than €9.20 per share, once stripping-out the gain from Cromology. Subsequently, Wendel valued its IHS stake at $17.10 per share, as of September 30, 2021, which compares to the company’s current share price of $13.42 (21.5% lower). Therefore, further write-downs could be forthcoming if IHS Holding’s share price roughly maintains its current levels at year-end 2021.
Michiels continues, stating that “our approach for the valuation of IHS was solely based on emerging markets-listed comparables and had been very consistent over the past few years. Our calculation resulted in an implied valuation multiple, which was pretty close to Helios Towers, generally considered as a good comparable”. To this end, IHS trades at ~7x 2021 estimated EBITDA, as compared to ~12x for Helios Towers.
Finally, Michiels adds that Wendel Group’s valuation “methodology does not include any premium or discount, and the latter [discount] materialized in a massive way at IPO and has been widening since then”.
David Darmon – Deputy CEO
To bridge IHS Holding’s valuation disconnect, Darmon points-out that “there are 6 research analysts covering the stock today, and all with a buy recommendation, at an average target price of $24.50, versus a share price of roughly $14 today”. Per the company’s website, these equity analysts include the firms Barclays, Citigroup, Cowen, Goldman Sachs, J.P. Morgan, and RBC. Notably, these 6 firms (albeit a different division) were each amongst the top 7 underwriters for IHS Holding’s IPO.
Darmon continues, stating that “the current share price is well below the valuation we had in our NAV in June 30, 2021, and well below the analyst consensus on the company, computed then by analysts following Wendel. Our stake is worth today around, let’s say, €800 million”. In comparison, the company notes that equity analyst consensus pegged a ~€1.4bn valuation for Wendel’s stake in IHS Holding prior to the IPO – implying a €600m negative variance.
André François-Poncet – Group CEO
During Wendel Group’s Investor Day question and answer session, a question was submitted inquiring whether “given the current share price of IHS” would Wendel “consider buying some additional shares on the market?”.
In response to this question, François-Poncet notes that “regarding IHS, the float is pretty limited. As you know, the size of the IPO was small. And today, mopping up part of the float doesn’t seem, to us, the way to go. So the answer there, no, we have no such plans”.
Rationale for IHS Holding Stock Price Underperformance
Following the above situation overview, we highlight 5 key points of investor concern about IHS Holding, which may have contributed to the 36% decline in its share price post-IPO.
Overhang from Future Share Sales
Presently, IHS Holding’s five largest shareholders, including MTN Group, Wendel Group, Emerging Capital Partners (ECP), Korea Investment Corporation, and GIC, collectively own 75% of the company.
|Shareholder||# of Shares||% Owned|
|Emerging Capital Partners (ECP)||45.5m||13.9%|
|Korea Investment Corporation||21.7m||6.6%|
|Total – Top 5 Shareholders||245.8m||74.9%|
At the time of IPO, certain of these shareholders (e.g., MTN Group) together intended to sell 4.5 million shares. Ultimately, no share sale from existing shareholders took place through the IPO. This means that there is the potential for future share sales, following the expiration of shareholder lock-up periods.
IHS Holding’s executive officers, directors, and the majority of its existing shareholders have agreed to, at minimum, a contractual 180-day (i.e., 6 months) lock-up period to not to dispose of or hedge any of their shares. However, every 6 months following the IPO, these shareholders collectively can sell, on average, an incremental ~62 million shares (~19% ownership interest in IHS) in the tower company.
Given MTN Group’s prior willingness to sell shares in IHS Holding’s IPO, they may pursue sales following each lock-up period expiration. In turn, this would add significant future supply of IHS Holding’s stock that will be for sale in the market.
For the six months ended June 30, 2021, revenue from IHS Holding’s top three wireless carrier customers together accounted for 97% of the company’s consolidated revenue. Of this total, MTN Group accounts for 66% of IHS’ revenue. Furthermore, IHS’ exposure to MTN Group has increased over time, from 63% of revenue in 2019, and is set to increase further through recent acquisition activity (see below).
As of Q3 2021, Nigeria is IHS Holding’s largest and most important market, representing ~55% of towers, 72% of revenue, and 82% of EBITDA. However, Nigeria presents certain challenges for the company including economic oil dependency, foreign currency risk (Nigerian Naira), and customer concerns (wireless carrier 9mobile).
Recently, in October and November 2021, IHS Holding announced plans to diversify its revenues geographically by expanding into Egypt (5.8k sites) and South Africa (5.7k towers). Nevertheless, IHS Holding’s stock price has continued to decline following these announcements. Therefore, customer concentration may be a more intense concern than geographic concentration, given that IHS’ deal in South Africa added more exposure to MTN Group, the company’s largest customer.
Diesel Fuel Prices
One of IHS Holding’s primary operating expenses is diesel fuel, which it uses in substantial quantities to power its tower site operations. This is because of the intermittent and unreliable grid availability in its countries of operation. For example, in Nigeria, grid electricity is rarely used as a source of power, with 39% of the company’s towers operated only with diesel generators and 57% operated with hybrid solutions.
Overall, for the six months ended June 30, 2021, the cost of power generation, which is primarily diesel and haulage, accounted for 29% of IHS’ cost of sales. Furthermore, this diesel power generation expense is a variable cost, which is typically paid in local currency, but linked to the U.S. dollar through the international price of oil.
In contrast, IHS Holding’s lease revenue received from tenants is generally fixed (subject to annual inflation-linked escalators) for the term of its master lease agreements (MLAs) and manage with a license to lease (MLL) contracts. Therefore, this fixed revenue and variable cost dynamic leaves IHS’ financial performance exposed to fluctuations in oil prices over the duration of its leases/contracts.
Recent increases in global oil prices have negatively impacted IHS Holding’s financial results – a trend which may persist. Particularly, in Q3 2021, IHS Holding reported adjusted EBITDA of $220m, a 4.2% decrease year-over-year. Degradation in IHS Holding’s EBITDA was in-part from higher power generation costs (i.e., diesel), with the company continuing to expect this negative impact into Q4 2021.
Foreign Currency Risk
For the six months ended June 30, 2021, 63% of IHS Holding’s revenues were linked to the U.S. dollar (48%) or Euro (16%). As such, this implies that the company derives ~37% of its revenues from emerging markets currencies including the Nigerian Naira, Brazilian Real, and Zambian Kwacha. Moreover, the conversion rates within IHS’ MLAs may also be different from the rates at which the company translates its financial results into U.S. dollars, which is particularly relevant for the company’s operations in Nigeria.
Implications for Publicly-Traded Tower Companies
If IHS Holding’s valuation re-rating by investors is i) not entirely company-specific and ii) sustains at levels of ~7x EBITDA, then implications on the valuations of other publicly-traded tower companies with exposure to Africa and Latin America could be drawn. Specifically, these tower companies include American Tower, SBA Communications, and Helios Towers, which own the following:
- American Tower: operates 21.3k sites in Africa and 48.9k sites in Latin America
- SBA Communications: operates 16.8k sites internationally, primarily in Brazil and South Africa. Additionally, the company is in the process of closing its acquisition of 1.4k towers in Tanzania for $175m
- Helios Towers: operates 8.8k tower sites in Africa. Also, pro forma for all pending acquisitions and committed build-to-suit (BTS) programs, Helios Towers’ site count will increase to 14.9k towers
Historically, public comparables and precedent M&A transactions for towers, both in Africa and Latin America, have traded above IHS Holding’s current valuation of ~7x EBITDA. As a reference point, in Africa these multiples have trended in the low double-digits (e.g., 12x EBITDA) and in Latin America, mid- to high-teens (e.g., 17x EBITDA).
As a result, it is possible to implicitly decompose American Tower and SBA Communications’ blended 25x to 30x+ EBITDA multiples on a sum-of-the-parts basis, by geography. For example, this is important for assessing the implicit valuation ascribed to American Tower’s U.S. business, which can often be pegged at 35x+ EBITDA.
With that background, if IHS Holding were to be considered an appropriate comparable (at ~7x EBITDA) for American Tower or SBA Communications’ Africa or Latin America operations, then there is a material disconnect in valuation. Either American Tower and SBA’s international operations could implicitly be valued too high or IHS Holding valued too low.