IHS Holding Limited (NYSE: IHS), the parent company of IHS Towers, an emerging markets tower company focused on Africa and Latin America, today announced an agreement to acquire São Paulo Cinco Locação de Torres Ltda (SP5) for a purchase price of $315m, which comprises a portfolio of 2,115 telecommunication towers across Brazil. Presently, the SP5 tower portfolio is owned by Grupo TorreSur (GTS), an independent tower company in Brazil, which is backed by private equity firm Providence Equity, through its fund Providence Equity Partners VI.

Finally, the transaction is expected to close in Q1 2022.

Transaction Detail – IHS Holding Buys Towers from Grupo TorreSur

IHS Holding is acquiring Grupo TorreSur’s SP5 portfolio which has a nationwide footprint of 2.1k tower sites, located in 25 of Brazil’s 27 states. This portfolio has a tenancy ratio of 1.4x, which equates to 3.0k tenants with equipment on the portfolio’s towers.

Notably, nearly all of the SP5 towers are operated under a right of use agreement (ROU) agreement, where SP5 does not own the towers or the underlying land leases. Instead, SP5 has the contractual right to operate the sites, including leasing out additional space on the towers.

Customers

Oi SA, Brazil’s fourth largest wireless carrier, which is currently in bankruptcy protection, entered into a 20-year operating lease agreement with Grupo TorreSur’s SP5, in April 2013, to use space and install equipment on the company’s fixed-line communication towers.

Presently, this operating lease would have an initial remaining term of ~11.2 years. Additionally, the contract is renewable for another 20 years.

IHS Holding notes that Oi Fixed is a key customer of Grupo TorreSur’s SP5 towers, while the portfolio has de minimis exposure to Oi Mobile. Overall, this tower portfolio has contracted future revenue of R$7.9bn ($1.4bn USD), which includes the non-cancellable second lease term from Oi SA.

Valuation

Based on IHS Holding’s $315m valuation for Grupo TorreSur’s towers, the transaction infers an Enterprise Value of $149k per tower, on the 2.1k tower sites. However, given that SP5 does not own the towers or underlying land leases, this asset-based valuation is less relevant.

Additionally, for the first full-year following closing, the acquisition will deliver revenue of ~$38m and adjusted EBITDA of ~$36m. As such, IHS Holding’s valuation of SP5 represents a forward EV/EBITDA transaction multiple of 8.7x.

Financing

IHS Holding will finance the acquisition of Grupo TorreSur’s SP5 portfolio in Brazil using its cash and available facilities.

IHS Holding – Pro Forma Business Impact

As of Q3 2021, IHS Holding owned 4.5k tower sites in Brazil. Therefore, upon completion of IHS’ acquisition from Grupo TorreSur, the company will own 6.6k towers in Brazil. Indeed, this equates to an increase in IHS’ Brazil tower count of 47%.

Overall, IHS Holding will become the third largest independent tower company in Brazil, behind American Tower (23.0k sites) and SBA Communications (10.2k sites).

Post-transaction, IHS will integrate SP5 into its existing Brazilian business. Also, no employees will transfer to IHS Towers as part of the acquisition, meaning that IHS is gaining limited SG&A expense from the deal.

Total Tower Portfolio

Pro forma for IHS Holding’s $415m South Africa acquisition and today’s expansion in Brazil, the company’s total portfolio will grow to 38.3k owned and managed tower sites.

IHS Holding Total Tower Portfolio Pro Forma Map

Additionally, through these transactions, IHS Holding will reduce its exposure to Nigeria, its largest and most important market. Particularly, on a pro forma basis, Nigeria will represent 43% of IHS’ tower count and 62% of its revenue. To this end, IHS’ geographic concentration is one of a number of reasons that IHS Holding’s stock has fallen ~45%, from its $21.00 per share IPO price, to close at $11.63, as of January 24, 2022.

IHS Holding – Brazil Digital Infrastructure

Beyond towers, IHS Holding owns 51% of I-Systems, an open wholesale fiber network in Brazil, alongside TIM SA, a wireless carrier in Brazil. Specifically, I-Systems provides residential fiber optic broadband services in Brazil through a network that spans 6.4 million homes passed. Notably, this network currently utilizes both fiber-to-the-home (FTTH) and legacy fiber-to-the-cabinet (FTTC) technology.

Over the next three years, IHS will contribute an additional R$350m ($64.0m USD) into I-Systems, in three installments.

Adam Simmons covers Towers for Dgtl Infra, including American Tower (NYSE: AMT), Crown Castle (NYSE: CCI), SBA Communications (NASDAQ: SBAC), Cellnex Telecom (BME: CLNX), Vantage Towers (ETR: VTWR), IHS Holding (NYSE: IHS), and many more. Within Towers, Adam focuses on the sub-sectors of ground-based cell towers, rooftop sites, broadcast / radio towers, and 5G.

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