The Indian tower sector is ripe for M&A, with numerous telcos, towercos and private equity firms discussing potential deals.
The Indian tower sector is ripe for M&A, with numerous telcos, towercos and private equity firms discussing potential deals.
However, with some processes continuing indefinitely and others disintegrating over valuation, it is unclear how many will complete.
Between the late 1990s and 2010, the sector was on a roll, driven by rapid telecoms growth, prompting operators to sell or spin off towers, enabling them to focus on customer numbers and services.
In 2008, the top three telcos Bharti Airtel, Vodafone India and Idea Cellular created joint venture Indus Towers, now the world’s largest towerco. This was followed by a spate of M&A and aggressive growth among new entrants. According to AK Kearney, tower numbers grew from 100,000 in 2007 to 310,000 in 2010, reaching about 400,000 today.
But this growth has cost towercos. As AT Kearney partner Nikolai Dobberstein points out, many spent billions of dollars on acquisitions but now struggle with low operating cash, mounting debt, significant capex requirements and high operating costs.
GTL Infrastructure, for example, has struggled since spending US$1.8bn on a sale-and-leaseback with Aircel in 2010. Its lenders are reportedly now considering converting some of its Rs34.1bn (US$535.4m) debt into equity in order to take control of the company and sell it. Dobberstein says a turnaround would be very difficult. “They need to sell, but who would buy it?” he asked. Aircel, itself facing financial difficulties, is unwilling and unable to pay a higher fee, he added.
Abhishek, a TMT director at Deloitte in India, said the top players are faring well despite the downturn. According to Deloitte data, Indus is the largest player with a 31% share of total towers and 37% of tenancies, followed by Bharti Infratel, which has a 42% stake in Indus, a 9.8% share of total towers and 11.6% of tenancies. Reliance Infratel has 11.6% of total towers and tenancies, BSNL has 18.2% of towers and 9.9% of tenancies and Viom Networks has 11.3% of towers and 14.8% of tenancies. Smaller players include GTL, American Tower’s ATC India and Tower Vision.
Telecoms consolidation a major threat
An expected wave of consolidation among telcos presents the greatest threat to the tower sector in Dobberstein’s view.
“Towercos need at least two tenants, each paying about Rs30,000 per month, on each site. So if operators consolidate, it could end up bankrupting the tower sector,” he said.
However, the fact that many telcos are locked into contracts with towercos for 10-15 years could indeed prevent their consolidation.
“If Telenor, for example, wants to merge, how will it consolidate the network and energy costs when it is locked in with Viom?”
New licences and technology to fuel growth
Following the Rs1.1trn (US$17.3bn) 3G spectrum auction earlier this year, operators are keen to deploy their newly-acquired airwaves, which will drive infrastructure investment.
Reliance Jio’s highly anticipated 4G launch represents another potential boon, yielding infrastructure investments and towerco partnership agreements. Abhiskek said it has agreed 60,000 tenancies over the past year and is likely to sign many more.
Towercos could themselves look to become technology leaders, since Indian telcos have yet to shift significant traffic onto micro sites, small cells and Wifi, noted Abhishek.
“The towercos need to assess and develop expertise around these evolving areas, which will require them to start interacting with Wifi, cable and other emerging providers in addition to their existing telecoms and equipment partners.”
Stage set for tower consolidation
These challenges, together with the growing disparity between the largest and smallest players have prompted talk of consolidation.
The largest towercos, with their relatively deep pockets, could snap up smaller players or become targets themselves. The ambitious American Tower is expected to be a key consolidator, while private equity could also play a leading role.
In terms of active deals, Reliance Communications said in mid-August that it had received non-binding bids from “a number” of interested parties for a controlling stake in tower unit Reliance Infratel. The telco said it had shortlisted a smaller number of “very credible interested parties” to progress to the next round of the sales process and would make further announcements when appropriate. According to local reports, American Tower and private equity firm The Carlyle Group lead the bidding for a 51% stake in Reliance Infratel.
As reported today, American Tower is reportedly close to sealing a deal to acquire a majority stake in Viom. The deal reportedly values the target at about Rs190bn (US$2.84bn), including about Rs6.5bn (US$97.24m) of net debt.
More tower disposals could also be in store with Bharti Infratel in talks to buy sites from Vodafone India and Idea Cellular. Reliance Communications (RCom) and struggling state-owned operator BSNL are meanwhile also looking to sell towers.
Abhishek, Dobberstein and Harsh Jagnani, assistant vice president of Indian investment information and credit agency ICRA, agree that leaders Bharti Infratel, Reliance Infratel and Indus – all part-owned by telcos – are likely to further increase their market share.
Abhishek believes Bharti Infratel could play an active role in consolidation, but noted that 71.9% owner Airtel has its own large debt pile.
Dobberstein, on the other hand, does not expect Indus and Bharti Infratel to lead since together they already take 95% of revenues from operators.
He also questioned the attractiveness of Reliance Infratel as a target given its reliance on main tenant RCom, itself struggling.
Internationally acquisitive American Tower, which agreed earlier this year to buy sites from KEC International for about Rs810m (US$13m), has been named as a potential buyer of multiple assets. Prior to its reported interest in Infratel, the company was linked to Viom, until talks fell apart on price.
“A Viom deal would have given American Tower that critical mass – it would have become the second largest towerco – so it was logical,” Abhishek said.
The tower sector is expected to open up more to foreign investors, including private equity, Jagnani said. PE investors would likely play an active role in consolidation, most likely through buy and builds, he said.
Dobberstein, however, is doubtful that the tower sector will see many deals of considerable size until metrics improve. The questionable prospects of many local telcos could dissuade potential suitors for towers, which need “anchor tenants themselves to survive,” he said.
Financing is attractive
Despite the obstacles facing the sector, acquisition finance is straightforward, says Dobberstein.
“You just need to demonstrate that a deal makes financial sense. It helps that towercos have iron-clad contracts with tenants for 10-15 years.”
Ascend Telecom and Viom are both planning IPOs to raise help fund expansion, and others could follow suit, said Abhishek.
Dobberstein agrees: “I’m sure [more IPOs] will happen over the next couple of years and that towercos will find new ways to survive.”
