India's Tower Sector Set to Catch M&A Fever

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India's telecom tower sector is set to witness a wave of mergers and acquisitions in the coming months, with operators and independent tower operators looking to exit the mobile passive infrastructure market, analysts believe.

"Operators now consider towers a non-core activity, and since the valuation of towers is consistently coming down, they will want to monetize their tower assets at the earliest [opportunity]," says Neeraj Jain, a director at KPMG International . In addition, some operators have taken on debt to pay for their 3G licenses, and "are looking to hive off tower business to generate cash." (See India's 3G Auction Ends, Raises $14.6B.)

In India there are two types of tower companies: pure-play tower companies, such as GTL Infrastructure Ltd. ; and tower companies owned by the telecom operators. Some operators, such as Reliance Communications Ltd. , have their own tower subsidiaries (Reliance Infratel), while others have formed consortia such as Indus Towers Ltd. , a joint venture among Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Vodafone India , and Idea Cellular Ltd. (See Indus Towers Names CEO.)

In total there are about 12 companies in the sector, which, as the table below shows, is dominated by the operator-owned tower firms.

Table 1: India's Main Telecom Tower Players

Company name Ownership Number of towers
Indus Towers Joint venture of Bharti Airtel, Vodafone Essar, and Idea Cellular 100,000
Reliance Infratel Reliance Communications 48,000
Bharti Infratel Bharti Airtel 30,000
BSNL/MTNL State-owned operators BSNL and MTNL 45,000
GTL Infrastructure Independent 32,500
WTTIL Quippo Independent 25,000
Others NA 50,000
Total 330,500

Most of the operator-owned towers are in the metros and Tier 2 cities, except for those owned by state-run Bharat Sanchar Nigam Ltd. (BSNL) , which has coverage in rural circles (service areas) too.

Deals already struck, more to come
The consolidation wave has already started. Earlier this year, Aircel Ltd. sold its 17,500 towers to GTL Infrastructure Ltd. for 84 billion Indian rupees (US$1.8 billion), while American Tower Corp. (NYSE: AMT) acquired 4,450 towers from Essar Telecom Infrastructure earlier this year. (See Aircel Plans Mobile App Store, Tower Sale and American Tower Closes India M&A.)

Now, according to industry sources, Vodafone Essar, Reliance, and Idea Cellular are looking to sell off some tower assets. Vodafone was recently in the news for trying to sell 7,000 towers in six districts.

Vodafone isn't the only one. Reliance Infratel was set to offload 50,000 towers to GTL Infrastructure, but the deal fell through at the last minute over valuation disagreements. The deal would have created the world's largest independent wireless passive infrastructure company. (See Reliance/GTL Merger Collapses, Reliance, GTL Strike $10.8B Tower Deal, Reliance, GTL Merge Tower Units, and Trio Chase Tower Deal.)

Those operators will want to strike deals as soon as possible, as the value of India's towers is on the slide. About two years ago the average value of a telecom tower was in the range of INR9-11 million ($198,000-243,000). Now, though, it is INR4-5 million ($88,000-110,000).

There are, though, doubts as to whether the value will continue to fall. "It's true that the value of each tower has been coming down, but this is not going to continue endlessly," says Ovum Ltd. principal analyst Shiv Putcha.

Smaller players are also looking to exit the market, as they lack the scale and efficiencies of the larger tower firms such as GTL. "Some of the key success factors for the tower companies are the footprint, presence across geographies and circles, relationships with multiple service providers, and the service levels offered to customers. On these fronts it becomes difficult for the smaller companies to scale up, and this is what is driving the consolidation in the tower industry," explains a GTL spokesperson.

While GTL has been active in the consolidation process, the sector's largest player, Indus Towers, which boasts around 100,000 towers, has been conspicuous by its absence. Industry sources believe the company is facing a number of internal issues and has been unable to capitalize on any potential value-enhancing acquisitions. According to market sources, Indus didn't even bid for any of the tower assets that have been available recently.

Ultimately, the market will shrink to just a handful of players, believes Ovum's Putcha. "In the end, only [a few] tower companies will be left -- one of them a consortium of operators, one standalone tower company, and maybe one or two more," predicts the analyst.

Little boost from 3G, but BWA might help
For the current tower firms, the rollout of 3G networks by multiple operators is having relatively little impact, as the network operators are adding new technology to existing locations, and not boosting the tower firms' tenancies very much.

The tower firms' business models are all dependent on customer tenancies, which usually involve agreements spanning 10 years at least. The monthly rentals charged by the tower companies are approximately INR30,000 ($662) for GBT, and INR21,000 ($463) for a rooftop tower (per operator per month).

The race to roll out 3G hasn't been too lucrative. However, as is the case when operators add a BTS (base transceiver station) to an existing location, in the areas where they already have a tower tenancy agreement, "they are never going to pay the same tenancy rate" as their initial installation, "so it's not a big draw for the tower companies," notes Ovum's Putcha.

The rollout of networks using the BWA (broadband wireless access) spectrum auctioned earlier this year might provide a more notable boost in new tenancies and additional revenues, but that potential additional business is still likely to be a year away. (See India's BWA Auction Ends in $8.2B Drama.)

— Gagandeep Kaur, India Editor, Light Reading

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