Telecom firms struggle to offload towers

Reilance Communications has run the gamut of options to divest itself from costly cellular tower subsidiary Reliance Infratel.

One year ago, the company put part of its 95% stake in the unit up for sale, but there were no takers. It then tried to spin off Reliance Infratel through a public listing, again to no effect. The company's entire holding went on the block earlier this year but offers didn't match expectations. Now Reliance is offering the asset to the likes of Advent International, Apax Partners, Blackstone Group and The Carlyle Group.

A joint bid by Blackstone and Carlyle - for an asset thought to be worth $3.5-4 billion - is possible but by no means certain. The past 12 months have shown that offloading 50,000 cellular towers isn't easy.

"It may be far-fetched that anyone will buy Reliance Infratel's towers because they're in a tough position in the current market climate," says one India-based fund manager with knowledge of the tower industry. "And if someone buys it, they'll still have a tough time doing something with it."

Reliance isn't alone in trying to divest its tower business. TPG Capital and Farallon Capital are among those said to be interested in GTL Infrastructure, which is struggling with cost pressures after acquiring mobile phone operator AirCel's towers last year for $1.9 billion. Tower Vision has put its 8,000 towers up for sale at $125,000 apiece while Bharti Airtel has voiced plans to sell a stake in its tower arm, Bharti Infratel, which received funding from KKR in 2008.

Competitive squeeze

The driver of this activity is the competition mobile tower operators face in India, which dampens returns. According to Neeraj Jain, a partner at KPMG in Gurgaon, there were approximately 340,000 cellular towers in India as of March. Despite projected 10-11% compound annual growth in India's mobile user base over next four years, Jain estimates that only 380,000-400,000 are required to meet this demand. It would appear, therefore, that the market is already near saturation.

India's telecom operators, which manage most of the towers, are also being squeezed by low call prices. In a climate of high interest rates and expensive capital costs, operators are trying to jettison tower assets to raise funds. It invites a period of consolidation that has yet to truly begin.

"The most attractive thing for private equity is the extent to which restructuring and consolidation can take place," says Vikram Utamsingh, head of transactions and restructuring at KPMG based in Mumbai. "Some of these towers are attractive if you can merge them, but it's a tough sell given that some are loss-making."

A handful of factors make cellular towers finicky assets for telecom operators. First, they are not perceived as core assets to a business: While undoubtedly necessary, a telecom company doesn't need to own towers - it can rent space. Second, towers need a critical mass of tenants to validate their operation and demand currently isn't strong enough. Tower-sharing appears to be the preferred route because it is a cost-effective way to roll out networks, but a surfeit of towers diminishes this potential.

One fund manager tells AVCJ that the optimal tenancy ratio is two occupants or more per tower. Companies like Viom, owned by Tata Teleservices, IDFC and Quippo Telecom Infrastructure, claim tenancy of approximately 2.4 occupants per tower. The source estimates that Reliance Infratel and GTL towers have an average of no more than 1.1-1.5 occupants per tower.

"Independent tower companies should have rented out space to telecom operators," the source says. "Instead, the telecom industry approached it with an ‘if we build it, they - the tenants - will come' mentality. Now we see that they aren't coming, and they won't come for a lot of these guys, which is going cost operators a lot of money."

Independent operators haven't had it so easy either. GTL, for example, is exploring options for restructuring its debt. This comes nearly a year after GTL and Reliance Infratel failed to agree on a proposed $11 billion merger plan. It was reported at the time that Abu Dhabi Investment Authority, Blackstone, Carlyle and TPG would have considered part-funding GTL's financial commitment had the deal gone through.

Others looking for cash include Viom Networks, which owns 38,500 towers. It was considering a $1 billion IPO this year, but hasn't filed a listing application, The Wall Street Journal reported. Speculators suggest the company is delaying in order to explore merger opportunities.

Consolidation has yet to occur on a sector-wide level but some smaller players have merged with a view to boosting their competitive edge, says Archana Hingorani, CEO and executive director of IL&FS Investment Managers. In March, New Silk Route (NSR) portfolio company Ascend Telecom Infrastructure combined its tower business with that of India Telecom Infra, which is 50%-owned by IL&FS. The outfit now operates approximately 4,000 towers.

Others merges include Tata and Quippo, the companies behind Viom; the $1.9 billion purchase of Aircel's towers by GTL; and American Tower's acquisition of Essar Telecom Infrastructure, Transcend Infrastructure and Xcel Telecom.

Hingorani adds that mergers generate capital required to augment infrastructure and cater to newer services such as 3G and the ability to "gain better and bigger size so as to be able to achieve capital market recognition through listing."

Calling all buyers

With so much seemingly for sale, there remains the question of who will buy.

In many cases, towers have the same characteristics as distressed assets: laden with debt, capital-intensive (towers themselves cost upwards of $65,000 to construct), and little opportunity to elevate above the competition, who are all in the same boat. Potential buyers must be bring in savvy management or the problems will simply follow the owner.

But there are incentives to purchasing. According to Utamsingh, regulators and banks understand these towers' pivotal role in supporting demand for mobile communications, and they may offer favorable terms to new buyers. "It's possible that buyers will find a sensible valuation for these towers," Utamsingh says.

There are other factors that may soon drive down the price of towers for at least one company: A source tells AVCJ that Reliance Infratel is "under severe crisis" to raise capital following the arrest of three top executives at Reliance Telecom for their alleged role in India's widespread 2G license scam. This may lead to greater penalties.

"We saw Reliance try to sell its tower unit before, but I don't think it was serious. Now it's in crisis, and it'll be far more open to selling the business," the source says. "The mobile tower industry is bleeding, and that can mean real opportunity for buyers, including private equity."

What this "opportunity" could translate into is discounted asking prices. Depending on the company and the size of its debt burden, sources suggest that a 20-30% discount wouldn't be unreasonable. Coupled with cheaper interest rates to sweeten the deal, these assets have appeal.

Under independent owners who can consolidate towers, scrap the excess structures and find a viable number of tenants, a cellular tower business could be sustainable. If a private equity firm holds the asset for five years, it could realize substantial returns because of the potential to grab a 20-25% market share through consolidation, according to KPMG's Utamsingh.

"If PE is running it, and it has new management and government standards and no corruption it would be a crown jewel asset," he concludes. "And you'll get a multiple on your own exit. It won't be 20% IRR - it will be much more than that."

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• Topics
• South Asia
• Technology
• Media
• India
• TMT
• The Blackstone Group
• The Carlyle Group
• IDFC Private Equity
• IL&FS Investment Managers
• Archana Hingorani
• KPMG
• TPG Capital
• Vikram Utamsingh