While telcos merge, investors rush for tower assets

Investment in Bharti Infratel is the third such deal in six months

With the number of telecom operators shrinking, tower infrastructure companies are expected to lose tenants. However, there is an unusual rush to invest in the latter.

On Tuesday, KKR and CPPIB bought 10.3 per cent stake in Bharti Infratel for Rs 6,193 crore, the third such deal in six months by financial or strategic investors in telecom tower companies.

In December, Canada-based Brookfield Infrastructure bought a controlling stake in the tower business of Reliance Communications for Rs 11,000 crore. Two months earlier, American Tower Corporation bought 51 per cent stake in Viom Networks for Rs 7,635 crore, which included 35 per cent from Tata Teleservices.

“Telecom operators need cash, as they now pay for spectrum at market prices through auction. So, they are monetising their investments in tower companies,” says Manoj Tirodkar, chairman GTL Infrastructure. This Mumbai-based telecom tower company is under a strategic debt restructuring process, to be completed in the next 12 months, with a new owner coming in. GTL came under stress as operators built their own telecom infra instead of renting from purely infra providers such as theirs.

This is set to change, as consolidation at the front end of the telecom sector is expected to also drive this at the back end. “With consolidation in this space, infra companies will get greater pricing power. Besides, new business opportunities are coming up with a surge in use of data. It is this opportunity and the pricing power that is bringing new investors,” says Tirodkar.

This is true of KKR India, which has invested in Bharti Infratel for the second time. It had earlier invested in 2007, divesting this in public markets in three tranches (between December 2012 and June 2015), providing it a return multiple of about 1.5 times.

KKR now plans to ride on the surge in digital communication that has come with the launch of Reliance Jio’s fourth-generation technology (4G) services. Going forward, 5G services which will provide the internet-of-things will further drive growth for data, providing new opportunities for tower companies.

“Small tower companies (70-75 towers) comprise nearly a fifth of the market, suffer from low utilisation (1.5 times tenancy vs 2.3 times for Infratel) and are financially distressed,” said Vivekanand Subbaraman, analyst with Ambit Capital. Consolidation among telecom operators further squeezes these small tower companies, given their low bargaining power and weak exit clauses. His report mentions Idea Cellular and Vodafone India’s independent towers (five per cent of the market) as good candidates for acquisition.

“The tower industry today needs to redefine itself from being a service provider to a solutions provider,” says Hemant Joshi, partner at consultancy Deloitte India. “There are new opportunities such as bringing solutions for the internet-of-things and smart cities. That will require new investments, best suited for long-term strategic and financial investors."

While telcos merge, investors rush for tower assets.