The consolidation of the Indian telecom tower business has taken a giant leap with Indus Towers' merger into Bharti Infratel. After this move, there will be only three major players in the game (and a smaller one, BSNL), compared with as many as nine slugging it out for the mobile tower sweepstakes earlier. Yet analysts say that in the next 12 months with the merger of Vodafone and Idea and the closure of many telcos as much as a fifth (200,000) of the 100,000, tenancies currently on the towers will not be there, putting pressure on revenues as well as margins for the business in the next 24 months.
With over 163,000 towers across India's 22 telecom circles, the combined entity will, after the merger, be locking horns with Reliance Jio, which, after buying RCom’s tower assets, will have over 162,000 towers under its control. And the only pure-play non-telecom tower company to remain in business will be American Tower Corporation (ATC). With a majority stake in the erstwhile Viom Networks (in which the Tatas still have a stake), and after its recent acquisition of the Vodafone and Idea tower assets, ATC will command over 78,000 towers. That is less than half of the two big boys in the game – Bharti-Indus combine and Reliance Jio. At present, there are 500,000 telecom towers in the country.
Though small, state-owned BSNL is an important player, with 65,000 towers. It has already received the government's permission to spin off this business into a separate entity. Two other players – GTL and Tower Vision, together controlling 32,000 towers – might eventually sell their assets to one of the existing players, say analysts.
However, analysts say that the closure of the business of many telcos which include RCom,Telenor, MTS, the uncertainty in Aircel and the merger of Idea with Vodafone (which will see consolidation in tenancies) to reduce costs will put pressure at least in the initial 24 months on the tower companies. "As much as 20 per cent of the tenancies will be wiped out and this will reduce the tenancy ratio which has been at 1.5-1.7 earlier. But with the data revolution, there will be a requirement for more towers in the long run", says a telecom watcher.
The tower business, of course, has the advantage of being a predictable annuity one, as it is based on signing long-term tenancy contracts with telcos. Also, in case of telcos moving out, they have to pay a compensation for the remaining tenure of the contract. While tenancies will be under pressure in the short run, they are expected to go up by 2020. One reason: Thanks to the explosion in data which has grown multiple times there will be a need for more base stations as well as towers which is expected to continue for many years. Because of the Jio onslaught, incumbent operators are working overtime to invest heavily in increasing their coverage of 4G and enable VOLTE across the country. This requires more towers. Also, the launch of very high speeds of 5G, which requires substantial bandwidth available only in the higher bands of spectrum. That could also change the game dramatically, as it would require a huge increase in tower infrastructure to be successful.
Telcos say that the monetisation of the business will surely help incumbent operators generate cash to fight a bitter pricing battle, generate cash for the large new investments they are making in 4G, and also drop tariffs to keep their customers from moving to Jio. They will also require fresh investments to buy spectrum and roll out 5G in the next two years.
So, for instance, Idea Cellular will be able to generate Rs 65 billion by selling its 11.15 per cent stake in Indus Towers, even if it is at a 10 per cent discount to the discovered price (it was a condition when the three partners joined to set up a common tower company). This will help the company fund the requirements arising from its merger with Vodafone, as well as a faster rollout of 4G services. If Idea and Providence cash out, Bharti Infratel will have a 37.2 per cent stake in the new merged entity, which it is already looking to sell partly, to a clutch of investors (like KKR). Bharti Airtel is planning to invest over Rs 240 billion this financial year for the rollout of its 4G and VOLTE services across the country. The cash can be used for this investment plan. While Vodafone has not made any announcement yet, it will also have over 29 per cent stake which it could cash out if required.
Some analysts argue that even Reliance Jio, which uses its towers only for its own network, might look to monetise the business by bringing in tenants or divesting stake to independent operators.