Buy or be bought

Consolidation is the way out for telecom tower companies

It was much needed oxygen for telecom tower company, Viom Networks and the 51% acquisition by Boston-headquartered American Tower Corporation (ATC) couldn’t have come at a better time. For a while, the biggest shareholder of Viom, Tata Teleservices has been looking to raise money and this ₹7,635 crore-transaction will see a dilution in its stake and the exit of Srei Group, another major shareholder.

Telecom tower companies expanded in a big way following the entry of new operators after 2009. This included names like Videocon, MTS, Uninor etc. Between 2007 and 2010, the number of towers increased sharply from 100,000 to over 310,000 and today there are four lakh towers in India. Indus Towers is the largest, followed by Bharti Infratel, Reliance Infratel and ATC. Following the cancellation of licences and the consequent scaling down of operations, tower companies are now saddled with underutilised infrastructure. In Mumbai, Loop Mobile has exited its operations, while those like Videocon and MTS have reduced their presence. This has had a bearing on their respective tenancy ratio, which needs to be at least 2.1, for the business to remain robust. Simply speaking, it means for every tower, there has to be a minimum of two operators using the infrastructure. Indus Towers, a joint venture between Bharti Airtel, Vodafone and Idea Cellular, has a tenancy ratio of 2.19, and that of Bharti Infratel and Reliance Infratel being less than 2.

Along with a debt of ₹5,800 crore, Viom Networks has a tenancy ratio of 2.4. “The big problem in the telecom tower industry has been that of oversupply and players having a disparate footprint. For a company to get the advantage of scale, it must have at least 40,000 towers,” says Romal Shetty, national head of telecom, KPMG. A player like GTL, which bought Aircel’s 17,500 towers in 2010 for over ₹8,000 crore, had a net loss of ₹515 crore on revenues of ₹600 crore for FY15. In addition, it has borrowings of ₹4,826 crore and a tenancy ratio of just 1.45. While those like Essar Telecom and KEC International smartly sold their operations (both to ATC), a player like Ascend Telecom Infrastructure, a New Silk Route-owned entity with only 5,000 towers, is struggling.

Like mobile telephony, the telecom tower business, too, is an operation for deep-pocketed players. Shetty is clear that at any point, there is never place for more than four players. While another round of consolidation looks inevitable, existing players, also have to look for new revenue streams. According to him, there are opportunities in sectors like banking, e-commerce and retail. “Towers could provide the answer to a banking interface in rural India, which will not require a person to visit an ATM,” adds Shetty.

Given the talk around data being the next big story, it is only natural for tower companies, including the smaller ones, to get a share of the business. That said, the big boys are likely to get a big chunk of the revenue leaving very little on the table for the also-rans. For now, the task for the minions is to increase tenancy ratio and figure out ways to use the infrastructure that has been created. In a scenario, where large operators either have their own tower companies or are locked into long-term deals, the way forward looks extremely difficult. Clearly, consolidation is the only way out.