XL Axiata drives a bargain in US$460mn tower deal with STP

XL Axiata has announced the sale of 3,500 towers to PT SOLUSI TUNAS PRATAMA (STP) for US$460mn, with an initial term of ten years, realising a healthy return of US$131.4k per tower. Reports suggest XL’s all-in, fixed price leaseback rate is just IDR10mn per month (a little over US$800), significantly below the market lease rates in Indonesia, which tend to be around US$1,200-1,500 per month. While those familiar with the process agree that XL Axiata drove a hard bargain, could this be indicative of lease price erosion in the maturing Indonesian tower market? And how does this deal enhance STP’s platform?

Prevailing tower industry wisdom runs something like this; MNOs’ core competency is selling minutes and megabytes, their KPIs are all about ARPU and the Customer Experience. Towercos’ core competency is adding value to passive infrastructure through co-location sales and efficiency programmes, and their KPIs are about uptime, tenancy ratios and tower cash flow. The capital markets reward the separation of telecom retail risk from telecom infrastructure with increased valuations when assets are transferred from MNOs to towercos. So it’s a win-win for MNOs to sell their towers to passive infrastructure specialists, and when operators choose to monetise their towers, MNOs might choose to maximise cash released, OR they might choose to minimise opex costs by negotiating a discounted lease rate… So how have XL Axiata managed to strike a deal with STP in which they realised a healthy average cost per tower AND secured a discounted leaseback rate?

This is a great deal for XL Axiata. XL is 66% owned by Malaysia’s Axiata Group, who know a thing or two about towerco economics having recently carved out their own towerco, edotco. Through their deal with STP, XL Axiata have raised almost half a billion dollars to deleverage the debt from their 2013 acquisition of Axis Telecom while securing an anchor tenant leaseback rate 30-50% below prevailing rates.

But this a good deal for STP too. With Protelindo and Tower Bersama driving through the internationally recognised indicator of ‘scale’, a 10,000 tower count, STP was in danger of being left behind. The deal to acquire 3,500 sites (3,233 ground based towers and 267 rooftops) from XL Axiata doubles STP’s portfolio and cements their position as number three in a market that in the long term may only sustain three towercos of scale. STP’s partnership with XL Axiata makes them more credit worthy as a function of the status of anchor tenant XL Axiata, number two ranked operator in Indonesia.

 

While it’s true that Protelindo probably has too much discipline to do a deal on these terms, and while Tower Bersama concentrated their energies on structuring the recent equity-swap deal with PT Telkom Indonesia to add 3,928 Mitratel towers to their portfolio, STP faced a tough negotiation, but come out of the XL Axiata transaction with an attractive portfolio of 6,625 assets with strong growth prospects given less than 1% of the acquired towers overlap existing STP locations. Indeed, post-integration, 90% of STP’s portfolio would be located in the attractive Greater Jakarta, Java, Bali and Sumatera regions.

XL Axiata’s towers were always going to attract a good valuation – it’s unusual for an operator-captive portfolio to have a tenancy ratio as high as 1.66, which STP will feel they can boost even higher in part because their ownership of the assets lends ‘independence’.

With energy costs passed through to the tenant, and opportunities for to create synergies and efficiencies in O&M post-integration, STP feels they can further increase the acquired towers’ already solid 87% EBITDA margin.

Is the XL Axiata-STP deal symptomatic of a shift in the balance of power between MNOs and towercos, and of pressure on lease prices in Indonesia? Let me state up front that Indonesian tower lease prices are not typically in the public domain, so TowerXchange can only share third party observations. However, we have seen lease pricing in other tower markets develop along similar lines to what is rumoured to be happening in Indonesia. In the early days as an independent tower industry takes root, capital constrained tenants accept ‘rack rate’ pricing to co-locate within 60-90 days on a finite number of independent towers, accelerating time to market for sites where permitting and building a new site could take 12-18 months (if permitted at all).

TowerXchange have spoken to knowledgeable sources in Jakarta who suggest that as the inventory of independently owned and co-locatable towers has increased, as the cost of site rental has become an ever growing line item on operators’ balance sheets, and as leases roll off their initial term fixed rates, Indonesian MNOs are trying to re-price lease rates in their favour.

Moody’s link the pressure on Indonesian lease rates to the XL Axiata-STP transaction: “the sale is credit negative for the Indonesian tower industry because it increases the probability of increased price competition. The sale and leaseback terms are quite favourable for XL... such favourable deal terms are thus far unprecedented in the Indonesian tower sector.”

Not everyone agrees. “Fitch does not view the XL/STP deal as setting a precedent for tower rental pricing, and should not lead to heightened price competition. In sale and lease-back transactions, low lease rental payments can be offset by larger up-front cash payments, so they do not necessarily act as pricing benchmarks for standard non-sale leasing agreements.”

Moody’s add their own caveats to the lease rate debate; “Leading independent tower companies (Protelindo) and (Tower Bersama) would face revenue pressure if the XL-STP terms become a benchmark for future rental contracts. However, there is no immediate risk because existing contracts are non-cancellable, non-negotiable and long-dated. The average remaining life of Protelindo’s contracts are 7.4 years and TBI’s are 7.2 years.” Moody’s concludes “if STP continues to offer very competitive low rental rates on towers it builds and purchases, (Tower Bersama) and Protelindo may be forced to follow suit for newly signed contracts... Price competition within the industry will be a drag on margins and lead to telecom operators negotiating down rental rates when their tower lease contracts come up for renewal.”

Are STP offering below market “very competitive low rental rates on towers”? The company’s own commentary on the XL Axiata deal specifies that the rental rate for non-anchor tenants on the towers they’re acquiring is IDR 13.3mn per month (around US$1,100). It seems like STP is pricing aggressively, but reports of the collapse of lease rates in Indonesia seem premature – Indonesian tower companies remain one of the world’s most respected success stories in the asset class.

STP’s unique selling point is their 4G play. STP is the only listed towerco in Indonesia to have obtained a license to lease out space on micro-cell poles, and they own a fibre backbone to connect these poles – STP owns over 1,200km of fibre in Greater Jakarta alone. This strategy is supplemented by a comprehensive outdoor and indoor IBS offering, the latter of which already boasts a tenancy ratio of 2.58. 6% of STP’s revenues already come from micro-cell poles, fibre and DAS, a proportion they expect to increase in future.