Is American Tower’s acquisition of Viom Networks a good deal?

After a two year courtship, the marriage of American Tower and Viom Networks has finally been announced. The dowry agreed (does that analogy work?) will be US$1.17bn. Taking into account the initial 51% stake and the just under billion dollars of local debt American Tower is taking on, the transaction creates an enterprise value of Viom Networks of US$3.23bn. While American Tower will achieve the scale they have long sought in India, the sale of Viom Networks is the multi-billion dollar culmination of a ten year startup to exit success story for Quippo-SREI.

American Tower (AMT) has made no secret of their desire to achieve scale in India. AMT is attracted by the Indian mobile market’s long runway for growth – the vast majority of India’s 950mn+ mobile connections are still 2G, 3G rollouts are ongoing, 4G spectrum has been auctioned and more is coming to market, smartphone penetration is still less than 25%, and tenancy ratios as high as 2.7 could be achieved by the most mature portfolios as soon as 2016.

While AMT’s current 14,643 towers might be a sizable portfolio elsewhere, in India it currently makes AMT the country’s sixth largest towerco, meaning the company lacks the ‘all-India’ footprint network planners generally assume to require ~45,000 towers. Upon closing, the Viom acquisition will give AMT a 57,000+ tower count, and a genuine all-India footprint, whilst increasing AMT’s tenancy ratio as a function of integrating India’s most mature and most leased up tower portfolio; Viom Networks has a tenancy ratio of 2.4, whereas American Tower’s own tenancy ratio in India is estimated to be around 2.0.

American Tower isn’t just acquiring Viom Networks’ 42,200 towers and 200 DAS. Viom Networks’ management team, led by CEO Syed Safawi, is credited with leading a turnaround from setbacks which the entire Indian tower industry suffered in the wake of the 2012 MNO market restructuring, when 122 telecom licenses were cancelled. At that time Viom Networks lost 30% of their topline almost overnight, yet the efficiency programmes of then new CEO Safawi enabled Viom Networks to deliver their maiden profit that same financial year. The leaner, more efficient Viom Networks is now able to build a tower in India for as little as US$25,000-30,000, a paradigm shift in that it enables the company to make a profit even from a single tenant tower.

Of course the value in a tower company is not just generated by efficiency programmes; a roster of investment-grade tenants is critical to ensuring the security of long term recurring cash flow. At the beginning of 2015, 75% of Viom’s customer base came from tier one MNOs, led by equity partner Tata, Reliance Jio and Telenor. If Viom’s legacy customer base is impressive, their ability to lease up towers is second to none in India: combined, Viom and AMT represented more than a third of incremental tenancy additions in India in 2014, despite their combined portfolios representing around a sixth of the total inventory of towers proactively marketed for co-location in India.

By acquiring Viom Networks, American Tower will achieve scale in India, integrating a fast growing tower portfolio generating proven cash flows, under the leadership of an equally proven management team, whilst at the same time managing AMT’s debt at or below 5x. This is a great deal for American Tower… But is a great deal for their counterparts in the transaction?

First let’s identify the sellers. Quippo, the equipment leasing arm of SREI Infrastructure Finance, held the management rights and 18.5% of the equity in Viom Networks. Under the terms of the transaction announced on October 21 2015, SREI Infrastructure Finance will exit entirely. We understand minority shareholders GIC Investments and Oman Investment Authority are also exiting, while Tata Teleservices will dial back their stake from 54% to 26% and IDFC drops from 6.2% to 3.2%, facilitating AMT acquiring a 51% controlling stake, which they may opt or be compelled to increase in future. Macquarie, serial towerco investors worldwide, will retain their 11% stake.

Ten years ago Viom Networks, then Quippo SREI, created India’s first independent commercial tower company, building 50 towers for Spice Telecom, soon shared with Hutchison. Through a combination of organic growth and small scale acquisitions, by 2008 Quippo Telecom Infrastructure Limited (QTIL) had 5,000 towers and a tenancy ratio of 2.5. Meanwhile, Tata Teleservices were hiving off their 13,000 towers into WTTIL, for which QTIL secured the management rights, enabling QTIL to partner with Telenor to leverage those towers to accelerate their local subsidiary Uninor’s time to market. With Uninor fuelling an unprecedented 16,000 new tower build in 2009-10, Quippo’s tower count leapt to 36,000, with a tenancy ratio of 2.3.

In 2009-10, QTIL merged with WTTIL, creating Viom Networks in a transaction which valued the enterprise at around US$1.6bn.

The aforementioned 2012 MNO market restructuring followed, wiping out almost 15,000 tenancies for Viom, yet in the face of these setbacks Viom still managed to record their first annual profit. Viom has since built upon the new efficiencies that were so critical to achieving that maiden profit, concluding with a 42,200 tower portfolio and a tenancy ratio of 2.4 at the time that their two year negotiation to sell to American Tower finally reached agreement.

By selling to AMT, SREI Infrastructure and the other exiting investors have passed the torch for the management of Viom Networks and their 1,400 staff to a trusted, independent and proven counterparty in American Tower. The founders of Viom Networks went from startup to an enterprise worth US$3.23bn in under ten years, and are exiting having realised a near 12x EBITDA valuation. That’s a very good outcome by Indian TMT standards.

Tata also has much to gain from this deal. Tata have retained many preferential rights as an original joint venture partner. While they may dilute their equity, they continue to retain a significant stake with now access to a larger entity in AMT.

In the two weeks since the deal was announced, and at time of writing, the share prices of Tata Teleservices and SREI Infrastructure Finance, the primary beneficiaries from AMT’s transaction, fell by almost 12% and by over 20% respectively.

Over the same period AMT were up 6.4%. There are so many moving parts in the AMT business, with Q3 results and Brazilian and Nigerian acquisition closures being simultaneously digested by the City, it is difficult to isolate the effect of one transaction announcement on investor sentiment.

Share price adjustments may be in part driven by disappointment at a deal valuation which realised US$76,540 per tower. But this is still a win-win deal.

In order to understand why this is a win-win deal, readers must understand that the U.S. and Indian tower industries developed along different planes. The U.S. tower market, inaugurated in the mid nineties, is one of the best examples of competitive, free market, business model innovation the TMT sector has ever seen, yielding tremendous new value creation and valuation multiples in the high teens and beyond. In contrast, the Indian tower industry has always been more driven by the needs of the country’s cellular operators, who held and continue to hold substantial stakes in many of the country’s towercos.

The P&Ls of U.S. and Indian towercos are very different. Lease pricing and lease terms differ substantially; the average lease rate in India is around US$600pcm, with discounts applied when additional tenants are added. In contrast a typical lease rate in the U.S. is three times higher at US$1,800, with no discounts as additional tenants are added. The replacement cost of an Indian tower is approximately one tenth that of a U.S. tower (~US$25,000 compared to ~US$250,000), as a function of relative labour and material costs, and as a legacy of the efficiency programmes the Indian tower industry pioneered as a result of the aforementioned 2012 market restructuring.

This all adds up to dramatically different business models, dramatically different tower cash flow profiles, so the market should not be surprised at dramatically different valuations.

The reality is that there have been no meaningful benchmarks for the value of an Indian tower since the MNO market was restructured in 2012-13. The reality is that the efficiency of an Indian tower industry that can build a new tower for as little as US$25,000 had to a certain extent reduced that industry’s per asset valuation as a function of falling replacement cost. The reality is that the AMT-Viom transaction was agreed in a ‘buyers market’ with a surplus of towers for sale in India. American Tower was always going to buy one of several substantial portfolios for sale and, whilst Viom’s exiting investors will walk away with a substantial amount of American Tower’s money in their bank accounts, the likes of Reliance Infratel could be left struggling to finalise a deal having lost their most credible prospective counterpart.

Did American Tower use the volume of Indian towers coming to market as negotiation leverage? I’m sure they did. Should AMT’s shareholders be happy with the Viom acquisition? Time will tell of course, but I think it looks great today. Does that mean Viom Networks secured a bad deal? No – after two years of on-off courtship, the marriage of two towerco powerhouses has been announced. SREI and the other exiting investors have agreed the union of their precious child Viom Networks with a handsome American suitor – we look forward to the wedding!