Five of Asia’s leading tower transaction analysts were joined by another dozen interested stakeholders at the “India tower valuations and deal flow” roundtable held at the 2nd annual TowerXchange Meetup Asia on November 24-25 in Singapore. The conversation started with a debate about the relative merits of different valuation metrics, before contrasting the valuations of Indian towers with similar assets in international markets, before focusing on recent and future transactions involving American Tower and Viom, Reliance Infratel, and the potential carve out of a towerco bringing to market BSNL’s ~65,000 towers.
American Tower’s acquisition of Viom Networks, a strong portfolio of 42,200 towers with a tenancy ratio of 2.4, at an enterprise value of US$3.23bn, may soon be followed by the acquisition of Reliance Infratel by Tillman Global Holdings and TPG for a reported US$3.3bn. Viom Networks realised a valuation of US$76,540 per tower. While Reliance Infratel’s tower count and final valuation remains unclear, the cost per tower will be comparable to the new benchmark established by the AMT-Viom deal.
Why have recent Indian tower M&A apparently attracted lower valuations than recent global comparisons, with towers changing hands in Indonesia for US$300,000+ and the recent sale of Verizon towers in the U.S. coming in at over US$400,000 per tower? One explanation is that the replacement cost of an Indian tower (as low as US$25,000) is significantly lower than a tower in, for example, Indonesia at around US$100,000 or in the U.S. where a tower can cost upwards of US$250,000. Similarly, lease revenues in India are lower, typically around US$600pcm compared to approximately US$1,150 in Indonesia, and around US$1,800 in the U.S. The proportion of opex spent on 15-20 year ground leases (currently around 50%) is increasing in India. Compared to their international counterparts, many Indian towercos have a limited capacity to generate amendment revenue from the exchange of conventional antennae for multi-band antennae. Indian towercos, and their investors and analysts, called for pricing based on radio signals not on numbers of antennae.
A hypothetical perfect evaluation of a tower portfolio or tower transaction would require an understanding of the structural capacity and demand for capacity of each tower in the portfolio. What excess wind load capacity is available on a given tower? How readily and cost efficiently could the structure be updated? More importantly, is there demand for additional space on the tower? A proactively marketed tower portfolio like Viom Networks’ with India’s highest tenancy ratio at 2.4 might have already leased up space to the most obvious tenants, whereas should BSNL’s portfolio of 65,000 towers come to market, the current tenancy ratio of around 1.1 to 1.2 suggests there could be pent up demand for their many towers in sought-after locations. “Towers with low tenancy ratios are more marketable provided they’re in right location,” concluded one analyst.
Data growth in India is currently focused on urban areas, with a second stage to come in semi-urban and suburban India. With currently around 800,000 BTS and 400,000 towers in India, and a BTS needed approximately every 500m in a high data usage environment, some analysts have suggested India needs 50% more BTSs in the coming years. Many of those BTSs need to be smaller. The height and weight of towers in India is coming down, making structures easier to relocate. The spectrum now being acquired demands antenna located lower on structures, shifting market dynamics from a coverage to a capacity play. Analysts estimated 30% of India’s 400,000 new BTS would be IBS and iDAS, 35% being tenancies on existing towers, 35% requiring new towers.
should BSNL’s portfolio of 65,000 towers come to market, the current tenancy ratio of around 1.1 to 1.2 suggests there could be pent up demand for their many towers in sought-after locations. “Towers with low tenancy ratios are more marketable provided they’re in right location,” concluded one analyst
How to measure the value of a towerco or a tower transaction
The financial analysts at the “India tower valuations and deal flow” roundtable used a variety of tools to value towercos and to evaluate tower transactions. The oft quoted, oft critiqued cost per tower, or valuation per tower, was recognised as a flawed metric given the dynamic relationship between the price paid and rental fees: some sellers seek to maximise revenue from the sale, others seek to minimise opex. Conventional financial performance valuations, such as P/E (price to earnings ratio), leverage ratios and EBITDA margins; or financial performance valuations adapted to basic tower industry metrics, such as EBITDA per tower or EV (Enterprise Value) per tower, were felt to be more informative.
Tenancy ratios remain a critical and relatively stable performance indicator, although analysts warned that different towercos have different definitions of a tenancy, particularly affected by their ability to generate ‘amendment revenue’ (revenues from existing tenants adding supplementary technologies). Multi technology BTS and multiband antennas make it difficult to understand whether the tenant concerned is running 2G, 3G or 4G and, while contractual language in markets like the U.S. often defines the cost of ‘amendments’, in markets like India it has proved more difficult to monetise an existing MNO tenant running a supplementary technology.
Deal flow in India
Deal flow returned to the Indian tower market with a vengeance in H2 2015. With the acquisition of Viom Networks by American Tower announced but not yet closed, and with Tillman and TPG having entered exclusive, non-binding negotiations to acquire Reliance Infratel, two of India’s largest tower portfolios may soon be ‘off the table’. Ascend Telecom, the last of India’s ‘big little’ towercos, with 4,843 towers and a tenancy ratio of 1.8, is being restructured with an investment by ROI Acquisition Corp creating an enterprise value of US$308mn (10.8x projected 2016 EBITDA or US$63,597 per tower).
What’s left?
GTL has sold many assets to alleviate debts, but retains almost 30,000 towers – a potential acquisition target for anyone with appetite for a turnaround play. Tower Vision and their 8,600 towers have been rumored to be on the block in the past.
Tower transaction deal flow in India, or in any market, is ultimately driven by MNOs’ appetite to monetise their towers. This in turn is a function of pressure to restructure balance sheets from investors, from bond rating agencies, and from the debt market. With substantial capital being spent on spectrum and 4G rollout in India, many MNOs are increasingly inclined toward a view that they would rather have cash in hand to focus on their core business, rather than the steady flow of cash that comes from retaining their towers or a captive towerco. ‘Professionalising’ towers frees up the towerco to strengthen and increase the shareability of towers, thus maximising their value.
Tens of thousands of towers remain operator captive in India: Vodafone are believed to have around 10,000 outside of Indus Towers, while Idea Cellular has a captive portfolio of 8,600 towers with a tenancy ratio over 1.6 which could be monetised.
However, analysts were most excited about the prospects of BSNL’s ~65,000 towers coming to market. With many of their POSs on high quality towers in fantastic locations, and with very little lease up to date, the Telecom Ministry has increased pressure on BSNL to hive off the towers, perhaps as a 100%-owned subsidiary, perhaps with a tender for a third party towerco to market the towers and manage operations.
However, the cancelled sale of Mitratel in Indonesia (initially structured as an equity swap with Tower Bersama) represents a cautionary tale when it comes to monetising public assets: political risk is substantial with these kinds of transactions. As a result, the prevailing opinion was that a potential phase of third party management of the BSNL towers might be brief, with a spin off and IPO the most likely outcome.
Participants all agreed that the scale and attractiveness of locations in the prospective BSNL towerco would make it a formidible competitor for new tenants with the likes of Indus, Bharti Infratel, the new owners of Reliance Infratel and the combined ATC India + Viom Networks.
India has few remaining zero tenant towers
With the restructuring of the Indian MNO market in 2012, and the associated cancellation of 122 MNO licenses, a significant number of telecom towers were left with no tenants. However, according to analysts at the recent roundtable, as few as 1% of India’s 400,000 towers, and a maximum of 4%, currently have no tenants. Most zero tenant towers have now been leased up, dismantled or relocated.
Conclusions
There is no standard metric for the evaluation of towers and tower transactions, but the most widely quoted metric, cost per tower, is fundamentally flawed.
When comparing Indian towers and Indian tower transactions with international deals, one must be cognizant of the wide variation in cost structures and lease prices.
With deal flow returning to the Indian market, with almost 100,000 towers worth almost US$7bn in the process of changing hands, attention remains focused on the world’s second largest tower market, with analyst interest particularly piqued by the future of BSNL’s highly desirable ~65,000 towers.
