How MNO consolidation is restructuring the Indian tower market

Towercos own 68.4% of India’s 461,016 towers, so when the country’s #2 and #3 MNOs merge, who both happen to be partners in the country’s leading joint venture towerco, you can expect significant repercussions. Sure enough, tower ownership is being re-organised and there is mounting speculation that MNO consolidation will trigger renewed towerco consolidation. In an article featuring exclusive quotes from Bharti Infratel Chairman Akhil Gupta, TowerXchange reviews the MNO consolidation afoot in India, summarises anticipated triggered tower transactions, and forecasts the structure of the Indian tower market in 2020.

The merger of equals of Vodafone India and Idea Cellular, creating a new 395mn subscriber market leader, headlines an array of proposed MNO consolidation which will restructure India’s tower market as much as it will the country’s mobile market.

The merger of India’s #2 and #3 MNOs remains unlikely to be confirmed until 2018, with speculation that spectrum holding and revenue market share caps could be breached in several circles, so the deal is still subject to approvals from government and regulators, as well as shareholders, creditors and stock exchanges. Vodafone and Idea have publicly stated intent to monetise a combined 19,812 stand alone towers to help reduce the debt of the combined entity.

The mega-merger follows the announced but as yet unclosed RCom-Aircel-Sistema merger, with BSNL and MTNL also coming together.

Bharti Airtel has responded with a proposition to acquire Telenor’s Indian opco, adding their 44mn subscribers to Airtel’s 269mn, as well as their spectrum and infrastructure, although Telenor owns very few cell sites having heavily leveraged co-location to launch, particularly on the former Viom Networks cell sites, now owned by American Tower India.

Airtel’s transaction would add 43.4 MHz of spectrum in the 1,800 MHz band, in which Airtel is rolling out 4G, to Bharti Airtel’s already substantial holdings, and reflects the primary driver for MNO consolidation:  the emergence of Reliance Jio, their disruptive free voice and data offers, and the battle for 4G spectrum and subscribers.

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Amid this consolidation, what will be the impact on tower tenancy ratios, and what will be the impact on the tower transaction pipeline as India’s carriers increasingly seek to monetise their towers to reduce debt and re-invest in their core business?

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TowerXchange: What will be the implications for Bharti Infratel if the Vodafone-Idea merger does proceed?

The implication for Bharti Infratel on negative side will be reduction of one big customer and possible exits on some common sites.

On the positive side, the said merger would create a very strong and committed operator with passion to match other two large operators in terms of its data network footprint, instead of two operators who were heretobefore operating on a sub-optimal basis in this regard – with inadequate spectrum leading to sub-optimal data network rollouts.

TowerXchange: What is the overlap between their respective networks, thus the number of co-locations that might be at risk? Are there terms under which they can be cancelled?

All sharings including Vodafone and Idea are under terms of a common MSA which provides for exit charges in case of premature exit of any site. While clearly there would be some overlap between the two, we are neither allowed nor as a matter of principle give any specific details for any of our customers.

TowerXchange: What magnitude of reduction in total network capex, including new tower builds and new co-locations, might a merger between Idea and Vodafone result in?

As stated in my first answer, with availability of requisite spectrum in the merged entity, the rollouts might be more vis-à-vis individual rollouts, which could result in higher sharings and possibly higher capex at towercos.

TowerXchange: As a shareholder in Indus Towers, what could be the implications of the Vodafone-Idea merger for the ownership structure of that entity?

The merger would have no implication since in any case 42% is intended to be kept outside the merged entity, leaving only 11.15% inside. In any event, Shareholders’ Agreements provide adequate protections to all shareholders, including minority.

India’s carrier consolidation threatens to render thousands of tenancies and towers redundant, downwardly recalibrating tower valuations overnight – particularly the stand-alone towers of Idea and Vodafone, which are to be monetised as part of the merger.

American Tower had reportedly been courting the acquisition of Idea Cellular Infrastructure Services (8,886 towers with a tenancy ratio of of 1.74x) and Vodafone India’s 10,926 stand alone towers, which have a tenancy ratio of 1.45x. American Tower reportedly require assurances that Vodafone and Idea tenancies would survive through the merger for at least 8-10 years.

Vodafone and Idea’s aren’t the only towers on the market in India: heavily indebted GTL Infrastructure (28,000 towers) continues to seek new investors, Ascend Telecom (5,222 towers) has been refinancing, and Tower Vision (8,400 towers), which has been rumoured to have been on the block for years rather than months, has reportedly suspended their latest sale process, with an insurmountable gap between valuation and the bid of a private equity buyer. Even Tata is getting in on the act, reportedly being in negotiations to sell their 26% stake in the former Viom Networks assets to new majority owners American Tower.

Equity in Indus Towers also seems likely to be shaken loose by the Vodafone-Idea merger, with Idea’s 11.15% stake to be sold as the combined entity seeks to delever to 4.1x, with Vodafone India’s 42% stake in the joint venture with Bharti Airtel also likely to be sold.

Vittorio Colao, Group CEO of Vodafone, told investors in March 2017: “Importantly, Vodafone’s 42% Indus Towers stake will remain outside the new company, and we will explore strategic options to monetize part or whole of this valuable asset… the Indus agreements are written in such a way that the three partners altogether influence the destination of their stakes. So, it’s obvious that the fact that now us and Idea are together makes our voice at the table stronger for both their 11% and our 42%. But let me say that essentially, our interests are aligned to the ones of Airtel... And we will be all aligned in a good monetization solution.” (Due acknowledgement to Seeking Alpha for the call transcript).

Bharti Infratel seem the most likely buyer of Vodafone and/or Idea’s equity, supplementing Bharti Airtel’s existing 42% stake in Indus Towers. The Indus Towers and Bharti Infratel portfolios are highly complementary with minimal overlap since the former focuses on 15 circles, the latter on the remaining seven. When TowerXchange asked Bharti Infratel for comment, on March 27 2017 they told us that no formal process nor bilateral talks had been initiated with Indus at that time. Nonetheless, Bharti Airtel has been restructuring the Infratel balance sheet, and may be gearing up for a run at the Indus Tower equity. Bharti Airtel sold a 10.3% equity stake in Bharti Infratel to KKR and CPP for US$952mn, and has also transferred 11.3% equity to wholly-owned subsidiary Nettle Infrastructure for US$1.046bn, which could be the first step in a process to monetise a controlling stake in the tower business. Such a move would render Bharti Infratel truly independent, which may be necessary to comfort rival MNO stakeholders in Indus, and would also provide an opportunity to raise further capital to acquire the US$5bn+ rated Indus Towers equity. Bharti Infratel’s valuation nosedived below Rs 300 after the Vodafone-Idea talks hit the public domain, but has since recovered and at time of writing was up 6.5% since the turn of the year.

With all these towers, and equity in India’s largest towerco, potentially coming to market, who are the other prospective bidders besides Bharti Infratel and American Tower? The sale of RCOM’s Reliance Infratel (now Towercom) to Brookfield has received approval from the Competition Commission of India, and the investor may consider supplementing the acquisition. Brookfield is not the only financial investor circling the market: Tillman Global Holdings had been in negotiations to acquire Reliance Infratel in 2016, and retains an appetite for Indian towers, while minority stakeholder in Idea Axiata, and by extension their towerco edotco, have also been rumoured to have an appetite for Indian towers.

“As part of the due diligence process, we’ve undertaken a detailed mapping exercise, looking at the overlaps between every one of our 273,000 combined sites,” Vodafone CFO Nick Read told analysts in the aforementioned March 2017 call. “This analysis has shown that we can reduce the site count by over 20%. Wherever possible, we would aim to cut third party sites rather than Indus Towers. With both companies only partway through their roll out of 4G, we also expect substantial opex and capex savings through a combination of site avoidance, relocating surplus equipment and other operational savings.”

Former Viom Networks CEO Syed Safawi was quoted in the Economic Times of India as having estimated that 8-9% of 2G tenancies could be cancelled in the coming 24 months, equating to 85,000 co-locations: “Return multiples over a seven year horizon would have fallen roughly 1-2x (of operating margin) which is showing in the revaluation of the bids,” added Safawi.

In their Q3 FY17 Vodafone had 118,822 tenancies on Indus Towers, Idea 31,544. Edelweiss Securities report that 39.5% of Bharti Infratel’s revenues come from Vodafone and Idea. In January 2017 CLSA forecast that the Vodafone-Idea merger alone “could lead to a loss of 14,000 tenancies for Indus Towers and 4,000 tenancies for Bharti Infratel.” Based on current tower and co-location counts, such an adjustment could reduce the tenancy ratio of Bharti Infratel from 2.28x to 2.16x, and reduce Indus Towers from 2.35 to 2.24x. However, the brokerage firm later suggested that the “tenancy hit from potential Vodafone-idea merger is likely only after FY19.”

Of course, India’s other towercos would be similarly affected by MNO consolidation, for example Vodafone and Idea were expected to make up 26% of American Tower India’s revenue after the acquisition of Viom Networks.

MNO consolidation always looks like worse news for a country’s towercos than it really is, although admittedly the merger of #2 and #3 operators Vodafone and Idea, and the merger of Airtel and Telenor, will have more effect than the consolidation of Aircel, MTS and Reliance. Ultimately, the synergy of Vodafone and Idea is motivated by the finite amount of overlap between their subscriber bases and networks; Vodafone is traditionally stronger in tier one cities, with Idea Cellular stronger in tier two cities and rural areas – “we tend to be strong where Idea is weak and vice versa,” Vodafone CEO Colao told investors.

The main driver of co-location and new build is not the number of MNOs, but their appetite to deploy capex to optimise spectrum. The Indian MNO landscape, weighed down by almost US$70bn in debt, is becoming more rational – spectrum is being concentrated in the hands of companies with healthier balance sheets. Towercos may see a setback to tenancy ratios of a magnitude of 0.1, but that will quickly be offset as 4G rollout race continues apace, with 5G coming on the horizon.

TowerXchange foresees the emergence of a duopoly of tower super-powers in India. Eventually American Tower are likely to sweep up the stand-alone Idea and Vodafone towers held outside Indus Towers, and may yet find a way to extract the more desirable Chennai Networks assets (18,000 towers) from GTL Infrastructure. Indus Towers could become a subsidiary of Bharti Infratel, control of which may pass into private ownership. Tower Vision and Ascend Telecom (5,222 towers) could also be acquired if the valuation gap can be closed. These ownership changes come at a difficult time for the new owners of RCOM’s 45,000 towers Brookfield, who are likely still assessing what they have bought – it may be difficult for the Canadian pension fund to “double down” on their Indian investment, although they are clearly capable of writing a big cheque to compete with American Tower and Bharti Infratel.

By 2020 TowerXchange forecast that 58% of India’s towers will have been absorbed into either American Tower or what is now Bharti Infratel. We also forecast that towerco penetration will exceed 90%, particularly as around 2020, we expect the 4G network to start becoming a commodity, at which point we could see Reliance Jio joining BSNL in carving out their towers into a towerco.