4G drives the restructuring of the Indian tower industry

It is increasingly apparent that the 4G rollout will have a significant effect on the structure of the mature, hitherto stable Indian tower industry. While MNOs committed outlay of Rs66,000 crore (US$9.9bn) in India’s most recent round of spectrum auctions did not precipitate any immediate tower monetisations to raise capital, it seems the cost of rollout, exacerbated by competitive pressures created by Reliance Jio’s innovative tariffs, has prompted several MNOs to reconsider monetising their towers, as well as prompting consolidation among towercos and MNOs.

Phase one of the 4G rollout in India has, to date, consisted primarily of loading 4G onto MNOs’ existing sites. Because master lease agreements in India are structured to derive a relatively small fee for loading, the equivalent of 10-15% of a tenancy, rather than 80-100% of a tenancy (as it is for towercos in the U.S.), the full effect of 4G on towerco profitability has not yet been seen.

The 4G rollout will soon require that new sites be added as more affordable 4G devices come on to the market, as more subscribers take up 4G, traffic increases, and as networks need to be densified to deliver a true 4G experience. In phase two of the 4G rollout TowerXchange predict a significant uptick in new full blown tenancies and new build once the “low hanging fruit” of overlay on existing sites is harvested. Deloitte has forecast that tenancy ratios, currently around two in India, will rise to almost 2.5 by 2020.

As India’s first all-IP network, Reliance Jio is a benchmark, albeit an atypical one. While about half Reliance Jio’s rollout is co-located on towerco sites, they have self-deployed over 25,000 new sites, mostly micro sites, and have suggested they could deploy a further 45,000. Reliance Jio continues to rapidly deploy capex, and is raising Rs30,000 crore through a rights issue, bringing their total investment over Rs2 lakh crore (US$27bn).

While network capex is rising across the board, we have not yet seen other Indian MNOs self-deploying micro sites in large numbers, perhaps because other MNOs have a more symbiotic relationship with a towerco (Bharti Airtel with Bharti Infratel and Indus Towers, with which they are joint venture partners with Vodafone India and Idea Cellular).

With Reliance Jio challenging incumbents on several fronts: network strategy, tariffs and technology, India’s leading MNOs have raced to deploy their own 4G base stations. This accelerated rollout has both added value to the towercos hosting many of the utilised sites, and at the same time put pressure on the balance sheets of the MNOs who own significant equity stakes in many of the same towercos. These twin pressures have re-invigorated the formerly nascent Indian tower transaction pipeline.

One can increasingly divide India’s towercos into buyers and sellers – those seeking to grow inorganically, and those seeking to complete an exit strategy. TowerXchange count American Tower, Indus Towers and Bharti Infratel among potential strategic buyers, joined by a cluster of funds with an appetite for Indian towers, including Brookfield, CPP, KKR and Blackstone, as well as tower entrepreneurs such as the Ahuja family’s Tillman Global Holdings, backed by TPG.

American Tower, which has been rolling up Indian towercos since 2009, has already taken the prized Viom Networks assets off the table, and Chairman and CEO James Taiclet recently said “we are open to those discussions with any potential sellers.”

Bimal Dayal, recently promoted CEO of Indus Towers, recently told TowerXchange they were open to the idea of acquisitions, adding “M&A is a game of synergies given the scale of our footprint. Any potential acquisitions must have a good fit with our rollout strategy; there must be a need from our clients for those locations.”

After Tillman balked at the deal, Brookfield recently signed a binding agreement to acquire RCOM’s Towercom (formerly known as Reliance Infratel), which owns ~45,000 towers. For several years, RCOM had struggled to find a buyer for their towerco, but benefitted from a substantial Reliance Jio co-location package, which brought their tenancy ratio close to two, although the impact on tower cash flow would have been dampened by a substantial discount agreed between brothers Mukesh and Anil Ambani’s MNOs, which the latter recently described as “virtually merged”.

Bharti Infratel could be another buyer, but parent Bharti Airtel are also exploring the sale of a substantial equity stake, with the Economic Times suggesting Brookfield, KKR and CPP all have appetite for stakes reportedly between 40-51% of the towerco. Airtel’s stake in Indus Towers is also contained within Bharti Infratel, so any investment opportunity in the Bharti Infratel platform (already 28% owned by public shareholders) could increase third party investor access to India’s largest towerco.

Idea Cellular are also rumoured to have appointed advisors to explore the monetisation of some or all of their 16% stake in Indus Towers, and/or the monetisation of Idea Cellular Infrastructure Services, their captive towerco, within which some ~11,000 towers are held outside of the Indus Towers platform. Idea Cellular Infrastructure Services has been proactively leasing up the towers, which reportedly have a tenancy ratio of 1.8.

Rumours persist about the potential sale of India’s smaller towercos, Ascend Telecom and particularly Tower Vision. And there is a growing sense that, amid GTL Infrastructure’s balance sheet restructuring, the more attractive 18,000 Chennai Networks portion of GTL’s portfolio could be monetised, although valuations are affected by the uncertainty about the 86% of revenues that reportedly come from Aircel: the anchor tenant is in the process of being acquired by RCOM. The business may also have to be restructured, as a deal to recast GTL’s debts in 2011 reportedly restricts carving out the Chennai Networks towers.

The final piece of the 457,597 piece Indian tower portfolio jigsaw is BSNL, whose carve out of their ~65,000 towers is dragging on into another year.

MNOs’ need to raise cash for 4G and towercos jockeying to benefit from the rollout have both played a significant part in prompting tower assets to change hands in India, but the restructuring has only just begun. “Eventually the Indian market will be consolidated into maybe four larger towercos,” suggested Indus Towers CEO Bimal Dayal.

With 3G coverage of India approaching 95% within the next two years, 4G has already taken root and is spreading rapidly: the overlay is reportedly already on over 20% of sites. After Airtel launched first, Reliance Jio been a disruptive innovator in 4G, launching India’s only all-IP, 4G network, rapidly rolling out new infrastructure and purchasing prized spectrum. India’s other MNOs have followed suit by increasing the pace of their 4G network rollout, and looking to monetise their infrastructure to raise capital for the most expensive spectrum auctions in India’s history.

While Reliance Jio has rolled out over 100,000 base stations, in terms of network size, Bharti Airtel still leads the market with between 150,000 to 160,000 base stations across the country including 2G, 3G and 4G towers. Idea and Vodafone have around 100,000 each, but neither has all-India coverage.

According to CRISIL research, India’s top three telecom operators – Bharti Airtel, Vodafone India and Idea Cellular—are expected to spend around Rs 80,000 crore (almost US$12bn) in network capex over the next two years, which is 25% higher than the aggregate network capex in the previous two.

In last year’s spectrum auction Bharti Airtel, Vodafone India and Idea Cellular, fortified their 4G spectrum holdings across key circles, giving them adequate 4G spectrum to counter Reliance Jio.

The Rs66,000 crore outlay bring the total invested in spectrum by India’s MNOs to over Rs 350,000 crore (over US$50bn) in the last five years.

At 14x the price of the 2,300MHz spectrum and 4x the price of the 1,800MHz, MNOs clearly felt the coveted 700MHz and 900MHz spectrum was overpriced, thus none was sold, so further attractive spectrum for 4G could come to market in the future. In the meantime, with higher frequencies being used for 4G, greater cell site density will be required - good news for the Indian tower industry.

While industry debt in Q1 2016 was around Rs2 lakh crore (US$27bn), the capital outlay for the recent auction will have significantly increased MNOs’ leverage. India’s MNOs are taking different approaches to raising capital for 4G spectrum and rollout. Vodafone India has secured an investment of Rs47,700 crore from their parent company. Idea Cellular has issued corporate bonds and is exploring monetising its towers. Meanwhile Bharti Airtel are releasing further equity in their towerco, Bharti Infratel.

Reliance Jio is raising capital through share issuances whilst leveraging co-location to accelerate time to market. TowerXchange understands around half of the Reliance Jio network is co-located, with 30% of their sites on RCOM (Towercom) towers, 20% on other towercos’ structures (The Economic Times reported that Reliance Jio had taken 14,000 tenancies with Indus, 5,000 with American Tower and around 6,000 with GTL at lease rates varying from Rs 28-33,000). While Reliance Jio has built over 25,000 captive towers to date, and has suggested they could build 45,000 more, TowerXchange understand many of these sites are too small to accommodate multiple tenants, thus we think it unlikely Reliance Jio will launch its own towerco soon.

After the cancellation of 122 MNO licenses in 2012 created a more rational MNO landscape in India (at the expense of tens of thousands of towerco tenancies), the market has settled into a two tiered structure, led by Bharti Airtel, Vodafone and Idea Cellular.

Reliance Jio is making inroads in the high value, 4G customer segment, the addressable market for which is estimated to be around 5% of the total 1bn current subscribers.

While there has been speculation in the press about a prospective Vodafone-Idea merger, or even a Vodafone-Reliance Jio merger, consolidation is a more immediate prospect among a second tier of MNOs, led by Reliance Communications (RCOM). RCOM is integrating the acquisition of Sistema and is finalising a deal to acquire Aircel. Meanwhile, Airtel is reportedly in “advanced talks” to acquire Telenor India, while Tata DOCOMO could be another acquisition target.

While Morgan Stanley expect MNO consolidation to slow tower tenancy growth, a view echoed by Goldman Sachs whose models suggest up to 10,000 Bharti Infratel tenancies could be at risk because of consolidation in the coming year, towercos take a more positive view.

“It is not healthy for the industry to have say ten operators, including five or six sitting on spectrum without the wherewithal and means to rollout,” Bharti Infratel Chairman Akhil Gupta told TowerXchange. “Consolidation remains a work in progress, but it will leave spectrum in the hands of companies that have the resources for rollouts. So Indus Towers and Bharti Infratel and the entire tower industry in India will benefit from each of these developments.”

American Tower’s Amit Sharma, President of American Tower Asia, concurred, telling the Economic Times: “carrier consolidation has been historically positive for our operations, and we expect strong growth trends in India, going forward.”