As forecast by TowerXchange and most analysts covering India’s tower market, consolidation among tenants is to be reflected in consolidation among towercos, with Indus and Infratel joining forces to create a 163,000 tower giant. Long joined at the hip by non-compete arrangements and Infratel’s stake in Indus, the union of the two towercos unlocks financial and operational synergies, and gives global investors direct access to Indus towers. Bharti Infratel Chairman Akhil Gupta kindly responded to TowerXchange’s questions about the merger.
TowerXchange: Thank you for agreeing to speak to TowerXchange about the landmark merger of Indus Towers and Bharti Infratel, creating the world’s largest tower company (outside of China). There has always been a natural synergy between Indus and Bharti Infratel; you share a common philosophy, business model, you even use adjacent office space. But of course you operate largely in different circles. Can you comment on just how much overlap there is between your capabilities and your networks, and how you see that natural synergy now yielding operational efficiencies through the merger of the entities?
Akhil Gupta, Chairman, Bharti Infratel:
Most of the costs of a tower company are linked to the overall tower and co-location count where as you rightly mentioned, Indus and Infratel have limited overlap largely due to different telecom circles of operation. Even in the four circles that we overlap, a non-compete was agreed upon at the time of incorporation whereby the new tower rollouts would be done by Indus while Infratel could continue to own and operate its existing towers and add any additional sharing operator (or co-location) to those towers. Thus from an infrastructure perspective, there is very little duplication at the circle level.
We do however, envision some operational synergies such as:
1) Savings on the dividend distribution tax on the dividends paid by Indus to Infratel. On the last declared Indus dividend for FY17-18, we expect savings on account of dividend distribution tax to be in the vicinity of ~Rs2bn per annum which pertains to Infratel’s 42% stake in Indus currently.
2) The combined opex and capex of the two companies are approximately Rs.145bn and Rs.35bn respectively and while the exact figures are yet to be worked out, we do expect savings of a few percentage points on account of economies of scale and rationalisation of overlapping spends.
TowerXchange: What is the anticipated timeline for the completion of the merger?
Akhil Gupta, Chairman, Bharti Infratel:
The transaction is expected to complete before the end of the financial year ending 31 March 2019.
The transaction is subject to approvals from the relevant regulatory authorities, including from CCI, SEBI, NCLT, DoT (FDI approval), Bharti Infratel shareholders as well as closing conditions being met.
TowerXchange: What will be the capital structure of the combined entity Indus Towers and what does that mean for the company’s independence in being able to lease sites on a non-discriminatory basis to all Indian MNOs?
Akhil Gupta, Chairman, Bharti Infratel:
Both Indus and Infratel already provide passive infrastructure to all operators on a non-discriminatory basis.
With the merger, we are seeking to dissolve a dual capital structure where global investors can invest directly in the largest towerco outside China with a pan-India presence. This is much more desirable than the current structure where the only way to invest in Indus is through the listed Infratel entity. With no single operator owning a majority position and also having an Independent Chairman in the combined entity, we believe the new structure would further aid in dispelling any perceived issues around the Company’s independence.
TowerXchange: There have been forecasts that MNO consolidation could lead 100-200,000 tenancy exits across Indian towers in the near term. Indeed, shortly prior to the merger announcement, Indus revealed an expectation that tenancy exits could see their revenues could drop 10% between FY18 and FY20, before resuming growth. Do you foresee MNO consolidation causing a similar dip in revenues, and resumption of growth, for the combined entity?
Akhil Gupta, Chairman, Bharti Infratel:
With potential exits from the remaining smaller operators and the impending Vodafone-Idea merger, we expect a decline of ~50-60,000 tenancies in total for Indus and Infratel over the next 12-18 months. However, the revenue and financial impact is difficult to quantify without knowing the specific site-wise details and the timing of exits as these will involve exit penalties as well. While there would be some revenue loss due to exits, we expect new orders for co-locations, loadings and normal escalations to more than make up for those in the coming years.
With potential exits from the remaining smaller operators and the impending Vodafone-Idea merger, we expect a decline of ~50-60,000 tenancies in total for Indus and Infratel over the next 12-18 months. .... While there would be some revenue loss due to exits, we expect new orders for co-locations, loadings and normal escalations to more than make up for those in the coming years
TowerXchange: What are the key contractual terms that govern an MNO seeking to exit a tenancy on a Bharti Infratel or Indus Tower? Are those terms largely similar across the two entities?
Akhil Gupta, Chairman, Bharti Infratel:
The exit terms are similar across the two entities and across operators. Early termination typically involves payment of exit penalties of either 35% of unpaid amount for the remainder of the term or 12-month rent, whichever is higher, where exit takes place after five years and more in other cases. In addition there will be rebasing of rents upwards, to be paid by the remaining operators in line with the slab pricing system.
TowerXchange: Forgive the focus on tenancy exits, let’s talk about upside: what visibility or forecasts are you putting against network investment, translating into new build and new co-locations, both by Jio and their newly combined competitors?
Akhil Gupta, Chairman, Bharti Infratel:
With overall coverage of 4G in India being still only 50-55% of 2G & 3G coverage, it is clear that all three remaining private operators i.e. Airtel, Voda-Idea and Reliance Jio would have to rapidly roll out 4G all over the country over the next 18-24 months at most, to match their 2G coverage. Also considering that by then 5G would be a reality, the demand for new sites is expected to be robust over next several years. As is well known, since 5G will cater to many critical applications the coverage will have to be seamless, thereby requiring much larger number of sites especially since 5G is likely to be on higher frequencies like 3.5GHz.
However, since we do not provide guidance, we would not be able to give specific estimates at this stage. We are however, fully prepared for meeting the anticipated surge in demand in the coming years.
TowerXchange: The combined Indus Towers is forecast to carry relatively little debt compared to international tower companies – does this suggest a potential war chest for acquisitions or diversification?
Akhil Gupta, Chairman, Bharti Infratel:
As mentioned in the press release, on the assumption that both Idea Group and Providence elect to receive the maximum possible cash consideration, the pro forma net debt of the combined company would have been INR56bn (US$0.8bn) as at 31 March 2018. This is equivalent to 0.5x net debt/LTM EBITDA.
Bharti Airtel and Vodafone have also agreed a capital structure and dividend policy which is expected to be implemented post completion. The combined company is expected to distribute any excess cash flow to its shareholders through dividends or share buybacks, without exceeding a maximum leverage ratio of 3.0x LTM EBITDA. However, this is a ceiling and at this time there is no defined path to reach this level of leverage. We will evaluate any opportunities for acquisitions, et cetera. and will communicate the same to the market when we have any such plans.
TowerXchange: With as few as 20-30% of Indian towers fiberized, and Jio citing the lack of fiberisation as a motivating factor for them to self-deploy several thousand towers, what will be the combined Indus Towers’ appetite to diversify into provision of fibre?
Akhil Gupta, Chairman, Bharti Infratel:
Fiberisation is the need of the hour given the surge in network traffic in the last few years. Currently, operators own and rollout most of the fiber themselves. We at Indus/Infratel evaluate opportunities to rollout fiber where we do not have a direct conflict with our customers i.e. operators.
The Smart City project is the perfect example of such an opportunity where we have either exclusivity and/or free right-of-way. Indus and Infratel are currently implementing Smart City projects in Vadodara, Delhi and Bhopal and rolling out fiber selectively after discussion with the operators on their requirements. The merged towerco will proactively work with all its customers to fiberize the sites owned by the merge co with an aim to share transmission with all operators co-located on such sites.
TowerXchange: According to Analysys Mason, through October 2017 Indus partners Airtel, Vodafone and Idea had self-deployed ~1,000 small cells – what prospect is there to capture such opportunities on the newly enlarged Indus Towers balance sheet going forward?
Akhil Gupta, Chairman, Bharti Infratel:
With 95% of population currently covered by existing infrastructure, we believe enhancement of capacity will happen with a combination of macro and micro towers (small cells, et cetera). So far operators have rolled out some small cells on a selective basis, but their key focus still remains launch of 3G/4G across their 2G towers and hence we have not seen a significant growth in this segment. We believe in the long run small cell rollout will involve large investments due to higher volumes. Given the sharing potential, the towercos are best suited to rollout small cell networks for the operators similar to what we have accomplished on the macro side.
We at Indus/Infratel are ready with various products and once the same are approved and standardized by operators, we will be participating in this segment in a big way in the near future.
TowerXchange: In the last year, what proportion of new Bharti Infratel and Indus Towers sites have been infill, data only or street furniture-type sites as opposed to larger macro towers? And how do you foresee that trend continuing in the next 2-3 years?
Akhil Gupta, Chairman, Bharti Infratel:
As discussed above, in the last year or so operators have been focused on increasing their 3G/4G reach by way of additions or loading on existing 2G sites. We have therefore not yet seen a meaningful increase in infill sites or street furniture. However, with incumbents entering the last leg of 3G/4G rollout via loading and new entrant focusing on 99% population coverage, we believe the next round of network rollouts will be driven by infill sites, small cells, fiber, et cetera.
TowerXchange: Please explain how you see the merger enhancing Indus Towers status as prospective infrastructure partner for the creation of 100 Smart Cities in India?
Akhil Gupta, Chairman, Bharti Infratel:
As a single entity, we can enhance our prospects in future tenders by our combined proof of concept, and experience in the ongoing Smart City projects. One entity also reduces governance for other stakeholders like Government, municipal corporations, consortium partners, vendors, et cetera. Internally, we will look to pool our resources and knowledge base for a new vertical exclusively working on these projects.
TowerXchange: Finally, please sum up the drivers and benefits of the merger between Bharti Infratel and Indus Towers.
Akhil Gupta, Chairman, Bharti Infratel:
The key drivers and benefits are as follows:
- Creating a listed pan-India tower company which will be the largest tower company in the world outside China with over 163,000 towers
- Dissolving a dual ownership structure with one private entity in the form of Indus and one listed entity in the form of Infratel which restricts direct access for global investors in Indus which could lead to removal of hold-co discount
- Creating a more independent structure with no single operator owning majority.
- Leveraging highly complementary footprints to continue to support the delivery of the Government of India’s vision of ‘Digital India’
- Continuing to offer high quality passive infrastructure services to all telecom operators on a non-discriminatory basis
- Operational synergies in the form of capex/opex savings, and through the envisioned simplification of organization structure
- Potential of some leverage vs the current net cash balance sheet if both Idea Group and Providence elect to receive the maximum possible cash consideration in the merger transaction
