In a mix of rumours and done deals, India hasn’t relented in its flow of news. In this editorial, TowerXchange offers its readers a no frills vision on what is happening in the country, some of its most intricate scenarios as well as nine simple outcomes that the industry might deliver in the short term.
India is a mature tower market but also an evolving one whose shape is likely to change considerably over the next few months. With as many as 43 broadband service providers, many of which only operate in a handful of circles, it comes as no surprise that the top MNOs look at ways to improve their financial efficiency, resulting in merger talks between Vodafone and Idea Cellular, Bharti and Tata Teleservices, MTNL and BSNL (as well as the now collapsed Reliance Communications and Aircel deal) all hitting the news.
If consolidation is good news for MNOs, what are the implications for towerco contracts and cash flow? Let’s look at the biggest deals in turn to see what we know about each of them.
The implications of Tata Teleservices exiting the mobile industry
In recent news, Tata Teleservices (Tata) announced its intention to exit the wireless market and close down its mobile service unit. According to American Tower’s press release on the matter, Tata “accounted for approximately US$80mn, or 5%” of the towerco’s consolidated property revenue and for “approximately US$40mn” in gross margins as of the end of Q2 2017.
Tata was the anchor tenant (and a 33% shareholder) on most of Viom Networks’ sites which were acquired by American Tower in April 2016, which acquired a 51% controlling stake. And most of the non-cancelable contracts between Tata and Viom are still valid for a period in excess of six years.
In a press release on the matter, American Tower stated that it expected to “fully enforce the average non-cancelable remaining contract terms on the leases with Tata Teleservices as well as the other contractual provisions included in the Viom transaction.” But the towerco is likely to experience churn levels above the usual as a result of Tata’s departure from the telecom sector as well as other consolidation processes likely to considerably reduce the number of MNOs active in India.
MNOs in India by subscribers (end of Q2 2017)
Interestingly, the operator planned to go ahead with the shutdown in spite of expected costs of approximately US$5bn and the reasons behind it didn’t seem related to a bankruptcy. In fact, Tata has been affected by the ongoing loss of market share, lack of high-speed spectrum and poor financial results.
Not long ago, Tata used to be the second largest MNO in India but is now in ninth place as a result of its lack of investments in LTE services.
The Q2 2017 Indian Telecom Services Performance Indicators report published by the Telecom Regulatory Authority of India (TRAI) stated that “Tata Teleservices recorded the highest decline of 5.21 million subscribers during the QE Jun-17” as shown in Figure 2.
Figure 2 Tata market performance (end of Q2 2017)
A twist in the tale
Tata’s exit announcement shook the Indian market for just days before Bharti Airtel came to the rescue. In fact, the leading MNO agreed to acquire Tata Teleservices Limited and Tata Teleservices Maharashtra Limited’s consumer mobile businesses. Indian news outlets report that Bharti Airtel has agreed to a cash-free and debt-free deal, exception made for some of Tata’s unpaid spectrum liabilities.
The transaction is still subject to regulatory approval and will entail the takeover of operations in nineteen circles. And while Bharti Airtel will acquire Tata’s 40mn subscribers and spectrum, Tata will retain its stake in Viom Networks.
Sunil Mittal, Bharti Airtel’s Chairman, was quoted saying “On completion, the proposed acquisition will undergo seamless integration, both on the customer as well as the network side, and further strengthen our market position in several key circles … The acquisition of additional spectrum made an attractive business proposition. It will further strengthen our already solid portfolio and create substantial long term value for our shareholders given the significant synergies.”
And if anyone is wondering why Bharti Airtel is interested in acquiring ill-fated Tata, the answer is simple… Fighting hard to keep its spot on the podium while Vodafone and Idea keep moving forward with their merger and plan to become the largest operator in India, and while Reliance Jio continues to claim growing market share.
Bharti Airtel’s move comes after the collapse of the merger between Aircel and Reliance Communications, a merger planned to save both companies from piling debts and falling market share. Reliance Communications’ other plan to monetise and sell its tower portfolio to Brookfield is still ongoing as per the binding contract signed with the financial institution back in December 2016.
Vodafone-Idea merger talks progress
If I could pick one word to describe the Indian telecom industry at this moment in time, that would be volatile. And while we know all so well that consolidation often results in healthier and stronger organisations, we just cannot get over how dynamic negotiations and changes have been in India lately.
In fact, Idea Cellular’s shareholders have approved the merger scheme with Vodafone during a meeting held on October 12. And the next step for the two MNOs is to seek the final approval from the Department of Telecom.
If approved, the merged entity will become the largest MNO in India with over 35% market share and a valuation around US$23bn. And while the two MNOs aim at joining forces to dethrone Bharti Airtel of its spot as first MNO by market share, Vodafone and Idea tower portfolios are coming to market with Brookfield and American Tower as two of the most likely acquirers.
While the merger would reduce the number of tenants on sites leased by the two MNOs, exit penalties due as a result of the cancellation of duplicate agreements (upon consolidation) would still protect towercos from immediate revenue churn.
And whoever buys the portfolios will not only acquire towers but also tenants. In fact, Idea’s 8,886 towers have a tenancy ratio of 1.7 with 15,418 tenants and Vodafone’s 10,926 towers a tenancy ratio of 1.5 with 15,846 tenants.
MTNL-BSNL: could two become one?
The two State-owned MNOs have been in the news for their intentions to monetise their tower portfolios. In fact, while BSNL received the green light to carve out its 65,000 sites into a new entity, MTNL was considering the divestment of its 10,000 tower portfolio.
MTNL has been reporting losses for five fiscal years in a row and struggling to gain market share in the two circles where it operates (Delhi and Mumbai). And recent Indian news have reported the possibility of MTNL’s wireless business merging with BSNL.
The option of a merger between the two State-run operators has been discussed for many years now and has appeared once again in local news outlet over the past couple of weeks. BSNL doesn’t operate in the two circles where MTNL is active, which could allow the two to merge their operations rather than going through complex analysis to combine networks, reduce staff et cetera. However, since MTNL is a listed entity and BSNL is now, the two would need to go through a reverse merger process.
While Indian news outlets revive the possibility of a merger, the fate of their tower portfolio isn’t being discussed and the two operations to carve out and divest assets are possibly still moving forward.
Reliance Jio increases its tariffs
On a positive note for other MNOs, Reliance Jio has finally increased its tariffs by around 15%. The MNO has steadily hiked the price of its plans in an attempt to finally gain profitability. And this comes as good news for other MNOs who have been hit hard by the entrance of Reliance Jio in the Indian mobile landscape with its aggressively priced offering. It must be noted that with the new price increase, the MNO will see its ARPU reaching just half of what it had planned to achieve by now (Rs141 or US$2.17).
Since its commercial launch in September 2016, Reliance Jio has shocked the Indian market with its highly successful marketing strategy, which has earned the MNO more than 123mn subscribers in less than a year of operations. According to the aforementioned TRAI report, “During the QE Jun-17, Reliance Jio Infocom Ltd. recorded the highest net addition of 14.68 million subscribers followed by Bharti Airtel (7.01 million).”
Reliance Jio’s 4G LTE network (the MNO doesn’t offer 2G/3G services) aimed at creating a new approach to data consumption by enticing subscribers to 5Gb or even 10Gb of monthly data usage and the MNO has been working relentlessly to fiberise its sites, building (via build-to-suit and not) a variety of site typologies including In-Building Solutions (IBS), light monopoles, small cells and more.
Towercos completing the Indian makeover
While the competitive landscape among India’s MNOs is undergoing a total makeover, the towerco landscape is likely to reshape quite considerably as well. In fact, a consortium led by KKR and formed by the Canada Pension Plan Investment Board, the Abu Dhabi Investment Authority and GIC Singapore is eyeing a US$11bn transaction to acquire Bharti Infratel and Indus Towers.
According to the Economic Times, the transaction would first require Bharti Infratel to buy out the 58% of Indus Towers held by others (Idea, Providence Equity Partners and Vodafone) and then KKR to increase its interest in Bharti Infratel (from 10% to around 45%).
Bharti Infratel and Indus Towers have always been potential bedfellows - there is almost zero overlapping sites between their two portfolios, their company cultures are similar, their headquarters are in close proximity, and Bharti Infratel manages Bharti Airtel’s stake in Indus Towers, hence financials are already somewhat consolidated.
The proposed combined Infratel-Indus entity would operate over 162,000 towers across India and would jump one step ahead as the second largest towerco in the world behind China Tower Corporation and in front of American Tower.
On separate news, GTL Infrastructure is currently refinancing its residual debt (approximately US$721mn) and plans to switch ownership around March 2018. In the meantime, talks for a takeover by a private equity fund of a controlling stake in Tower Vision, which appeared in the news at the beginning of 2017, seem to have stalled.
Positive long term perspectives
If consolidation among MNOs tends to be seen as a threat in the immediate turn by both towercos and investors, the effects in the long run are often positive. In fact, streamlining the shape of the market by reducing the number of players means adding strength to those who remain active, increasing their subscriber base and their competitiveness.
The Indian telecom industry has been debt-ridden for quite some time now and the consolidation process should improve the financial health of MNOs, leaving only four large players to compete (Bharti-Tata, Vodafone-Idea, Reliance Jio, BSNL-MTNL) followed by a pool of smaller MNOs.
India remains an evolving playground for MNOs and towercos and TowerXchange will keep reporting as it restructures into a new, more efficient shape.
What could change in the Indian market
1. Bharti takes over Tata —> 27.3% market share —> 330mn subscribers
2. Vodafone and Idea merge —> 33.7% market share —> 436mn subscribers
3. Vodafone and Idea sell towers —> 20,000 towers for sale
4. MTNL and BSNL talk merger —> 10.27% market share —> 124mn subscribers
5. MTNL could sell towers —> 10,000 towers for sale
6. BSNL could carve out towers —> 65,000 towers into a new entity
7. KKR could take over Bharti Infratel and Indus —> creating a 162,000 tower entity
8. GTL Infrastructure refinancing —> new ownership by March 2018
9. Reliance Communications sells 51% of Infratel to Brookfield —> New entity named TowerCom Infrastructure
