30 May 2009, 0308 hrs IST, Joji Thomas Philip, ET Bureau
NEW DELHI: The days of standing tall are virtually over. India’s standalone telecom tower companies are crumbling under the crushing weight of a credit crunch, few new orders, and competition from the gigantic tower networks owned by mobile phone companies themselves.
A spate of mergers and acquisitions will certainly help a few standalone tower companies survive to tell the tale. But market watchers say without a serious makeover of their business model, it may be hard to ring in sustained profits
Just a year ago, standalone tower companies were enjoying exceptional good fortune in the world’s fastest-growing telecom market. Backed by foreign private equity funds in a two-year-old sector, these companies had enough cash in their war chest to start looking for acquisitions and even expanding overseas.
But the global economic recession, which began to make itself felt from the start of 2009, rudely brought this dream run to a halt. Capital is now hard to come by in this investment-intensive sector, forcing smaller players to look for mergers and sellouts.
The M&A list is getting longer by the day. Xcel Telecom, which was incubated by Dallas-based $4-billion multi-strategy fund Q Investments
, is looking for the exit door. Xcel itself had acquired Tics Telecom, a Punjab-based telecom infrastructure firm, for an undisclosed sum before selling out to Nasdaq-listed American Towers (ATC) for Rs 700 crore.
ATC is also in talks with Gurgaon-based tower company Independent Mobile Infrastructure that is present in 10 circles with 400 towers.
Essar Telecom Infrastructure, the country’s second-largest independent mobile tower company, has also approached ATC for a possible merger or even a complete sellout. This is not the first time, though.
Earlier, ETI, which owns over 4,500 towers, was talking with Tata-Quippo for a merger
, but could not make much headway. Last year, ETI was on the verge of sealing a merger deal with GTL Infrastructure, but the $2-billion deal fell through at the last minute.
Even Quippo Telecom Infrastructure, which till recently was vying with GTL Infrastructure to be the country’s largest independent tower company, had to merge with the tower arm of Tata Teleservices in December 2008 to take on larger players. The newly-created company could boast of over 18,000 towers and commanded an enterprise valuation of about Rs 13,000 crore ($2.6 billion).
Other standalone tower firms too are headed this way. Executives in the tower business say, South India-based firms such as Aster Teleservices & TVS Interconnect Systems are also reportedly on the block. But earlier this week, an executive with private equity firm New Silk Route, which owns majority stake in Aster, denied his company was exiting the tower company.
So what went so spectacularly wrong? Has this sale season been triggered by a mere cash crunch or is it the symptom of a deeper fault line in the business that has cracked open with the first tremors of a crisis?
BK Syngal, senior principal, Dua Consulting, and former chairman of VSNL, says the primary reason is that the business model of small players has failed.
“Over the past two years, all major telecom operators have hived off their towers and other related infrastructure into separate companies. Standalone players who have between 3,000 and 5,000 towers cannot compete with the hived off tower arms of the telcos in terms of scale,” he said.
“Scale is precisely the reason why Quippo and the Tatas merged their tower arms. From about 22,000 towers currently, we are looking at a portfolio of over 60,000 within the next two years. No player with less than 60,000 will be able to survive in the market,” said QTIL group president and MD Arun Kapur. “You need such numbers to cover about 70% of the country’s geographical area,” he said.
It may be a Herculean task. Indus Towers, a three-way joint venture between Bharti Airtel, Vodafone Essar and Idea Cellular, has over 100,000 towers, making it the largest tower firm in the world.
Bharti Infratel, which holds Airtel’s towers in circles where Indus is not present, has close to 30,000 towers. Reliance Communications has consolidated
its 48,000-plus towers in a new entity called Reliance Telecom Infrastructure while the recently established Quippo-Tata combine has over 21,000 towers.
New entrants in the mobile phone business prefer to tie up with these larger established players rather than sign on standalone tower companies as it reduces risk as well capital investment.
According to industry estimates, this model can reduce capex by up to 60% and rollout can be much faster. For instance, Telenor, which picked up 60% stake in Unitech Wireless, entered into a tower sharing deal with the Quippo-Tata combine. The latter is also talking to other new players Sistema-Shyam and S Tel for similar deals.
QTIL’s Kapur says new entrants choose larger players because it brings down costs significantly. “We are perhaps the only completely independent tower company that is not linked to any operator. We already have committed business from the Tatas, Telenor and several other players. The higher the tenancy rate, the larger the savings for telcos as the overall costs come down. When costs are down, we can invest more in technology, R&D and increasing efficiency,” he said.
But this has been a huge blow for standalone tower companies. The new orders they were banking
on, did not arrive after all.
An senior executive, who recently quit an independent tower company, says the slide started in the second half of last year. “We rolled out towers and then waited for telcos to sign on. But over the past six months, telcos have chosen to go with established larger players to minimise risk,” he said.
The scramble by small and medium tower companies to sell out or seek mergers will only intensify in the days ahead. Industry analysts say the market will soon shrink to four or five large players who are backed by service providers. For smaller players, the dream of cashing in on the Indian telecom success is turning out to be shortlived.