Telecom Towers - unlocking value

Physical assets are rarely core to the business, unless you are in the commodity business. For businesses where intellectual property assets or brands are key to success, physical assets need not be the focus of company resources or management attention. The point here is — what’s non-core can be carved out, and thus unlock value for the company and its shareholders.

This process is currently on in the telecom industry, where cellular companies are increasingly saying – Do I really need to put up cell towers on my own? This minor question has led to a multi-billion , value unlocking process, and a large deal-making opportunity for investment bankers and PE players.

The business opportunity here is at two levels – there is scope for standalone tower companies to build and operate towers for one or more telecom companies; some telecom companies may even hive off their tower assets completely or partially. In fact, all of this is happening, and the size of the opportunity is rather large. Both options have room for strategic and private equity investors.

India had around 110,000 telecom towers at the end of March 2007. Industry will add around 90,000 towers each in FY08 and FY09. At an average estimated cost of about Rs 20 lakh per passive tower (not including electronics), the investment required is Rs 18,000 crore each year. Active elements like electronics cost a similar amount. So the total investment planned is around Rs 36,000 crore, or almost $10 billion, per year. If each telecom company continues setting up its own towers, then this investment will not be very efficient. A tower, alteast the passive elements, can be shared and this will improve returns on investment.

Looking at the increasing size of investments, telecom companies have come around to the view that going it alone in a non-core activity isn’t a good idea. So far, most of the tower assets are owned by telecom companies themselves. Analysts believe the market value of a tower could be around Rs 1 crore on an average. That is if you treat a tower as an annuity asset, and don’t factor in growth in number of towers. So the existing asset base as on March 2007 could be valued at over Rs 1 lakh crore, or $27 billion. Now, what happens if you price in growth? The best answer for this perhaps comes from the valuations telecom companies are asking for their tower subsidiaries. And this seems to be as high as Rs 3 crore per tower on the existing tower base.

For example, Reliance Communications (RCL) hived off its tower assets into a company called Reliance Telecom Infrastructure (RTIL). The company is believed to have had around 14,000 towers at the end of FY07. RTIL will invest in additional 20,000 towers in FY08. According to industry sources, RTIL has appointed JP Morgan to raise $500 million through minor equity dilution. JP Morgan is believed to be asking for a valuation of $8-10 billion for RTIL. This seems to be somewhat more than Rs 2 crore per tower. Earlier this month, Tata Teleservices (TTSL) announced plans to unlock value from its tower assets.

TTSL reportedly has 6,000 towers. Media reports suggest the value of its tower subsidiary could be around Rs 12,000 crore, or $3 billion. This suggests a value close to Rs 3 crore per tower. There are also benchmarks available from global independent tower companies. According to a report by Kotak Securities, American Towers owns 22,000 towers and has a market cap of $17.5 billion, or a valuation of Rs 3.3 crore per tower. Crown Castle owns 23,660 towers and has a market cap of $10.3 billion, or a valuation of Rs 1.8 crore per tower.

SBA Communications owns 5,550 towers and is valued at Rs 2.6 crore per tower. The telecom tower business could thus be a $60 billion opportunity at a valuation of say Rs 2 crore per tower. Even if you take 10% dilution, you have space for $6 billion of external capital. Given that, an investment of $20-billion is required over the next two years, $6 billion seems a reasonable number. “This could come from a combination of PE and strategic investors,” says a fund manager of a big-ticket PE fund currently looking at this space. Both American Tower and Crown Castle are reportedly interested in an India presence.

So expect some big deals in this space. Bharti hived off its tower business and related infrastructure into a wholly- owned subsidiary called Bharti Infratel in January 2007. Bharti currently has around 40,000 towers and is expanding furiously. Looking at the valuations that is being talked about, Bharti Infratel could even be a $20-billion company.

A 10% deal here can easily be India’s largest PE deal. Standalone tower companies could also offer space for deals. Quipo Telecom Infrastructure, a standalone tower company, already has three external investors – IFC, Washington, FMO and Swedfund. GTL Infrastructure and Essar Telecom Infrastructure, independent tower companies, could also raise equity at some point. Xcel Telecom, another standalone company, claims to have a $500 million equity commitment from Q investments, a Texas-based investment firm.