Foreign giant takes a call on Indian telecom

Other foreign majors are headed for the exit, but US-based ATC sees big potential in tower business

Over the past two years, Sistema of Russia and Telenor of Norway decided to call it a day after writing off their losses and UK-headquartered Vodafone reduced its exposure in the Indian market after merging with Aditya Birla’s Idea Cellular. The exception to this foreign disconnect with the Indian telecom market has been the US giant American Tower Corporation (ATC).

A low-profile player in the otherwise aggressive and noisy telecom business, ATC has in the same period invested over $2.5 billion to acquire telecom tower assets to become India’s second largest telecom tower company after Indus Towers, the mega-joint venture between major telecom service providers. This represents about half its total investment in India ($4 billion) since it set up shop here a decade ago.

Last month, for instance, ATC, grabbed over 20,000 extra towers owned by Idea Cellular and Vodafone combined by forking out $1.2 billion (~7,850 crore). Just two years ago, it had also picked up a majority 51 per cent stake in Viom Network (which was renamed ATC Telecom Infrastructure) by buying out the stakes of Tata Teleservices and other investors for ~7,635 crore and adding 42,000 towers to its asset base.

Headed by telecom industry veteran and former Motorola senior executive Amit Sharma, ATC’s strategy has been simple and opportunistic: to grow the Indian market by acquiring assets that many service providers are keen to divest in the interest of building war chests to fight Reliance Jio’s mega challenge. As a result, ATC has already put in $4 billion for five acquisitions over the past decade.

Now, with 80,000 towers under its kitty and a 20 per cent share of the Indian tower market, the India business is crucial to its global ambitions. The country already accounts for more than half of the 149,000 towers that it owns across the globe (the US remains the biggest market in terms of revenues) and 12 per cent of its property segment gross margins as of Q3 2017.

So, what has made ATC bet on India when other foreign majors are running for the exits? One is that the acquisition of towers is getting much cheaper. In fact, with over 65 per cent of the country’s 400,000 towers up for sale — on account of the Jio threat — it’s a buyer’s market now. For instance, ATC’s latest acquisition of towers from Vodafone and Idea cost around ~39 lakh apiece; compare that with the ~44 lakh per tower it paid to Essar Telecom in 2010.

Second, the tower business offers predictable and stable returns on investment. The huge capital investments in spectrum and hyper-competition that characterise telecom services do not obtain here. “You don’t make a lot of money in tower business. But you can predict your returns on your investment for a long period of time. You can make a stable 10 per cent return on your money every year with certainty,” says a source close to ATC.

The reason for that is simple: tower companies sign long-term rental contracts of at least ten years with service providers that include an annual escalation clause. Since costs are stable, the return on investment is predictable. If the service provider wants to move out before the term of the contract expires, it has to pay a hefty penalty, which includes rental for the unused period.

With monthly rentals of ~25,000 to ~30,000 per tower and an escalation of roughly 2 per cent a year, it takes seven years to break even. That assumption is based on the premise that the company has at least two tenancies on each tower, a rate at which ATC works in the country. About 40 per cent of this revenue it earns defrays the expenses of paying rent for the real estate on which the tower is located and energy costs (the diesel genset to run it). To be sure, costs here are much higher than other global markets, including Africa, and the rentals much lower. But given that the life of the tower is anything between 20 and 30 years, tower companies can make money for a long period of time.

But ATC also has serious competition. Bharti Airtel has already proposed acquiring a majority or full equity in the country’s largest tower company, Indus Towers, by buying out Idea and Vodafone amongst others. It then plans to sell a controlling stake in Bharti Infratel to a consortium headed by PE fund KKR. If that happens, the new entity will have over double the number of towers than ATC, and a ready customer base in incumbent service providers Airtel, and the Vodafone-Idea combine.

The other piece of the puzzle is Anil Ambaniowned Reliance Communications, which is also selling its 43,000 towers and the acquirer could play a key role in the market as it has one key client — older brother Mukesh Ambani’s Reliance Jio, which will be looking for more towers to take on its main rival Airtel in the data battle. RCom’s tower business is believed to have many suitors including alternative asset managers Brookfield. Sources say ATC is not keen to bid aggressively for this business.

So where will the new business come from? This is the key question because ATC has been impacted by Tata Teleservices closing operations. The service provider accounted for over 5 per cent of ATC’s global consolidated revenues in the quarter ending June 2017. Add in the closure of Telenor (both of which have been bought by Bharti Airtel), and over 40 per cent of ATC India’s revenues have taken a hit.

The good news for ATC is that Tata Teleservices has issued an assurance that it will pay ~7,000 crore for the the residual period (the contract was to end in 2023) or adjust it with their stake in ATC Infrastructure. Even Bharti, despite the fact that it has not given any assurances, may keep at least half the Tata Teleservices’ towers to improve coverage quality to take on Jio.

ATC, however, is also looking at the possibility of getting more business from Reliance Jio. With over 175,000 towers, Jio wants to expand its tower capacity to over 250,000. ATC is reportedly expecting to get a substantial share of this incremental business, because it is the only independent tower player while all the others are aligned to rival service providers. If that happens, ATC would be able to increase the number of tenants per tower and improve margins. Whichever way the business pans out, ATC has made a big call on India.