The Hindu Business Line : How pooling can unlock value for telcos

The coming together of Bharti Infratel, Vodafone and Idea Cellular to form an independent tower company called Indus Towers, is a logical way forward for passive infrastructure sharing by cellular operators, in a scenario of falling realisations and rising costs. Indus Towers will have 70,000 towers/cell sites pooled from all the three operators and is equipped to operate in 16 circles.

Investing in new towers/cell sites is an expensive affair for telecom operators, both in terms of capital expenditure (capex) and operating expenditure (opex).

Capex, opex

A roof top tower can involve a capex (shelter, tower templates, air-conditioners, diesel generators and batteries) of Rs 15 lakh, while a ground-based tower may involve an outlay of Rs 25 lakh.

There are opex components as well such as rentals associated with the space used, electricity charges and other maintenance charges. This sharing arrangement will ensure that all the three companies save substantial sums on both fronts.

Rising user base

With the subscriber base for these operators growing at a phenomenal rate — (Bharti-2 million, Vodafone-1.3 million and Idea 7-8 lakh per month) — there is a constant need for additional cell sites.

Stringent subscriber-linked allotment criteria for spectrum, which is being contemplated, may also require investments in more cell sites and new technologies by operators. This tower sharing arrangement may help operators to expand quickly and efficiently. The players can also look forward to additional revenues from new third-party tenants on these sites. Smaller operators may find tenancy an attractive proposition. Another impending opportunity for Indus Towers would be the entry of new players into the broadcasting and Wimax space.

Multi-tenancy

But there are challenges as well. Multi-tenancy is an evolving concept in India. Indus Towers may be judged a success if it able to attract two or more tenants per tower. However, other operators may weigh their options before agreeing to a multi-tenancy with a competitor and may do so only if the terms are attractive. Reliance Communications also has an independent tower business, which would compete with Indus Towers, and would look to woo operators. To add to the competition, there are independent tower management companies such as American Towers, Quipo, and GTL which are also aggressively entering the fray and may target players like BSNL, which is on an expansion mode.

Recent news items suggest that Indus Towers may add another 50,000 towers over next year and also possibly list the entity. A stake sale in the tower business may also find takers from private equity or other investors as well. This may unlock value for Bharti, Vodafone and Idea Cellular.

The likely valuation for Indus Towers is difficult to arrive at this juncture, when there is limited clarity on the possible revenues. The valuation will be a function of factors such as tenancy levels, rentals, split of ground-based towers to roof-top towers and circle category.

That Reliance Communications’ tower business, was valued at Rs 27,000 crore for 14,000 towers when the company offloaded stake to PE investors a few months back, offers a few cues on how Indus Towers may be valued.

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