The Hindu Business Line : ‘Towering’ logic to share telecom infrastructure

The Indian telecom services business is the fastest growing one in the world, with over 7 million mobile subscribers being added every month consistently over the past year. This expanding base poses challenges to mobile operators in terms of augmenting and upgrading infrastructure to maintain quality of service. Infrastructure sharing helps address such challenges.

Two kinds of sharing

Broadly, two kinds of infrastructure sharing arrangements exist — active and passive. Active sharing involves sharing of actual network elements such as antennae, base transceiver systems, base station controller, feeders, microwave equipment, transmission equipment, even spectrum and the like that are used in a live network. Usually such arrangements are done between a mobile operator and the MVNO (mobile virtual network operator) who is merely a reseller of talk-time to end-users. This type of infrastructure sharing is not as yet permitted in India.

Passive infrastructure, which supports the functioning of the network, comprises the actual tower, shelter, which is an enclosure for housing network equipment, air-conditioner inside the shelter, voltage stabiliser, diesel generator for back-up in case of power failure, battery back-up, fire alarm and so on, apart from the space used for housing the same, either over a rooftop or on the ground.

The rationale

The cost of passive infrastructure for an operator may work out to Rs 15 lakh for a roof-top tower and around Rs 25 lakh for a 45-meter ground-based tower. These apart, there are several operating expenses such as electricity bills, rentals (between Rs 10,000 and Rs 25,000 per month, higher in some metros) for the space occupied, apart from regular maintenance charges for each tower. This makes it clear why there is a substantial saving in capex and operating expenditure (opex) for mobile operators who share these resources; sharing also opens up a new revenue opportunity.

A burgeoning subscriber base and a more stringent spectrum allocation regime may create a higher requirement of cell-sites or tower sites for operators, to accommodate more subscribers and allow greater reuse of the radio frequency allotted to operators. This is especially true in dense urban areas, where finding space may not be easy. Infrastructure sharing could come to mobile operators’ rescue in this context.

In rural areas, where the offtake of mobile services is lower compared to urban areas, infrastructure sharing among multiple players could weigh favourably in a cost-benefit analysis.

Regional players and new players who have been granted licences for all-India operations may also find tower infrastructure sharing a viable and quicker way of launching services in new areas.

Services such as WiMAX, which are high on the radar of companies such as Tata Communications and Reliance Communications (RCom) for greater Internet penetration, will also require tower infrastructure and players in this space may find it useful to share resources of the existing operators.

It is in this backdrop that RCom, Bharti Airtel, Idea Cellular and Vodafone Essar have hived off their tower business into a separate entity to attract strategic investors in these ventures.

Only 25 per cent

Despite the many benefits that shared infrastructure offers, the concept, until recently, did not take off markedly. The telecom regulator TRAI’s recommendation paper on this subject indicates that as of April 2007, the country had a total of 1,00,000 towers owned by mobile operators/private players. With expectations of a 500-million mobile subscriber base by 2010, this number would be required to be scaled up to 3,30,000.

But the regulator has indicated that only 25 per cent of towers/tower sites are shared by operators at present. This means that average tenancy for Indian operators is between 1.2 and 1.5 per tower in India.

This is in stark contrast to the US, perceived to be the most advanced in tower infrastructure management, where average tenancy is 2.7 to 3 operators per tower.

Four business models

Mobile operators can explore four different options to manage their tower infrastructure:

Build towers purely for captive purposes. This is one of the reasons for low tenancy.

Tower-sites, in the initial years of expansion, may not have been built to accommodate multiple tenants by mobile operators.

Operate the tower business as a separate company, with private equity investors who can infuse capital. There is also the possibility of the independent tower company going public to raise funds.

RCom has already done the first part and is set to do the second very soon. Bharti offloaded stake in Bharti Infratel to eight leading private equity players including Temasek, Goldman Sachs and Citigroup for $1 billion late last year and sold a further stake of $250 million to KKR Roberts earlier this month.

Sell the tower business to an independent tower operator/s. GTL, Aster, Quipo and Tower Vision are examples of independent tower operating companies. Transactions between a telecom operator and specialist tower operating company are usually on a ‘sale and lease back’ model. Spice Communications’ sale of its tower entity to Quipo may be an example.

This method is not very prevalent in India as of now as independent tower companies operate on a ‘build-and operate’ model. This is unlike the US where tower companies such as American Towers, Crown Castle and SBA communications manage passive infrastructure for mobile operators on an end-to-end basis through a ‘Build Operate Own’ model.

Finally, operators can pool their towers as was done by Vodafone Essar, Idea Cellular and Bharti Airtel. The pooled entity, Indus Towers, will have 70,000 towers/cell sites from the three operators that will span 16 circles. Bharti Infratel will transfer 30,000 sites to the entity while Idea Cellular plans to transfer an estimated 9,000 sites.

Which of these models an operator chooses will depend on the individual operator’s dynamics and cost-benefit analysis, apart from the company’s decision on whether it would opt for a managed service model.

Valuations

As mobile operators increasingly explore new options to manage their tower infrastructure, the valuation accorded to the tower business as a standalone business may add a significant layer to telecom stock valuations. Some indications on this may be available from recent deals in this space.

Reliance Communications’ tower business was valued at Rs 27,000 crore for 14,000 towers when the company offloaded a 5 per cent stake to a group of PE investors for Rs 1,400 crore a few months ago. The value of Bharti Infratel’s tower business with approximately 50,000 sites is pegged at $10-$12.5 billion based on the deal with strategic investors. However, the company has indicated that actual valuation will be fine-tuned depending on the actual performance of this business in FY 2008-09. Valuation for this business usually is a function of factors such as tenancy levels, rentals for the location, split between ground-based towers to roof-top towers and the geographic area.

Reliance Communications plans to take its tower business public. The draft prospectus filed by Reliance Infratel mentions that the company’s revenues for the nine months of the current financial year were about Rs 902 crore, while the net profits stood at Rs 153.6 crore. These deals make it apparent that the valuation for tower businesses is based on estimates of earnings potential for several years into the future.

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