Weakening signals: Tower deals on hold as valuations head south

MUMBAI: Telecom may be sizzling at present, but investor interest in the towers sector has gone cold, with valuations having slipped 20-25% in the four months since January. Several negotiations have gone awry, the latest being for mid-sized Tower Vision’s portfolio of around 9,000 towers. Kotak Mahindra and Axis Bank ran a full process but the deal has been put on hold. Sources in the know said there was a significant valuation mismatch between sellers and the potential private equity buyer.

American Tower Corporation bid for Idea Cellular’s 9,000 standalone towers and Vodafone India’s 12,000 but both deals are being renegotiated. A senior industry executive said, “The value of Idea and Vodafone’s standalone towers halved the day the merger was announced,” partly because of sentiment and partly because cost-saving assumptions under the merger required a rental rationalisation.

“January valuations were ahead of the telecom sector consolidation reality,” said Syed Safawi, former chief executive of Viom Networks. Merger announcements — Idea with Vodafone India and Telenor with Bharti Airtel — have scuttled tenancy estimates, said industry experts. Massive redundancies are expected, which, in turn, may impact businesses.

Vodafone India is also seeking a buyer for its 42% stake in Indus Tower, a joint venture with Bharti Airtel (42%) and Idea Cellular (16%) but potential bidders recently initiated a revaluation.

“Vodafone will eventually sell to Bharti Infratel because they are looking to exit India and Bharti is mopping up stressed assets that align with making Airtel more competitive against Reliance Jio Infocomm,” said a person familiar with details.

Bharti Infratel sold 10% shares at Rs 320 a piece to a consortium of KKR and Canada Pension Plan Investment Board, though the intention was to sell a majority stake. “It is in Bharti’s interest not to allow Indus’ value to drop below a point,” said the person quoted above. Bharti Infratel planned to sell and consolidate Indus, making it an all-India play, but its condition of 13-15% premium to the stock trading price for handing over management control proved too expensive.

The management also developed cold feet after stock corrected 16% on announcement of the deal. Another deal hanging fire is the Rs 11,000-crore Reliance Communications’ telecom tower sale to the infrastructure arm of Brookfield. With RCom’s merger with Aircel having just received shareholder approval, the tower transaction may soon follow.

CHANGE OF SCENE
Aggressive growth projections were made on the back of Jio’s expansion plans and a corresponding increase in telecom towers by its peers, and transactions saw large PE interest. But now most rollouts are on hold.

“There are also a lot of tenancy renewals for the tower sector lined up in the coming few years. Hence, we may see pricing coming under pressure as well,” said a note by Rajiv Sharma, director (telecom, internet) and media analyst, HSBC.

Safawi estimates 8-9% of current 2G tenancies to be cancelled over the next two years, translating into 85,000 vacant slots. Thereafter, he estimates, growth will continue at the current forecast. “Return multiples over a seven year horizon would have fallen roughly 1-2x (of operating margin) which is showing in the revaluation of the bids.”

Rationalisation of operators to four major players will also mean tower industry growth will be driven by leases for data services. “For one more quarter, there will be new tenancies coming from Jio. From October, growth will only come from small cell or data loading tenancies,” said an industry expert.

Since data transmitters can be loaded on top of existing access points, rental will be a fifth of new tenancies that were being forecast. “In an attempt to manage costs, telcos are likely to bargain with tower companies for volume-based discounts,” said Sharma in his report.

Operators suggest much of the devaluation is driven by sentiment because growth is necessary for the remaining operators to survive. However, tower operators are more sceptical. “It is prudent to wait and watch where the chips fall, with operator consolidation and pricing pressure, before jumping into a deal,” said an industry expert quoted earlier.