Despite the rise in smartphone penetration and data service uptake, telecom operators in Southeast Asia, like most of their global counterparts, have been struggling to maintain revenue growth since the past few years. In fact, telecom groups including Malaysia’s Axiata, Indonesia’s Indosat and Singapore’s SingTel have all reported subdued or negative revenue growth for the year ended March 2014. While Axiata posted a 0.3 per cent growth in its top line, Indosat and SingTel reported a 0.3 per cent and 7.3 per cent decline in their revenues respectively for the year ended March 2014.

The dismal figures can be attributed to the fact that traditional voice and SMS revenues, which still account for the majority of the overall revenues, have been on a free fall as customers have been increasingly adopting over-the-top services. While the returns have so far been limited, operators are required to continually invest in augmenting their 3G and 4G network coverage and capacity to meet users’ rising bandwidth requirements. Since the majority of these investments have been financed through debt instruments, the financial performance of these companies has been adversely affected. In such a scenario, service providers are looking at alternatives to raise funds for their operations and network expansion. Monetisation of non-core assets is being considered as one such option.

Over the years, many service providers have built a large portfolio of telecom towers, which are mostly used for captive operations. Having a large tower portfolio was earlier considered a competitive ad-vantage, but not anymore. This is because the telecom markets of most countries in the Southeast Asia region have matured and most service providers have either set up several towers or leased them from other operators, thereby negating any advantage of having a large tower portfolio. Further, several operators across the world, particularly in India and Africa, have demonstrated that the benefits of hiving off or selling off tower businesses outweigh the gains of operating them through an in-house team. They have resorted to such a move in order to unlock the potential of their tower assets.

For telecom operators, monetisation of tower assets not only helps in raising funds but also allows them to focus on their core business – telecom services. Due to the short life cycle of telecom network technologies, service providers are often required to launch new services, through new technologies, to remain competitive in the market. In the case of mobile data services, while operators have successfully rolled out next-generation networks (3G and long term evolution), their efforts to monetise these services have remained largely ineffective. Consequently, it has become imperative for operators to reduce their operational expenses, thereby ensuring profit growth, while continuing to invest in next-generation network technologies.

In India, Bharti Airtel has hived off its tower business into a separate entity, Bharti Infratel, and leased back some towers from the latter for the long term. Now, apart from offering infrastructure services to Airtel, Bharti Infratel also leases telecom towers to other operators including Vodafone India, Idea Cellular and Tata Teleservices Limited. In this way, Infratel has been able to augment its revenue generation sources and improve its tower utilisation rates. At the same time, the move has enabled Airtel to focus more on its telecom business and explore new revenue growth opportunities.

With the trend of tower asset monetisation gaining momentum across the world, service providers in the Southeast Asia region too are opting for this route. The Southeast Asian operators that have so far monetised their assets or announced plans to do so have adopted different strategies. The first company to undertake this move in the region was Indonesia-based operator Indosat, which sold its 2,500 towers to Tower Bersama in August 2012 and leased them back under a long-term contract. As part of the sale agreement, Indosat received $406 million, which comprised $333 million in cash and about $77 million worth of newly issued equity shares amounting to 239,826,310 (equivalent to 5 per cent of the paid-up capital of Tower Bersama). The sale of tower assets not only enabled Indosat to realise income but also allowed it to reduce its expenses on tower operations and maintenance. Indosat also benefited from the deal by securing equity shares of Tower Bersama, which witnessed an increase in share price since the sales agreement. Now, the company is considering selling its stake for about $122 million, which would yield a 30 per cent return, adjusted for inflation.

Another Southeast Asian operator to monetise its tower assets is Thailand-based True Corporation. The company has transferred its network assets including telecom towers to a subsidiary, the True Telecommunications Growth Infrastructure Fund (True GIF). True Corporation intends to raise about $1.8 billion through an initial public offering (IPO) for the subsidiary while subscribing to at least 18 per cent, thus resulting in a cash flow of about $1.48 billion. The company then aims to lease back the network assets for about 15 years. A separate entity for operating the tower business will result in high operational efficiency and a focused approach towards network expansion, which will yield additional revenues. Given that True Corporation will hold an 18 per cent stake in True GIF, the former will receive dividend on a pro-rata basis, which will improve investor interest in the company.

Two more telecom companies in Indonesia, XL Axiata and state-owned Telkom, are considering monetisation of their tower assets. XL Axiata has announced its plans to sell part of its 8,000 telecom towers to raise funds through a tender process in the second half of 2014. As of end-July 2014, Solusi Tunas Pratama and Tower Bersama Infrastructure have reportedly emerged as frontrunners for purchasing the towers. XL Axiata intends to use the proceeds to pare its debt, which has almost doubled year on year to IDR 25.92 trillion as of March 2014, primarily due to the acquisition of telecom operator Axis Telekom Indonesia. The company had acquired 1,600 towers as part of the acquisition and these assets will be included in the tower sale agreement to address the issue of network duplication. Given that interest expenses have adversely impacted profit margins, reducing debt will significantly improve the company’s financial performance.

XL Axiata’s parent company, Malaysia-based Axiata Berhad had also reportedly stated its intent to raise $500 million through an IPO for its tower business. But the company has refuted these reports and is focusing on improving cost efficiency and increasing revenue generation. The company may nevertheless consider monetising its tower assets if income from core operations continues to remain subdued.

Meanwhile, Telkom Indonesia is considering swapping its 49 per cent stake in tower unit Dayamitra Telekomunikasi (Mitratel) with stake in a listed tower company in Indonesia. Mitratel currently has about 4,000 towers, which are valued at $410 million. Telkom has shortlisted four tower companies including Tower Bersama. Telkom aims to focus on its core business and unlock the value of its tower assets. Further, the operator intends to use the funds for network expansion. In the future, other tower companies are expected to follow suit.

As more operators strive to optimise costs, improve operational efficiency and raise capital, sale of telecom towers through different strategies will gain momentum. The majority of tower asset sales in the Southeast Asia region have so far taken place in the Indonesian telecom market. Other similar markets, such as the Philippines, Thailand and Vietnam, may see operators opting for tower asset sales as well, but such a move is highly unlikely in small-population countries such as Malaysia and Singapore or in the undeveloped market of Myanmar, at least in the near future.

For small telecom operators, one of the biggest issues in this regard would be their limited ability to attract investor interest owing to their small tower portfolios. Thus, it would make more sense commercially for these operators to pool their tower assets and then put up a large portfolio for sale. This will also enable telecom companies to diversify the revenue risks, which will, in turn, help attract more investor interest and lower the cost of capital for them. Going forward, it would be interesting to see if small operators can emulate their larger counterparts to gain from the current trend.