Driven by the exponential growth in the wireless subscriber base (over 700 million current), network expansion and the launch of 3G and broadband wireless access (BWA) services, the wireless segment paved the way for the emergence of the independent tower industry in 2007. Towers, an essential part of an operator’s strategy and considered merely as support infrastructure till as recently as 2006, have over the past four years come to the fore as a lucrative business model.

With its high quality annuity revenues and cash flows, this industry has grown at a compound annual growth rate (CAGR) of over 40 per cent, with the number of towers quadrupling in the past few years.

Capitalising on the strong demand for towers, several stand-alone tower companies including GTL Infrastructure Limited (GIL) (the biggest independent tower company in the country today), Tower Vision and Viom Networks (formerly WTTIL-QTIL) have entered the market. Meanwhile, the compelling opportunity in the tower leasing space prompted major operators, including Bharti airtel, Reliance Communications (RCOM) and Tata Teleservices Limited (TTSL), to hive off their tower assets into separate subsidiaries.

While operator-owned tower companies currently dominate the market, true independents are also holding their own and have significantly enhanced their tower portfolios over the past two years by way of mergers and acquisitions (M&As).

Size and growth 

Since 2006, the tower industry has almost quadrupled in size with the number of towers growing from 85,000 to over 346,000 at present. On a year-on-year basis, the industry witnessed the highest growth in 2008 at over 63 per cent although it was on a small base. This high growth rate may be attributed to tower build-outs by the industry in anticipation of the strong demand for towers due to the new operators entering the mobile segment as well as network expansion by existing operators.

However, over the past year, tower companies have scaled down their rollout plans in order to avert an oversupply situation and have now become more disciplined in tower rollouts. With the industry tenancy ratio already touching around 2x, most tower companies are setting up new towers when they are assured of at least two tenants. Consequently, the year-on-year growth declined to about 5 per cent in 2010. While smaller companies like India Telecom Infrastructure Limited are looking to increase their tower portfolio by 50-70 towers in 2011, industry major Indus is looking to roll out 5,000 towers annually. Consequently, while tower build-out is likely to continue in the near term (two to three years) due to the demand created by new technologies, the pace will be slower.

Key trends 

Passive infrastructure sharing is a key trend that the tower industry has witnessed over the past three years. This concept started gaining traction in the Indian wireless industry towards the end of 2006, driven mainly by the initiatives of the government that launched Project MOST (mobile operators’ shared towers) in 2006. While the project was not successful, it helped establish infrastructure sharing as a model in the country, with operator-controlled joint venture entities owning the majority of the towers and pure-play independents accounting for a smaller slice of the market.

This reflects a significant shift in the strategic focus of the operators from looking at network coverage and land grab as a competitive advantage to considering these merely as a base for providing services.

The model gained further momentum as the six pan-Indian operators accelerated their push into Category B and C circles and low-margin rural areas along with the new players that increasingly opted for passive infrastructure sharing, which is now a standard industry practice. For instance, 85 per cent of Idea Cellular’s sites are currently shared sites. While 27 per cent of Bharti airtel’s sites were shared as of 2007, the operator has now increased its sharing significantly. The estimated combined savings in the capex of telecom operators due to passive sharing were over $1.5 billion in 2010.

The competitive landscape of the tower industry has also undergone significant changes over the past few years with the need to garner scale, leading to a flurry of M&As in the sector over the past three years. Small- and medium-sized firms opted for mergers or alliances to take on larger rivals and hasten rollouts in the face of rising demand.

Some of the bigger M&A deals in the sector include GIL’s takeover of Aircel Cellular’s tower business and the merger of WTTIL with QTIL. All the consolidation deals in the sector include commitments of additional tower rollouts. For instance, in the GIL-Aircel deal, Aircel has committed to 20,000 more towers over the next three years.

In January 2010, GIL acquired Aircel Cellular’s tower business in a Rs 84 billion all-cash deal, which was the largest M&A transaction in India in the past 24 months and the largest all-cash purchase transaction in Indian corporate history. The deal, which values each tower at Rs 4.8 million, was financed by an equity investment of Rs 34 billion from GIL and its promoters, and debt funding of Rs 50 billion by a consortium of banks. It was completed in July 2010.

In January 2009, TTSL offloaded a 49 per cent stake in its telecom tower and infrastructure arm, WTTIL, to Srei group company QTIL. QTIL transferred its portfolio of about 5,000 towers and made an upfront payment of Rs 24 billion to WTTIL in exchange for the stake and management control in the new entity that was valued at Rs 130 billion. TTSL will retain a 51 per cent stake in the merged entity.

In March 2010, TTML divested its 100 per cent stake in its tower business, 21st Century Infra Tele Limited (TFCITL), for Rs 13.18 billion to the WTTIL-Quippo consortium. The transaction, which includes the company’s tower portfolio of 2,535 towers in Mumbai, Maharashtra and Goa, was done at Rs 5.2 million per tower and was higher than the other recent deals in this space.

This higher valuation may be due to TTML’s tower arm having a tenancy of over 2.15, which is much higher than most tower companies. This, in turn, may be attributed to the fact that TTML’s CDMA division and Tata DOCOMO, the GSM service provider, are each likely have a slot in these towers.

Post this acquisition, WTTIL-Quippo has a contiguous national network. As part of this deal, 21st Century has given a commitment to roll out approximately 4,000 towers over a period of five years in Mumbai, Maharashtra and Goa.

This trend of consolidation in the tower industry is likely to continue. Some key deals that are in the pipeline include the sale of Vodafone Essar’s tower subsidiary Ortus and the leasing of Powergrid’s tower portfolio of over 12,000 towers. Vodafone Essar has received bids from GIL and Viom Networks for Ortus, which has a portfolio of 7,000 towers in the seven service areas outside the Indus Towers agreement to Bharti airtel or Indus Towers. The bids from the two companies are reportedly in the range of Rs 32 billion to Rs 35 billion for around 7,000 towers, with at least one tenant on each tower.

Meanwhile, Powergrid has received bids from Viom Networks and a new entrant, Microqual, for the right to lease the utility major’s 12,200 tower slots to telecom operators. For Powergrid, the minimum assured revenue from the towers is estimated at Rs 60-Rs 70 million annually, although the bid spans 10 years with payment commitments increasing over time. In case Microqual wins the tender, the telecom tower industry will see a new entrant and, therefore, increased competition in the slot leasing market.

In addition, Reliance Infratel, which, in June 2010,  had come close to clinching the largest domestic deal – the acquisition of its tower portfolio by GIL – is still looking for a partner for its tower business. Similarly, Tower Vision India, owned by Israeli investor the Fore Group, private equity firm Quadrangle and Morgan Stanley, has been exploring a possible sellout even as it focuses aggressively on scaling up its tower portfolio to 10,000 from the current 6,000.

As the industry gets ready to enter its next phase of development, opportunities for organic growth and acquisitions continue to be strong and there is a compelling rationale for consolidation among tower companies with almost all independent tower companies being open to sale and alliances.

Other key trends include dominance of operator-owned tower companies, declining tower valuations and rentals, and an increased focus on tenancies. While operator-owned firms such as Indus Towers, Reliance Infratel and Bharti Infratel continue to dominate the competitive landscape of the industry and account for over 70 per cent of the tower infrastructure market, independent tower firms have garnered considerable scale through acquisitions over the past two years and have also managed to get substantial business from new operators.

According to some new operators, pure-play tower companies have flexible rollout plans and can build new towers to suit the new operators while the incumbent players are not flexible. Moreover, these companies are more cost effective. In addition, some new entrants are of the view that there is a clear conflict of interest. Incumbent telecom operators’ tower subsidiaries tend to delay the new entrants.

Meanwhile, tower valuations have been on a decline over the past three years and are currently in the range of Rs 4.8 million to Rs 5.2 million per tower, according to industry experts. While Bharti airtel and RCOM attracted valuations of Rs 12 million-Rs 16 million per tower while offloading stake in their tower subsidiaries in 2007, the recent TTML-WTTIL-Quippo deal values towers at Rs 5.2 million per tower. Even according to the bids received by Vodafone Essar, the towers are valued at Rs 5 million per tower. Much of the fall in valuations may be attributed to overcapacity in urban areas, where most towers are present. This is primarily due to the fact that approximately 35 per cent of the towers are still unshared and duplication is occurring in the same areas.

With operators facing unprecedented margin pressures, the rentals have also been on a decline and have reduced by 20 per cent over the past one year. In addition, smaller tower companies that want to stay in the business are also driving the price decline. In fact, rentals over the past few years have declined from levels as high as Rs 55,000 per month to Rs 32,000 per month for ground-based towers and Rs 21,000 for rooftop towers.

The industry has now shifted from focusing on tower build-out to increasing tenancies. All key players in the industry witnessed a significant increase in tenancies in 2010, with tenancies over 1.6 levels for most players. For instance, Indus Towers started with 73,800 tenancies in 2008 and reached 200,000 tenancies in less than 33 months; the company has an average tenancy rate that is fast approaching 2x.

The industry is also moving towards enhanced use of high capacity multi-tenancy towers. In order to reduce costs, it is looking at streamlining tower design and making them lightweight and tubular. Tower companies are also looking to downsize older uneconomical towers that cater to only one to two tenants. For instance, Indus Towers is in the process of bringing down 5,000 such towers. Industry estimates have pegged the number of uneconomical towers, which are likely to be replaced over the course of one year, at between 30,000 and 40,000. The service footprint of passive infrastructure players has also expanded to include backhaul bundling to facilitate network rollout for new operators.

Issues and challenges 

In spite of strong growth opportunities, this industry is not without its share of challenges. Key among the challenges is energy costs, which account for up to 60 per cent of the opex of a tower company and even more in rural areas. Indus Towers alone is the third largest consumer of diesel in India after the army and the railways. While these costs were initially passed through to the operators, in the future, these will become the differentiating factor among tower companies, since operators are not likely to opt for a pass-through mechanism. While there has been talk of using renewable energy sources, their deployment on a substantial scale is yet to take place.

There is also the issue that mobile towers have a higher emission of electromagnetic radiation, which is much beyond safety levels. While operators are of the view that radiation levels are checked by a telecom engineering centre and are at nominal levels, there continues to be strong opposition to these towers. An inter-ministerial committee has recommended to the Department of Telecommunications that the radiation level norms be brought down by one-tenth, from the current 9.2 watts per square metre to less than 1 watt per square metre. To reduce radiation hazards, the wattage per tower needs to be drastically reduced. This, in turn, means more towers will need to be erected to ensure quality of service, which will entail more investment. 

With the major push in terms of coverage likely to be over in the near future, the industry is readying itself to enter the next phase of development where capacity augmentation is primarily going to be driven by the market. Going forward, consolidation, focus on tenancies and energy management will continue to be key thrust areas for the industry.