Tata Teleservices, which provides wireless services to almost 32 million subscribers under the Tata Indicom brand, is the first Indian telecom operator to turn its previously captive tower business (Wireless-TT Info-Services Ltd or WTTIL) into a truly independent one. It will pay rent to use the towers just like any other external operator, and observers say they hope the deal will be a turning point in the tower industry in India. As a country with high mobile usage and a large number of carriers, India has a lot of potential for independent tower companies which allow the operators to focus on providing actual mobile services without having to worry about things like the availability of infrastructure or capital expenditure.
And while many of the operators that have their own tower infrastructure also make it available to other operators, the reality is that other players are often reluctant to rent infrastructure from the competition. An independent owner is therefore likely to be able to use its towers more effectively, resulting in better profitability.
However, so far most of the independent players are quite small. Quippo, which is promoted by the Kanoria family of SREI Infrastructure Finance and pioneered the concept of ôtower sharingö in India in 2005, is one of the largest ones. It currently has about 5,000 towers mainly in the northern part of the country after acquiring about 1,000 towers from Spice Telecom last year. While small compared with Tata TeleservicesÆ 13,000 towers, Quippo has built a reputation as one of the most professionally managed companies in this industry and its management team will run the combined business after the merger.
Tata Teleservices will retain economic control though a 51% stake in the new business which will have an enterprise value of about Rs130 billion ($2.6 billion). On account of the smaller size of its business, Quippo will make an upfront cash payment of Rs24 billion ($493 million).
ôThis partnership makes for a perfect fit û Quippo is one of the most professionally managed companies in this space and WTTIL is at the epitome of corporate governance,ö says Anil Sardena, managing director of Tata Teleservices, in a written statement. ôThe combined entity will reap the benefits of significant synergies through combining of portfolios û both at the operational and financial levels. This will help to further increase scale and reach, while ensuring better asset utilisation, and upside in tenancy and reduction in capital expenditure.ö
In December, Fitch Ratings noted that a consolidation of QuippoÆs tower business with that of other major tower companies ôcould be a positive ratings triggerö as it would lead to ôcaptive demand from a cellular operator and a much larger tower portfolio without deteriorating its financial profileö. Fitch assigned a long-term BBB rating with a stable outlook to the company.
Sources say the combined business will have an Ebitda margin of about 45% and is currently cash-flow positive. However, the aggressive expansion of its portfolio will result in a negative cash flow over the next few years. The expansion will be largely driven by Tata Teleservices, which needs more tower capacity to support the roll-out of GSM services.
GTL Infrastructure, another independent telecom tower operator, estimates on its website that India will need to set up over 350,000 towers over the next three to five years to sustain the growth in the countryÆs wireless market which is among the fastest in the world with an approximate addition of five million new subscribers every month.
Analysts too have stressed the potential for independent operators of telecom towers in India for some time and suggested that one potential route forward would be for the mobile operators to sell or spin off their in-house tower infrastructure. So far, however, the operators have made only minor divestments. In July 2007, Reliance Communications (RCom) sold a 5% stake in the unit that owns its telecom towers to a group of seven institutional investors for Rs14 billion ($337.5 million) as a pre-curser to an initial public offering that has yet to take place. And in December 2007, the Bharti Group, Vodafone Essar and Idea Cellular agreed to form Indus Towers Ltd to provide passive infrastructure to other mobile operators. This company too, which started off with about 70,000 towers, is eventually aiming for an IPO.
The importance of the Tata-Quippo deal should therefore not be underestimated as a potential trigger for similar transactions in the future û not only in India, but in other Asian countries too. One observer notes that Indonesia and Thailand are two other countries in the region that are well-suited for independent telecom operators, given the large number of operators. In China, on the other hand, where there are only three mobile operators, it doesnÆt make much sense.
The implied valuation of the Tata Teleservices and Quippo combination at $144,400 per tower is well below the $487,000 per tower that RComÆs business was valued at during the stake sale. However, equity markets have fallen significantly since then and the numbers are not really comparable. Like most other tower businesses in India, Tata Teleservices and Quippo are both unlisted.
Citi and Nomura acted as financial advisers to Tata Teleservices and conducted a sell-side process for the group in late 2007 before identifying Quippo as the best fit. The fact that the deal is carried out as a merger rather than an acquisition not only allows the future entity to reap the full benefits from both its owners, but also means that it wonÆt have to worry about raising acquisition financing in the current difficult markets. Quippo was advised by JM Financial.
Quippo, which also provides infrastructure and equipment to the construction, oil and gas, and energy sectors, counts several high-profile investors among its shareholders, including the Government of Singapore Investment Corp, IDFC Private Equity and Oman Investment Fund.
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