India’s tower play

What opportunities could a country with more than 1 billion mobile subscribers offer infrastructure investors?

With a population of over 1 billion and as many – if not more – mobile consumers, India’s telecoms market is one of the largest in the world.

So, where can infrastructure investors find investment opportunities? The answer lies in the telecoms tower sector, which comprises over 450,000 towers nationwide, the majority of which (around 66 percent) are owned by tower companies.

These assets are a “perfect match” for institutional investors, such as pension funds and insurance companies, comments Taponeel Mukherjee, chief executive of Indian research and advisory firm Development Tracks. The tower businesses are secured with long-term tenancy contracts with operators, matching investors’ appetite for long-dated assets, he explains.

In the past 18 months, India’s tower sector has witnessed a series of transactions involving international fund managers and institutional investors. Bharti Airtel, the country’s largest telecoms operator, is one example. In March 2017, it sold a 10.3 percent stake in its tower unit, Bharti Infratel, to KKR and the Canada Pension Plan Investment Board for approximately $951.6 million.

Brookfield Asset Management has also been actively looking in the past year at opportunities in the space, as well as other sectors in India, due to the market’s “tremendous growth potential” and expected exponential growth in demand for data over the coming decades.

The Canadian asset manager was going to invest in Reliance Communications’ (RCOM) portfolio of over 40,000 telecom towers, seeing it as an opportunity to acquire “attractive tower portfolios with scale”. A binding agreement was signed in December 2016 for a deal reportedly valued at around $1.65 billion. However, in November 2017, the transaction fell through as one of the deal terms – the merger of RCOM and Aircel – did not occur.

Brookfield said at the time that it remains patient in pursuing this and several other potential opportunities in the sector. “In particular, it is evaluating a number of tower portfolios in the hopes of developing a scalable presence in India,” the firm said.

Although the deal with Brookfield collapsed, RCOM pressed ahead with the sale of its tower infrastructure unit to raise funds in order to pay down debt. Last December, RCOM’s owner, Anil Ambani, sold the portfolio to Reliance Jio Infocomm, a company founded by his elder brother Mukesh Ambani, for 250 billion rupees ($3.8 billion; €3.1 billion).

Reliance Jio’s emergence is one of the key factors that has changed the market dynamics in the past 18 months. Commercially launched in September 2016, the LTE mobile network operator is already the country’s third-largest telecoms operator by revenue and market share.

“Reliance Jio’s entry into the market has put a lot of pressure on telecoms operators, particularly in terms of fierce competition and pressure on profitability margins,” says Mukherjee, adding that many telecoms operators are seeing weaker balance sheets due to high debt levels.

That should prove positive for infrastructure investors, as Mukherjee notes that telecoms operators are looking to sell their tower businesses to generate cash to fund the country’s ongoing 4G deployment, and at the same time pay off debt.

“It is completely market-driven momentum,” Mukherjee remarks.

A BRIGHT FUTURE

Importantly, the market has promising growth prospects, which should keep dealflow healthy for the foreseeable future.

“Considering 5G and newer technologies such as IoT, AI, VR and M2M, data demand will grow exponentially, providing growth opportunities to the tower sector,” Tilak Raj Dua, director general of industry body Tower and Infrastructure Providers Association, tells Infrastructure Investor.

Figuring out how to tap the data play effectively – as the world shifts from voice to data – remains a big question for tower businesses, argues Mukherjee. Wi-fi, micro sites, smart cells and other technologies, could be new sources of revenue for tower businesses in India, he adds.

“India will need more capacity for towers as well as more coverage,” he notes. In the short-term, Mukherjee expects more divestment of such assets to occur with telecoms operators eventually exiting the tower business entirely. Tower assets could then very well be in the hands of long-term institutional investors, he says.