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3 June 2019

More towerco consolidation under way in India and Africa

Mobile operators round the world have been consolidating for years as markets saturate, and one element of their strategy to counter slowing growth and falling ARPUs has been to offload their physical infrastructure to towercos. Now the towercos themselves are starting to consolidate, as they take a rising amount of control of passive infrastructure – fiber, small cells and data centers, as well as macro towers – and search for further economies of scale and new markets.

American Tower has announced a deal to acquire Eaton Towers to further its quest to be a fully global player, while a mega-merger between two Indian tower operators, Bharti Infratel and Indus Towers, is expected to close this month.

The Indian transaction has been in the works for a year now. It will create a pan-India tower company with over 163,000 towers in operation and a valuation of around $10bn. It will be the second largest towerco in the world after China Tower.

This will combine Bharti Airtel’s wholly owned infrastructure unit, Infratel, with Indus Towers, which is a joint venture between Bharti and Vodafone, but has become increasingly independent, and able to attract other operators as tenants. It was established in 2007 and was owned 53% by Vodafone India (now Vodafone Idea after acquiring Idea Cellular), 42% by Bharti, and 5% by Providence Equity Partners.

In a stock exchange filing, Bharti and Vodafone announced that they have proposed to appoint current Indus Towers’ CEO Bimal Dayal and CFO Hemant Ruia to the posts of CEO and CFO of the combined company. They reiterated that the new entity will serve Indian operators on a non-discriminatory basis.

Before the Vodafone/Idea merger (which created India’s largest MNO), Idea sold its tower business, including about 9,000 sites, to American Tower (ATC). That brought ATC’s portfolio in India to 68,000 sites. It had already acquired about 10,000 towers from Vodafone India, though neither that transaction, nor the Vodafone Idea marriage, included any of Vodafone’s stake in Indus Towers.

The tower industry in India has come under pressure because of the wave of consolidation among the MNOs, which has resulted in the survival of only three major national players – Vodafone Idea, Bharti and Reliance Jio – plus the two state-owned operators, BSNL and MTNL, plus some regional companies. Vodafone Idea is already shutting down duplicate or nearby sites within its two networks and plans to exit about 27,500 towers, or 3% of the country’s total, in the short term, with more to follow, according to research and ratings firm CRISIL. Towercos are also being hit by the loss of tenancies from smaller players like Aircel and Telenor, which have left the market or been acquired.

As a result, although the overall number of towers will grow as a result of 4G expansion and densification, towercos will see their operating margins fall in the next couple of years, CRISIL predicts – from about 44%, the norm over the past 4-5 years, to less than 40% by March 2019, and by a further 7.5 percentage points in the 2020 fiscal year. In the first half of the current fiscal year, Bharti Infratel saw its operating margin fall by 3.5 percentage points year-on-year.

The latest Indian deal unites representatives of two flavors of tower operator – the arm’s-length subsidiary of one MNO, and the joint venture between two or more operators, into which they place their towers. Examples of the latter include the UK’s MBNL and CTIL, and the vast Chinese tower JV.

The third type is pure-play towerco, typically established by buying towers from one or more MNOs, which are looking to offload the assets completely. The towerco then goes on to expand its footprint through acquisition and new builds (increasingly, targeted ‘build to suit’ deployments), while looking to attract additional tenants for each tower.

Fully independent towercos are growing in scale and number, and as pure real estate businesses with no ties to particular telcos, they often have greater freedom to work with new types of tenant, not just MNOs, and with new types of infrastructure, such as small cells.

One of the biggest is ATC, which has entered into a definitive agreement to acquire Eaton Towers for $1.85bn (including assumption of debt). Eaton owns and operates about 5,500 sites across five African countries. AMT expects to “accelerate new build activity across the region” – which has been a significant focus of its bid to expand globally – driven by expanded relationships with multiple key tenants.

The firm said the new assets are expected to generate about $260m in property revenue and $165m in gross margin, at current exchange rates, in their first full year within ATC’s portfolio, which consists of over 170,000 sites.

“This transaction will significantly augment our existing footprint in Africa and positions ATC to take even better advantage of the growth opportunity in the region as 4G mobile data technology is deployed to serve millions of Africans over the coming years,” said CEO Jim Taiclet.

The transaction is expected to close by the end of 2019, subject to customary closing conditions and regulatory approvals.

One driver for US towercos to expand in emerging markets is the intense pressure that their home MNOs are putting upon them. The US operators have been pushing for more flexible terms and lower rates, while at the same time investigating alternative partners. Sprint has been threatening to transfer some base stations to government land where it claims it would pay lower rates than to traditional towercos, for instance; while in 2017,  AT&T and Verizon entered into an unusual joint arrangement, signing a deal with Tillman Infrastructure to build hundreds of new cell towers across the country using an alternative approach to the traditional leasing model.

Tillman, which already owns and operates towers, small cell sites and city infrastructure, is an example of a company which is smaller than the US giants – American Tower, Crown Castle and SBC – but aims to use the new approach to network roll-out to ease its way into their core customers. Tillman will build towers on a ‘to-suit’ basis geared to the needs of AT&T and Verizon, and in return they have committed to leasing and co-anchoring the co-located sites for a period of time (unspecified).  In some cases they will support new coverage and capacity, but – in a clear signal to existing providers – the MNOs said they will also relocate some equipment from current towers.