On the face of it, GTL Infrastructure?s acquisition of Aircel?s 17,500 towers for Rs 8,400 crore doesn?t take it to the big league. Even with a total of 32,500 towers, the Mumbai-headquartered telecom infrastructure player remains pretty much at the bottom of the heap. But Manoj Tirodkar, chairman at Global Holding Corporation, believes he has made the right move. He says, ?The Aircel deal will work for us because it?s not about having a large number of towers, but having them at the right location. One of the world?s largest firms, American Towers, has just 25,000 towers.?
GTL plans to have 50,000 plus towers by 2012-13 with a major focus on semi-urban and rural areas. And, it wants to make life easier for telecom service providers. Explains Tirodkar: ?Most operators have their own tower bases; so, we need to provide them with towers in locations where they haven?t invested. Also, they would prefer being tenants in locations where it doesn?t make sense for them to put up towers because of the longer pay-back period.?
Typically, the average payback period for a tower in urban locations is around six to seven years while for semi-urban areas, it is nearly twice that. Aircel?s presence in circles like Tamil Nadu, Assam, Jammu & Kashmir, Uttar Pradesh, Bihar and Jharkhand, where penetration is low, will come in handy. The cost of running a tower ranges between Rs 35,000 and Rs 45,000 per tower per month depending on the location. GTL plans to build an additional 20,000 towers in the next three years. That would mean an additional investment of Rs 5,000-7,000 crore, pushing up the investment from Rs 14,000 crore (Rs 8,400 crore for the acquisition of 17,500 towers and Rs 7,265 crore for towers in rural and semi-urban areas) to about Rs 21,000 crore.
Currently, GTL?s tenancy ratio is 1:1 or, in other words, for every tower the company has just over one tenant. Tirodkar?s plan is to increase this to somewhere between 2.2 and 2.3 over the next three to four years, with the number of tenancies expected to increase to anywhere between 1 lakh and 1.2 lakh from the current 40,000. None of GTL?s existing tenants contributes more than 25% of the company?s revenues. However, industry watchers believe that GTL Infra?s expectations of upping the tenancy ratio to over 2 seems to be somewhat ambitious, considering that tenancy ratios in the industry currently are around 1.3-1.6.
Also, they point out that the supply of towers is already high in relation to the demand. Even if telecom companies are able to start offering 3G services later in the year, the demand will not go up because service providers like Bharti or Vodafone will make use of their existing tower infrastructure by simply upgrading them at a minimal cost. Should the tenancy ratio hit 2.3, GTL?s revenues would, of course, increase from the Rs 245 crore reported for the nine months to December 2009. Some of the increase could come from the escalation in rentals, which are currently around Rs 3.5 to 4 lakh per tower per tenant per year, with typical escalations of 3% annually. Aircel?s revenues currently are estimated to be in the region of Rs 550 crore. The increased scale should make the company more profitable with the operating margins expected to move up from the current 55%.
Industry watchers observe that it will not be easy for GTL to increase tenancy. Observes an analyst: ?Should a new service provider manage to win 3G spectrum, it would be inclined to partner with a tower company that has a larger presence in the metros. However, GTL doesn?t have too many towers in the bigger cities, just around 10,000, and therefore, cannot really benefit from this.?
However, Tirodkar feels there will be a three-fold increase in demand for towers in the next three year on the back of the launch of 3G services. ?We expect the current levels of 2.5 lakh will reach 7.5 lakh towers, with three slots being auctioned, in the next three to four years. By then, we expect our current market share of 11% to go up to 15%, with about 1 lakh tenancies in place,? he says.
Meanwhile, all around GTL, the industry is consolidating. In the last two years, Quippo acquired Tata Teleservices?s tower arm WTTIL at a valuation of $1,44,000 per tower, while American Tower picked up all of Xcel?s business at an enterprise value of $1,27,000 per tower. GTL has acquired Aircel at a valuation of $1,04,000 per tower. In the process, it has also managed to win an additional guaranteed 20,000 tenancies from Aircel for the next three years.
Of course, GTL has paid for the deal entirely in cash. Explains Akash Gupta, vice president, Barclays Capital, ?The per tower valuation for GTL-Aircel is lower than the headline price of $104,000 (based on price of Rs 8,400 crore at an exchange rate of Rs 46) because Aircel has assured GTL that it will be a tenant for the 20,000 new towers that are to be built.?
That should be a useful revenue stream for GTL since, as industry watchers point out, the demand for towers is slowly falling. That?s one reason why valuations in the tower business have been coming off. Analysts at research firm CLSA point out that deals in the tower space are being driven more by operator-owned tower companies such as Indus Towers, Reliance Infratel and Bharti Infratel, which together control around two-thirds of the country?s total tower base of 2.5 lakh towers. That, they believe, could pose challenges to the businesses of independent tower companies (ITCs). The analysts observe that ITCs are struggling to compete against those operators who have a head-start with their pan-India portfolios and benefit from anchor tenancies. Besides, it?s easier for these firms to raise money and therefore, expand, in a more coordinated manner.
It?s a fact that telecom players have been keen to monetise their tower assets, either by selling a stake to large institutional investors or listing their firms on the stock exchanges. For instance, Reliance Infratel has got the go-ahead for a public float and hopes to unlock value for its shareholders. Essar Telecom Infrastructure?s (ETIL) 4,500 towers are arguably among the last chunky tower assets that could be up for grabs. If GTL wants to make to the top rung, it might not be able to do so, on its own, and may have to look to buy more assets.
But, as it is, GTL?s balance sheet will be under some degree of strain. Analysts observe that this is because the company plans to borrow around Rs 5,000 crore at an interest rate of 10.5% for a period of ten years to fund the Aircel acquisition. Of the remaining Rs 3,400 crore that needs to be paid to Aircel, Rs 1,750 crore will be paid partly out of GTL Infra?s cash resources and the rest from those of the parent company GTL Ltd. As at the end of March 2009, GTL Infra had cash resources of just over Rs 1,350 crore and loans and advances of close to Rs 600 crore. GTL?s debt to equity ratio isn?t small at 2.7 times and it had loans of around Rs 3,500 crore at the end of March . GTL Infra has 2,418 outstanding FCCBs at a value of Rs 1,261.58 crore as on March 31,2009.
It?s not clear, analysts say, whether the company has managed to bring this down between March 2009 and now. However, excluding the FCCBs that mature in 2011-12, the firm claims its debt-to-equity ratio to be around 1.6. GTL Infra?s cash flows will be needed to repay the debt of Rs 750 to Rs 800 crore and it may need to borrow some more to roll out another 20,000 towers. All in all, it?s not going to be easy for the company to digest the acquisition.