Far from unlocking value, tower companies are sitting on surplus capacities, unable to attract new tenants and facing poor cash flows. Analysts do not see any consolidation here in the short term, unless companies restructure debts and improve cash flows. The tower business has become as crowded as the mobile business. Most telecom circles have 13 operators each, while there are 10 tower companies to service them.
Standalone tower companies like the American Tower Company entered India around 2006. However, since operators who got licences in 2008 failed to roll out services, the tower-centric business model turned sour. The only tower company with healthy cash flows and high tenancy ratio today is Indus Towers, a three-way joint venture between Bharti Airtel, Vodafone-Essar and Idea Cellular. All the three firms are top GSM operators with profitable balance sheets and no problems with expansion plans. Viom Networks and Reliance Infratel are two other tower companies doing well.
Says Romal Shetty, telecom analyst at KPMG: Most tower companies have piled on debt under the assumption that they will be able to reach a tenancy ratio of over 2, but the best they are able to get is between 1 and 1.5. He added that the ongoing 2G investigation has added to their woes, completely halting expansion plans of new telecom operators such as Videocon, Etisalat DB, STel and, to some extent even Uninor.
Stagnant tenancies are a major problem: Says Prashant Singhal of Ernst & Young: Even if a tower firm has one tenant, it will have to incur the same amount of operational costs of power and real estate which it would for more than one tenant. Hence, in this industry, variable costs too behave like fixed costs and in order to make business profitable, one has to keep adding tenancies which reduce the per-tenant cost by spreading it over additional tenants.
Akhil Gupta, deputy CEO of Bharti Enterprises points out why Indus is successful while many rivals are not. According to him, Bharti first built a successful telecom business and then to bring in efficiencies, hived off tower business into a separate entity. We did not set up telecom towers to achieve valuations, Gupta had said at the company's recent earnings announcement.
Viom has been successful since it is a joint venture between Tata Teleservices and Srei Infrastructure. Since TTSL has transferred its towers to this firm, the model is similar to Bhartis. However, since it doesnt have other operator stakeholders as is the case with Indus, incremental revenues are a problem.
Similar is the case with Reliance Infratel, the tower arm of Reliance Communications.
Its core model looks alright but its tower sharing pact with Etisalat DB, which would have enhanced its revenues hasn't really worked since Etisalat has barely rolled out services. An attempt to merge the company with GTL Infrastructure last year failed.
Some tower company executives said that with low per-user revenues, rental payments from several mobile operators have been delayed.
So, is the future bleak for tower firms Not really, if the long-term fundamentals are taken into account. According to the Telecom Regulatory Authority of India, India will need 1 lakh more towers by 2014, 25% more than the existing 4 lakh. Further, once 3G and broadband wireless access services are fully rolled out, demand would grow.
In the meantime, the possibility of tower companies looking out for diversification to broaden their revenue stream can also not be ruled out. One may probably see tower firms use their real estate to sell other merchandise, or offer other kinds of services, Shetty of KPMG said. But in the immediate future, it is more of pain and less of gain for telecom tower companies.