The agreement to buy 20,000 towers from Vodafone India and Idea Cellu­lar in November has been a good way for the Boston-based American Tower Cor­pora­tion (ATC) to mark a decade in India. The move is in line with the company’s strategy of expanding its footprint in the country. Post the acquisition, the company will have 88,000 towers in India, most of which have been brought into the company’s fold through inorganic expansion. This strategy has made ATC one of the top players in the country’s tower industry. With ailing tower companies looking to sell their assets, further inorganic growth would narrow the gap between ATC India and market leader Indus Telecom, which has about 123,000 stand-alone towers.

ATC, an New York Stock Exchange-listed real estate investment trust, is an independent owner, operator and developer of multitenant communications real estate with a presence across 15 countries. The steady expansion in India is consistent with its plan of increasing international revenues to surpass US sales in the next three to seven years. The company earned more than 41 per cent of its $5.79 billion revenue in 2016 from international operations. It operates more than 40,000 towers in the US and over 108,000 towers internationally.

The acquisition of stand-alone towers from Vodafone and Idea is expected to be completed by March 2018, following which ATC will operate more than double the towers in India than it does in the US. India is ATC’s largest international market in terms of towers, accounting for roughly 12 per cent of the property segment gross margin in the third quarter of 2017, before the agreements with Vodafone and Idea. ATC considers India an attractive growth market and the largest “free market de­mo­cracy” in the world, where the ­government seeks industry inputs and ­suggestions. Other factors that make India an ­at­t­­ractive destination are the ongoing consolidation in its tower industry, the increasing 4G network roll-outs and ­grow­ing smartphone demand (among the highest in the world).

Tower acquisitions over the years

As part of its growth strategy, in Novem­ber 2017, ATC agreed to buy 10,235 stand-al­one towers from Vodafone and 9,900 from Idea in a cash transaction of Rs 78.5 billion. The acquisition is being un­dertaken by ATC Telecom Infrastruc­ture Private Limited, a majority-owned Indian subsidiary of ATC.

This is the fifth such acquisition for ATC in India. Earlier, in 2009, two years after it set up operations in India, ATC acquired 1,700 towers from XCEL Tele­com and 700 towers from Transcend Infra. In 2010, it acquired Essar Telecom Infrastructure and added 4,450 towers to its portfolio. The period 2011 to 2014 was of organic growth, which took the total to 13,000 towers. In 2015, the company acquired a majority stake in VIOM, adding 42,200 towers, taking its portfolio to about 56,000.

Following the latest agreement to buy towers from Idea and Vodafone, the ­com­pany’s total investment in India stands at Rs 250 billion, according to media re­ports. In an investor presentation, the company stated, of the 20,000 Idea and Vodafone towers, 60 per cent are ground based, 36 per cent are rooftop and 4 per cent are in-building. The average expected tenancy is estimated to be 1.5. About 85 per cent of the current tenancies are from Vodafone, Idea and Bharti Airtel. The anchor tenants are Vodafone and Idea.

The transaction is estimated to gene­ra­te approximately Rs 21 billion in ­property re­venue and Rs 8 billion in gross margin du­­­­ring their first full year in ATC’s portfolio.

Consolidation in the tower industry

Currently, almost 74 per cent of the total to­wers in India are controlled either by telecom operators directly or through tower companies promoted by them, ac­cording to the Investment Information and Credit Rating Agency (ICRA). How­ever, ownership is likely to change hands fr­om telecom operators to independent play­ers, as operators look to divest their tower assets to fund infrastructure upgra­des due to the ongoing price war.

In India, ATC faces competition from independent tower companies such as Indus Telecom, Bharti Infratel and GTL, as well as telecom operators such as Reliance Communications (RCOM), Reliance Jio Infocomm Limited, Bharat Sanchar Nigam Limited (BSNL), Bharti Airtel, Vodafone and Idea, which also own telecom towers. Both segments – independent tower companies and telecom operators – are undergoing consolidation.

In the current scenario, Vodafone India and Idea (which are themselves in the midst of a merger) have agreed to sell their stand-alone towers to ATC. They, however, continue to hold 42 per cent and 11.15 per cent equity respectively in Indus Telecom.

The other major player, Bharti Infra­tel, which is majority owned by Bhar­ti Airtel, has 42 per cent in Indus Telecom and US private equity firm Providence owns the balance 4.85 per cent.  This may change with Bharti Infratel’s board ­issuing a statement in October that it has decided to “explore and evaluate the ac­quisition of stake in one or more ­tranches in Indus Towers with the aim of making it a subsi­diary or wholly owned subsidiary of Bharti Infratel”.

ATC’s move to acquire towers from Vodafone India and Idea Cellular is in line with its strategy of expanding its footprint in the country. Post the acquisition, the company will have 88,000 towers in India.

Other telecom operators like BSNL, which owns 65,000 towers in the country, is hiving off its tower business while RCOM is likely to sell its tower assets.

The unfolding landscape could result in fewer, but better, positioned players, with ATC being among the front runners. According to ICRA, the number of players is expected to decline from 10 at present to four-five in the next two years.

Consolidation among telecom service providers too has had a positive impact on the growth of the tower industry. Al­though there may be a churn in the short term as merging operators rationalise networks, it will create larger and financially stronger players that will invest more in networks over the long term.

Expected surge in tower demand

Meeting the rapidly growing demand for 4G will require operators to continue up­grading their networks in 2017-18 and necessitate a significant roll-out of new and infill sites. Moreover, as per a Del­oi­tte report on the Indian tower industry, the tenancy ratio is expected to reach 2.48 by 2019-20 from 2.08 in 2016-17. This would contribute to business growth for tower companies.

Typically, operators first upgrade their existing 2G and 3G sites, but inevitably need infill sites for augmenting capacity and new sites for increasing coverage. These will drive growth for the tower in­dustry. ATC India anticipates that the continuing roll-out of advanced network technologies by operators will lead to significant incremental demand for towers.

Radiation concerns

Obtaining permission to build new towers is becoming more and more difficult due to radiation concerns. ATC believes that multilateral bodies like the World Health Organization have the expertise and wherewithal to analyse the impact of any substance on public health. Since these agencies have conducted extensive long-term studies on cell tower radiation, ATC does not need to reinvent the wheel in India in this area. The government, after studying multiple reports, has categorically stated that mobile towers pose no health hazard to people. The company supports ­government initiatives to communicate this ­message and dispel misconceptions about radiation hazards put out by self-proclaimed experts on radiation issues.

Regulatory challenges

According to the company, in principle, the right-of-way guidelines are a step in the right direction as they recognise the fact that telecom infrastructure deployment cannot be done in a piecemeal fashion with each municipality imposing its own rules and charges. However, it is crucial that the guidelines clarify that infrastructure pro­­-­vi­ders can roll out towers on behalf of their customers – unified access service licence holders. The unprecedented increase in the adoption of digital services such as paym­e­nts, e-governance and entertainment will require further investments in the telecom infrastructure sector. Further, the industry has been given infrastructure status by the government, but none of the tax/financing benefits that come with this status.

ATC provides shared infrastructure to customers, reducing the burden that ­single-use communication sites place on land and natural resources, and ­minimising the negative visual impact of towers. It also strives to reduce energy usage and related ­emis­s­ions at its communication sites.