The telecom sector has attracted significant investments from private equity (PE) investors, over the years. These investors have contributed significantly to the sector’s growth by providing smart capital and improving capital efficiency. Further, PE investors have been not just providers of capital but also agents of change, by promoting new business models, backing entrepreneurs and encouraging the expansion of digital infrastructure. For instance, global PE companies such as Brookfield have been actively leveraging opportunities in the telecom domain since 2013 and also supporting the growth of new segments.
However, a drastic change in investor sentiment was seen in late 2019, owing to the onset of the Covid-19 pandemic. The majority of the industry stakeholders believed that the sudden onset of the pandemic would cast a huge shadow on investor appetite for investment in the telecom sector. Contrary to that view, the pandemic actually acted as a catalyst for investments in the sector, with telecom being among the highest gainers in terms of PE investments post the pandemic. According to a report by Praxis Global Alliance, PE and venture capital (VC) funds invested over $11 billion in the telecom sector during 2020 alone.
Going forward, as a new normal sets in, induced by the pandemic, and digitalisation becomes a way of life, the telecom sector’s attractiveness for PE investors is only poised to grow. In fact, key investors have already started eyeing opportunities in two key segments – data centres and satcom services – which are expected to witness strong growth in the coming years. Moreover, recent enabling reforms such as the production-linked incentive (PLI) scheme and the scrapping of the retrospective tax law will further strengthen investor sentiment in the telecom sector.
Growing attractiveness of the telecom sector
PE investors have found the telecom sector to be an attractive investment avenue owing to its dynamic nature. The biggest factor driving the steady inflow of PE funds in the sector has been the breakneck speed of subscriber additions. According to a report by the Competition Commission of India, the increase in subscriptions in the telecom sector has been nothing short of dramatic, on occasion touching even 20 million in a month. Further, the Indian telecom industry has emerged as one of the most competitive markets in terms of tariffs, with operators involved in an aggressive tariff war. Internationally, India offers the cheapest data prices, compared to the current market exchange rates.
The government too has played a key role in attracting investments as it increased the foreign direct investment (FDI) limit in the telecom sector from 74 per cent to 100 per cent, in early 2020. Another key development that reinstated investor confidence in the sector was the Supreme Court’s order to grant telcos a 10-year timeline to pay outstanding adjusted gross revenue dues. Besides, the Indian telecom infrastructure space has also been offering lucrative opportunities to PE investors, with telcos looking to monetise their assets during the past two to three years.
For instance, in 2019, Canada-based PE major Brookfield Asset Management, Inc. partnered with Singapore-based sovereign wealth fund GIC Pte Limited, and others, in a $3.6 billion deal to buy the telecom tower assets of Reliance Jio’s tower arm, Summit Digitel Infrastructure Private Limited. Brookfield acquired 135,000 recently constructed communication towers that form the backbone of Reliance Jio’s telecom business. The deal, which closed in September 2020, is the biggest PE transaction in India.
The pandemic effect
The pandemic acted as an unexpected catalyst for promoting digital expansion. Telecom companies, which have been the building blocks of 4G connectivity, home broadband, security and collaboration, emerged as the biggest enablers of social engagement amidst this crisis. During this period, India experienced a significant uptick in remote working solutions, digital payments, e-commerce activity and the adoption of online tools. These trends are expected to continue and become the new normal in the post-Covid era. With India yet to tap the full potential of the evolving digital ecosystem, investors remain hopeful of leveraging high returns from their investments in the market. Moreover, the evolving 5G ecosystem can help investors gain substantial benefits in times to come. Besides, the rising anti-China sentiment across the world could be a reason for investors to look for opportunities in India – the next big digital destination.
Investors in action
The year 2020 proved to be a watershed of sorts for PE investments in the telecom domain. While the entire country garnered an all-time high of $47.6 billion in PE/VC investments during 2020, the telecom sector alone garnered around $11 billion, invested across 13 deals. In fact, telecom has emerged as the top sector in terms of PE/VC funds invested and has witnessed a tenfold year-on-year increase in PE/VC investments.
The growth was primarily attributed to the mega investment spree by global PE investors in Jio Platforms, a three-and-a-half-year-old tech firm owned by Reliance Industries Limited (RIL) as well as Jio’s fibre infrastructure investment trust (InvIT). These global PE investors included TPG Capital, KKR, General Atlantic, Silver Lake, Intel Capital, L Catterton and Vista Equity Partners. Further, the Abu Dhabi Investment Authority (ADIA) and Saudi Arabia’s Public Investment Fund (PIF) jointly invested in Digital Fibre Infrastructure Trust, the InvIT that holds RIL’s fibre optic assets. According to RIL, ADIA and PIF purchased units worth Rs 37.79 billion each in the InvIT. In sum, the global PE giants invested $9.92 billion in Jio Platforms between May 2020 and July 2020, while ADIA and PIF invested $1.01 billion in Jio’s fibre InvIT.
Tapping emerging segments
The PE investment spree, started by Jio in 2020, seems to be continuing even during 2021, with PE investors trying to diversify their portfolios in the telecom domain. In addition to investing in telecom service providers, they have also started eyeing opportunities in emerging segments such as in-building solutions (IBS), data centres and satcom services. Investment in these arenas, which are set to witness massive expansion with the advent of 5G services, bodes well for investors. Not only will it help them in garnering adequate returns on their investments, but it will also help shape these growing markets in the country.
A key deal in the IBS space is the recent investment of $21 million in iBus Network and Infrastructure undertaken by Morgan Stanley India Infrastructure, an India-focused PE fund of Morgan Stanley Infrastructure Partners. Under the deal signed in April 2021, Morgan Stanley India Infrastructure would acquire a stake in iBus Networks, which offers IBS, outdoor small cells and other last-mile connectivity solutions to mobile operators.
In the data centre space, PE firm Everstone Group formed a strategic joint venture (JV) with global data centre major Yondr Group, at an investment of $500 million each. The JV, called EverYondr, with an initial capitalisation of $1 billion, will operate data centres in India. The firm’s first data centre facility will be located in the Mumbai Metropolitan Region. The land and power for the project, which will deliver 30 MW by 2023 and 60 MW of IT capacity when fully developed, have already been acquired. Meanwhile, PE players are also entering the satcom space, which is full of opportunity, especially as a means of connecting India’s large rural and remote population. Recently, Brookfield’s tower InvIT, the Tower Infrastructure Trust, acquired a 100 per cent stake in Space Teleinfra Private Limited (STIPL) for $121 million. By acquiring STIPL, the tower InvIT will be able to provide customers with a wide range of passive telecom infrastructure services, including macro towers and indoor solutions.
Deals in the pipeline
While a whole gamut of PE deals have been closed in the telecom sector during the past two years, there are some others in the pipeline too. Key among these is Vodafone Idea’s (Vi) sale of a sizeable stake in its business to keep the company afloat. As per industry sources, the company is in talks with US-based PE investors such as Apollo Global Management, to raise around $3 billion through a mix of debt and equity. Further, Vi is also reportedly in talks with TPG Capital, Apollo Global and the Carlyle Group to raise around $1 billion from the sale of its fixed line broadband subsidiary, optic fibre unit and data centre business. While Vi remains hopeful that talks with some PE investors will materialise, pricing will be the key determining factor for these PE deals.
By Kuhu Singh Abbhi