The fierce battle in the telecom industry is expected to result in a fair bit of M&A (mergers and acquisitions) activity in 2017. Regardless of whether companies move towards consolidation, it looks like there will be some asset sales, especially in the tower infrastructure space.
While announcing its September quarter results, Bharti Airtel Ltd said it has taken board approval for exploring the sale of a significant stake in its tower infrastructure subsidiary, Bharti Infratel Ltd. Since then, there have also been reports about Idea Cellular Ltd looking to sell its tower assets. Reliance Communications Ltd has already been in the market to sell its tower assets for a long time.
The key question is if companies such as Bharti Airtel will be willing to sell a majority stake in their tower subsidiaries or whether they will retain a majority stake. If they are willing to relinquish control, there can be wide-ranging consequences for the sector.
For starters, telcos themselves will get higher valuations for their shares in the tower companies. Analysts at Bernstein Research said in a note to clients, “One of the reasons we believe Infratel trades at a discount to other global tower companies is that it is not perceived as independent. If Bharti were to relinquish its control, investors in Infratel are likely to see upside. If Infratel re-rated to the levels seen at the large US based tower cos, the upside would be in the order of around 90%.”
But reports suggest Bharti Airtel is reluctant to let go of control over its tower subsidiary. It appears to be concerned about the fact that its bargaining power with a fully independent tower company will be far lower. According to analysts at Bernstein, the company should consider a majority stake sale, if it has a long-term contract that has locked in tariffs.
“Provided Airtel is reasonably confident that its existing agreements with Infratel are fair and reasonable, and are locked in for as long a period as is feasible, we would argue for the sale of a majority stake. This would allow a significant near-term premium, should allow Infratel to re-rate closer to global norms, and give Bharti flexibility to sell down further in the future,” they said in the note.
Currently, Bharti, Idea and Vodafone India Ltd together own Indus Towers Ltd, which provides a large part of tower infrastructure for these three companies. The asset sale strategy adopted by these companies can significantly alter the arrangement telcos have with this company next year.
Needless to say, for tower companies such as Infratel and Indus, the drop in ownership by telcos will result in higher valuations. Amid all of the other value destruction happening in the sector at the moment, the sale of tower assets can help create some value.