Rush for data centres, telecoms towers may be boon for telcos
Singapore
AS THE market heats up for communications assets, one group could be a beneficiary: telcos.
In April this year, Australian telco Telstra completed the sale of its data centre located in Paya Lebar to Hong Kong-based content exchange platform Big Data Exchange for an undisclosed sum. The data centre houses 1,800 racks with a 7.3-megawatt power capacity.
Just last month, Bharti Airtel, an Indian associate of Singtel, announced it would sell 25 per cent of its data centre company Nxtra Data to private equity giant The Carlyle Group for US$235 million.
"At one time, telcos thought they could seamlessly add data centre and cloud businesses to their existing operations. The running of data centre and telco businesses seemed to share a lot of characteristics. They were wrong," said John Dinsdale, chief analyst and research director at Synergy Research.
McKinsey partner Sai Tunuguntla said this is also due to the "shift" in the strategy of telcos.
"They are cash strapped. They have a new generation of technology to roll out, which is 5G. There is a lot of capacity that they need to put in their systems, to support the data for data consumption. As a result, they need more cash," he added.
The telcos have also been selling their telecom towers to "free up capital for other investments", said Mei Lee Quah, associate director of ICT at Frost & Sullivan who specialises in telecoms and payments strategy.
Last October, Indonesian telco Indosat Ooredoo sold 3,100 telecom towers to tower companies Mitratel and Protelindo for 6.4 trillion rupiah (S$601.3 million).
In December, Indian telco Reliance Jio announced plans to sell a portfolio of some 130,000 communication towers to Canadian company Brookfield Infrastructure Partners and its affiliates for Rs 25,215 crore (S$4.61 billion).
Since the announcement, more towers have come up, and the portfolio now stands at 175,000.
In Singapore, Singtel was reported in April to have been looking to sell its telecom towers in Australia worth more than A$2 billion (S$1.98 billion).
In response to queries from The Business Times, a Singtel spokesperson said: "We regularly review our options to optimise our asset portfolio and operating model and are currently undertaking a review of our Australian tower assets with the assistance of advisors."
Ms Quah of Frost & Sullivan said these deals come as telcos are finding it "increasingly a challenge" to stay profitable.
"The rollout of 4G LTE networks is levelling the playing field across Asean member states and allowing for adjustments in market share among telcos," she said.
"When network coverage becomes less of a competitive differentiator, telcos consolidate networks to shift focus away from infrastructure investment and towards developing innovative services."
But the telcos are also selling at a time when demand is healthy.
Mr Tunuguntla said that when telcos "carve out their tower or data centre assets, the valuation on these assets improves by three to four times".
Indosat, for instance, booked a net gain of 2.6 billion rupiah from the sale and leaseback of its towers. Meanwhile Bharti Airtel's deal with Carlyle values Nxtra at a post-money enterprise value (EV) of US$1.2 billion.
For the year ended March 31, Nxtra posted earnings before interest, taxes, depreciation and amortisation (Ebitda) of 2.9 billion rupees or US$38.4 million. This implies an EV/Ebitda ratio of just over 31 times.
The market has generally taken positively to announcements of asset sales. Shares of Telstra gained 1.3 per cent after the announcement of its sale completion on April 9. Bharti Airtel gained a smaller 0.05 after the Carlyle deal announcement.
Indosat saw its shares close up 7.2 per cent after signing the agreements with Mitratel and Protelindo.
Kiran Karunakaran, a partner at Bain & Company with expertise in telecommunications, said buyers of tower assets are looking at markets where tenancy ratios are low and there is a "high level of certainty that there is going to be an increase in the number of sites required and the number of tenants per site".
Telecoms towers with multiple tenancies per site produce higher returns than single-tenancy sites due to economies of scale.
Mr Karunakaran added that he is "very bullish" about the Indonesian telecom tower market and is expecting "a lot of activity in the next year or two years".
"There is still a large proportion of the towers that are owned by the incumbent telco. These incumbent towers are in areas outside of Java, where the telco operators don't have a lot of presence. So there's a natural opportunity for the incumbent telco to explore a potential carve out... and potentially bring in an investor to unlock value," he added.
Izzaddin Idris, the acting chief executive of tower company edotco Group, said the firm is continuing with its expansion into Indochina and is "looking to grow organically via build-to-suits".
"We see a continued resilience in the telecom tower sector with M&A activities remaining robust across the region... (and) continue to see conversations taking place within the sector which leads us to believe that competition is consistent," he said.
