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Bharti Airtel: Valuing the tower business - Views on News from Equitymaster

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Bharti Airtel: Valuing the tower business
Mar 23, 2010

The telecom tower industry in India is currently going through an interesting phase. There have been quite a number of deals that have taken place in the recent past. Some telecom companies are looking to hive off their towers so it would help them raise cash to spend on their core business. Others have been plainly exiting as the industry seems to be going through a consolidation phase. The most recent case was that of Tata Teleservices Maharashtra (TTML), the listed arm of Tata Teleservices. It sold its tower business to Wireless-TT Info Services (WTTIL) for an enterprise value of Rs 13.2 bn. WTTIL is the joint venture between Tata Teleservices and Srei groupís Quippo. The former owns the majority stake in the same. Around 2,535 towers were transferred in this transaction. Given the deal value, it came up to nearly Rs 5.2 m per tower. The tenancy ratio (average number of tenants per tower) stood at about 2.15, which is considered quite decent.

Moving on, in January this year, GTL Infrastructure acquired 17,500 towers from Aircel. The consideration for this was a whopping Rs 84 bn. However, when calculating the deal on a per tower basis, it stood at a lower figure of Rs 4.8 m per tower. The reason for the same is possibly on the back of a lower tenancy ratio of 1.2.

Then, just a month ago, American Tower Company (ATC) acquired Essar Telecomís 4,450 towers for a consideration of about Rs 20 bn. This works out to be about Rs 4.5 m per tower. The average tenant ratio at the time of the deal stood at about 1.8.

Now putting all this data together we get the following table.

Company Sold to For a consideration of (Rs m) Number of towers sold Value per tower (Rs m) Tenancy ratio
TTML Quippo-WTTIL 13,180 2,535 5.2 2.2
Aircel GTL Infra 84,000 17,500 4.8 1.2
Essar Telecom ATC 20,000 4,450 4.5 1.8
      Average 4.8 1.7

If we take the average numbers of these deals, we get a value per tower of about Rs 4.8 m on a tenancy ratio of about 1.7.

Before we move to the key point of this article, it is worth mentioning that in the past a good number of deals were made at rates that were two to three times than what they are at current levels. This is on the back of the hype created around the telecom tower business. The cost for setting up a telecom tower is believed to be within the range of Rs 3-3.5 m. But the reason why the deals are made at much higher prices is because of the amount of time that is saved for setting up a tower. Companies are ready to pay a higher consideration to acquire towers immediately than wait for setting up new ones. That is okay, as long as the payback period does not stretch too long.

Anyways, coming to the main point, Bharti Airtel has a telecom tower business which forms a part of Bharti Infratel. Bharti owns nearly 92.5% stake in this company. Bharti Infratel holds 42% stake in Indus Towers. Indus Towers is a joint venture between Bharti Infratel, Vodafone and Idea Cellular. The latter two hold 42% and 16% stake respectively.

As of December 2009, Bharti Infratel had 29,806 towers on a standalone basis. Indus Towers had a total number of 102,696 towers set up.

Now going by the average of Rs 4.8 m per tower with a tenancy ratio of 1.7, we have tried to value Bhartiís tower business. Considering that Bharti Infratel had a tenancy ratio of 1.6, and Indus Towers of 1.7, we have given a value of about Rs 4.5 m per tower (a slight discount to the average as shown in the table above).

The value of all the towers (adjusted on a proportionate stake) comes to about Rs 304 bn. The total number of shares outstanding at the end of the December 2009 quarter stood at about 3,797 m. This translates into the company having a tower value of around Rs 80 per share. Given Bhartiís share price of Rs 315, a good one-fourth of the price is captured by the tower business itself.

Investors should note that the valuation (on a per tower basis) have declined sharply from what they used to be a few years back. For example, when Bharti had raised over US$ 1 bn by selling about 9% stake in Bharti Infratel towards the end of 2007, the value per tower stood for that deal stood at about Rs 8 m per tower.

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