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Telecom: Hiving off tower business

Mar 30, 2007

Recently almost all the major private sector telecom companies have come out with announcements with regard to hiving off of their telecom tower businesses. While the strategy of hiving off the towers have been widely reported, investors must note that there are other telecom infrastructural assets also that the companies wish to offload from their books along with the telecom towers. The telecom companies want to embrace an asset light model so as to be able to focus more on the core business of marketing their telecom services and innovating their offerings. This will enable them to acquire a larger subscriber base.

Hive off of telecom towers
Company name Number of Towers Owned Number of towers to be hived off
Bharti Airtel 40,000 40,000
Reliance Communication 15,000 15,000
Tata Teleservices Ltd. 5,000 5,000
Idea Cellular 8,000 8,000
Source: Company websites

While Idea is still mulling hiving off the tower business, the remaining telecom companies have already made the decision and are in the process of forming subsidiaries to accommodate this business.

Impact of the move on telecom companies

Expanding services: The move will help the companies focus on their core competence i.e. offering of telecom (and related) services as they will not have to worry about the operations and maintenance of the networks. This allows the companies to focus better branding and marketing of the products. For instance, the company can target specific market segments (like students, lower income earners etc) with products designed for them and thus enhance their market shares.

Achieving cost efficiencies: Currently in the more matured markets like the US and Europe, there are specialised telecom infrastructure management companies that take on their books the cell sites and other infrastructure of the telecom companies. These companies specialise in managing the infrastructure and bring in operational efficiency, thus aiding the increase in profitability. A similar scenario when created in India will yield the benefits of cost efficiency to the Indian telecom companies too. Meanwhile, when the companies are viewed on a standalone basis (i.e. after a subsidiary has been formed for the infrastructure business), they will reflect an improved performance of the cellular mobile service business. This will be because their financial statements will reflect the true costs associated with the provision of these services.

Unlocking value in the future: Currently, the parent companies are forming wholly owned subsidiaries to manage the telecom infrastructure business, and are thus in the process of creating revenue-generating assets (as these can be leased out to the main parent company as also other telecom companies) for these subsidiaries. This will have the impact of improving the transparency in the sharing of passive infrastructure by the telecom companies. Also, this will lead to value unlocking for the investors as and when these subsidiaries are listed on the bourses.

Conclusion

Driven by this newfound wisdom and in a bid to create shareholder value, the Indian telecom companies are falling in line with their global counterparts by separating the telecom infrastructure business from their core business of cellular services. We believe that the move will augur well for them in the longer term, as it will help them consolidate their positions and compete effectively.


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