Synopsis:
Brookfield Asset Management is set to acquire American Tower Corporation's (ATC) India business for a staggering $2.5 billion. The deal signifies a significant move in India's telecommunications infrastructure sector and underscores Brookfield's strategic expansion initiatives. ICCBizNews provides insights into the implications of this acquisition, highlighting its potential impact on the telecommunications landscape and broader investment trends in the Indian market.
Brookfield Asset Management announced on Friday a significant M&A transaction in the telecom tower sector, revealing its plan to purchase the entire 100% stake in American Tower Corporation’s (ATC) India business for $2.5 billion (Rs 21,000 crore). This sum comprises a $2 billion (Rs 16,500 crore) enterprise value in addition to a ‘ticking fee accruing from October 1, 2023.
"Previously, I Squared Capital, an infrastructure investment group based in Miami, had been engaged in discussions to acquire ATC’s tower assets in India at an enterprise value hovering around $1.5-$1.75 billion.
"Brookfield's affiliate, Data Infrastructure Trust (DIT), is spearheading this acquisition, propelling Brookfield to become the largest telecom tower operator in India, surpassing Indus Towers.
"Expected to finalize in the second half of 2024 pending regulatory approvals, the deal arrives at a critical juncture for ATC India, which has encountered operational challenges due to significant dependence on just two telecom operators. Its primary client, Vodafone Idea, had been struggling with payments due to its weakened financial position.
"ATC had recorded a $322-million (about Rs 2,700 crore) goodwill impairment charge for its India unit during the July-September quarter, reflecting the difficult business environment in the country.
Brookfield's affiliate DIT currently possesses two tower companies – Summit Digitel and Crest Digitel. With the addition of ATC, which marks Brookfield's third acquisition in the Indian telecom tower sector, it will also be amalgamated into DIT.
Combining ATC’s 78,000 towers with Brookfield’s existing 175,000 towers, the company will boast a consolidated tower count of 253,000, surpassing Indus Towers’ 204,000 towers. Brookfield anticipates that the acquired sites will diversify DIT’s revenue streams and expand interactions with all mobile network operators in India.
Arpit Agrawal, Managing Director and Head of Infrastructure for India and the Middle East at Brookfield, stated, “We are enthusiastic about expanding and enriching our current telecom tower portfolio in India, enabling a wider range of solutions for our clients and partners. Through strategic acquisitions such as ATC India, we remain strongly committed to fostering digital connectivity and reshaping the telecom infrastructure landscape in the region.”
Nevertheless, ATC will maintain possession of the complete economic advantages linked to the Rs 1,600 crore optionally convertible debentures (OCDs) issued by Vodafone Idea to the company. Additionally, as part of the deal, the company will retain entitlements to receive payments related to existing receivables in the country.
Analysts, however, have expressed concerns regarding the future prospects of the telecom tower segment in the country, given the presence of only three telecom operators – one of which faces financial weakness – alongside six or seven tower firms.
Industry estimates indicate that the tower tenancy ratio, a pivotal operational measure, stands at only 1.3-1.4% and is not projected to undergo significant growth. Tower tenancy refers to the count of tenants on a single tower. An escalation in tenancy leads to incremental revenue and EBITDA, making tenancy the primary driver of revenue expansion.
"Over the past 1.5 years, there has been a shift towards single tower tenancy. While this has lowered capital expenditure, it has also impacted the returns tower companies traditionally derived from multiple tenancies on conventional towers," remarked Ankit Jain, Vice President and Sector Head at ICRA.
ICRA holds a pessimistic view of the tower sector, citing elevated receivables and reliance on financially weaker telecom companies. ICRA's report highlighted that the tower industry's reliance on weaker telcos for tenancies remains high, approximately at 34%.
However, Jain indicated that under Brookfield, ATC will continue to conduct business with Jio, similar to Summit and Crest. Jio holds the first right of refusal with Brookfield, entitling it to the initial tenancy rights on its towers.
Bharti Airtel possesses a 48% stake in Indus Towers and serves as its primary customer. Analysts affirm that the deal will not alter the sector's economics, and even Indus Towers will remain unaffected.
Brookfield has had a long-standing presence in the tower sector, although its primary focus remains its asset management operations, where a 7-8% asset yield in the tower sector suffices," noted an analyst based in Mumbai. "To achieve this, the company only requires two tenants who consistently pay their rentals," the analyst emphasized.
During 2022, Brookfield acquired a collection of 5,000 indoor business solution sites and small cell sites, facilitating the advancement of 5G deployment and allowing telecom operators to expand their coverage in challenging-to-access and densely populated areas. Additionally, Brookfield holds a portfolio of approximately 175,000 towers obtained in 2020 from Reliance Industrial Investments and Holdings Limited – the tower arm of Jio.
In India, Brookfield manages approximately $25 billion in assets across infrastructure, real estate, renewable power, transition, and private equity.
