Telecom tower valuations fall 90% from 2007 peak

Consolidation in the telecom sector is not just hurting call tariffs and new telecom firms.

Tower valuations, which have been dropping for the past three years, have touched their lowest as a lot of telecom firms that rent these towers have exited the sector.

And going by the uncertainty in the sector and delay in tower initial public offerings, the scenario would only get worse. A report by Goldman Sachs last week said in the last 6-8 months tower valuations have dropped to $60,000-75,000 per tower from a peak of $636,000 in July 2007. Valuations were $97,000 in February 2010.

“With further deterioration in fundamentals post 2010, mainly due to 2G licence cancellations and a slowdown in capex, we believe valuations may be further impacted. In addition, contribution to tenancy growth from 3G is also lower than initially expected as 3G rollout by existing tenants is not yielding higher tenancies, but higher rentals,” analysts Sachin Salgaonkar, Piyush Mubayi and Paras Mehta said in the report.

RCom, Bharti Infratel and BSNL are looking to sell their towers, but have met with little success. While RCom has shelved its Singapore listing plans till the next year at least, Bharti seems keen on an IPO, but only by December at the earliest, as it is “seeking favourable market conditions”.

Naval Seth of Emkay Global said, “There is near-term pressure on tower companies due to demand-supply imbalance. So while in 2007, tower valuations were at Rs1 crore plus, now they are around Rs40 lakh. This is because in 2007 there were a lot of operators, which is just the opposite of the case now, with so many telcos exiting due to uncertainty of their continuation, post licence cancellation.

Also, auction winners will only look at select circles – so again this reduces the demand for towers. Listing of the tower companies may help – but this would mean one company gaining a premium over the other, which will neutralise the impact of positive valuation for tower companies.”

Further, the 6% licence fee on spectrum usage may impact valuations.

According to analysts, Bharti is expected to lose Rs8-10 per share and Idea is expected to lose Rs5-6 due to the 6% fee, which will have a trickledown effect on tower companies as well.

Rajan Matthews, director-general, Cellular Operators Association of India (COAI), said, “The 6% licence fee amounts to double taxation and will definitely hurt telcos and tower company valuations. However, the impact of the same will reflect only after the auctions, as it will depend on how much spectrum telcos have and in which circle.”

The only light at the end of the tunnel seems to be earlier-than-expected 4G rollout in the 700 Mhz band and higher tenancies led by refarming of 900 Mhz spectrum, according to the Goldman Sachs analysts.

However, Matthews believes that there is very little chance of an early 700 Mhz auction due to 2G auctions ending in 2013 only. “In fact, the 700 Mhz auction may be further delayed, due to 2014 being an election year. However, tower demand may pick up due to 3G expansion, broadband rollout (4G), and new EMF tower norms, which should get factored into tower valuations in another 4-6 months, or after the auctions, when winners may need more towers.”

Jaideep Ghosh, partner, KPMG, said, “If LTE is rolled out on a mass scale, then it may help tower companies due to increasing demand for towers. However, this does not present a significant upside in the near term. Refarming may help, but there are a lot of regulatory issues, and this may not happen till 2014-15. Since 3G uses the same towers as 2G, and demand for the same hasn’t been as much as expected, the tower valuations have also dropped. However, this may change if 3G picks up.”