Indonesian telecoms company XL Axiata sold its towers business to Profesional Telekomunikasi Indonesia (Protelindo) for Rp3.57 trillion ($267.2 million) on Monday, as the country’s fragmented towers sector continues to consolidate.
The sale and leaseback of the towers is the latest of several such deals in Indonesia and across Asia as cash-strapped mobile telecom companies seek to unlock value from their balance sheets. The assets offer utility-like revenue streams.
Axiata, Indonesia’s third-largest mobile company, is 65%-owned by Malaysia’s Axiata Group and invited bidders to submit tenders for 2,432 of its 6,000 towers on January 6. Each bidder was required to pay $100,000 to be involved in the process and afterwards had to put down a bid bond equal to one tenth of their bidding value, to ensure the certainty of their interest, according to a banker familiar with the sale. The process closed on March 9.
Protelindo’s parent company Sarana Menara Nusantra offered a winning bid that values the Axiata’s towers at an estimated Ebitda ratio of nine times, the highest to date for a tower deal, the banker said.
He added that this was the most effective way to assess the deal because the cost is directly correlated to future earnings the business will gain from leasing the towers back to the seller.
“Axiata could have gone for a higher valuation but it had to consider that if it got it, this would lead to it being charged higher leasing costs after the deal,” the banker said. The company has agreed to lease back the towers as an anchor tenant for 10 years.
Protelindo is well placed to buy Axiata’s towers due to its relatively low leverage ratio. The company’s adjusted debt-to-Ebitda ratio for the 12 months to September 2015 was 3.1 times, less than half that of its biggest local rivals, analysts at Moody’s estimated in a report on India and Indonesia's towers sectors, released on Tuesday.
Axiata Group’s share price stood at RM5.93 by the market close on Tuesday, having closed at RM5.87 on Monday. Sarana Menara Nusantra’s share price closed at Rp4,085 compared with Rp4,000 a day earlier.
Ripe for consolidation
Indonesia’s fragmented towers market looks ripe for further consolidation.
In its report, Moody’s estimates the total number of towers in Indonesia at 76,000, with the two largest tower operators, Protelindo and Tower Bersama Infrastructure, each owning and operating 12,211 and 11,291 towers. With the new acquisition Protelindo’s tower count rises to 14,643.
Solusi Tunas Pratama comes next with 6,868 towers, followed by Mitratel with 6,800 towers. IBS Tower and Komet Infra Nusantara then have 2,185 and 1,000 towers apiece, respectively. There are also several tiny companies that own and operate 50 towers or less.
Axiata has already been involved in the consolidation process. STP bought 3,500 of its towers for $460 million in 2013.
And Moody's analyst Nidhi Druve expects more to come, both in Indonesia and India, "over the next two to three years” as mobile telecom companies seek to raise funds to roll out or upgrade 3G or 4G networks and to reduce debt levels.
Axiata was certainly a motivated seller, noting in its sales document that it wanted to raise funds to cut back on debt.
The company’s profit dropped to Rp25.3 billion in 2015 versus Rp803 billion the year before, largely as a result of Rp2.5 trillion in foreign exchange losses, according to the document. It also had liabilities totaling Rp44.75 trillion.
Economies of scale
There are also economies of scale to consider.
Druve noted in the Moody's report that telecom companies see “a limited strategic benefit to owning towers versus leasing them.” That is particularly true in the case of Indonesia, an archipelago of 17,500 islands that is expensive and difficult to cover.
“Whether you are talking about two mid-sized players merging or one of the big ones buying a mid-sized company, I’d expect to see further M&A,” the banker familar with the Axiata sale and leaseback said. “This is a scale business, so it makes sense.”
Protelindo would appear to agree. It reported an Ebitda margin of over 80% for the 12 months to September 2015, according to Moody’s.
Going forward, most attention will be drawn to the plans of Telkom and Telkomsel, the country’s leading telecom companies. They still own about 32% of the country's towers (Telkom does via towers subsidiary Mitratel), Moody’s estimates, and they could potentially sell these to independent operators.
Indonesia and India aren’t the only countries to have experienced M&A activity in the telecom towers space.
In October, China’s government dictated that its three telecom companies combine their tower assets into one company, called China Tower Corporation. Meanwhile Thailand’s True Corp listed its towers operations in an infrastructure fund on the Bangkok Stock Exchange via a $1.8 billion initial public offering in December 2013.
XL Axiata was advised by Bank of America Merrill Lynch on the sale.