Vodafone's deft tower move

John Delaney and Fernanda Mello Veiga
13 Dec 2007

India's Vodafone Essar, Bharti Infratel and Idea Cellular have confirmed that they will merge their tower operations into a single company, Indus Towers. The new company will be independently-managed and operated, offering passive infrastructure services in India (e.g. non-electronic elements of the network: tower, air-conditioning equipment, shelter, diesel electric generator, battery, electrical supply and premises) to other operators, including mobile operators and broadcasters. The new company will start its operations with approximately 70,000 sites. Vodafone Essar and Bharti will own a similar stake of 42% each, while Idea Cellular will own the remainder.

When Vodafone acquired its Indian operator, the market reacted positively, but with a wary eye on post-acquisition investment plans. The $11.1 billion that Vodafone paid for its stake in Hutchison Essar was near the upper limit of the ROI rules Vodafone has set itself. A lot of investment analysts are watching for any signs that it over-paid. Network sharing has always been a core element of Vodafone's plans to manage its Indian investments, and so details about how that will be handled have been eagerly awaited. Now at last we have them.

The key difference between the Indian strategy and the European strategy is that in Europe, the vehicle for network sharing is the 50-50 joint venture. Indus, by contrast, involves at least three operators and could involve more in the future. Vodafone India's CEO, Asim Ghosh, stated that there will be no controlling shareholder and that "it will be open to all comers". We believe this is important, because by encompassing several operators in this way, Vodafone is able to present network sharing to the TRAI as an initiative aimed at fostering the growth of the Indian telecoms industry as a whole, not simply as something that will work to Vodafone's and Bharti's advantage. By doing that, Vodafone will be able to sail with the strong prevailing wind in Indian regulation, rather than having to tack against it.

But let's not lose sight of the fact that as well as presenting an attractive prospect to the regulator, Indus will be a significant advantage to Vodafone's investment case. Switching and fiber costs are outside the scope of Indus; but the new company will still be handling around one-third of Vodafone India's projected $2 billion annual capital spending. Vodafone has made a rather deft job of setting up the vehicle for sharing that burden.

The US is the market where mobile tower leasing companies (i.e. American Towers Corporation and Crown Castle) are most developed, while in Europe mobile operators are signing network sharing agreements. So far in Europe only Eircom (in September 2007) has sold its mobile towers and in Italy, Wind and Three have announced that they will sell their towers by February 2008 (shortlist candidates have already been announced). Nevertheless, in developing markets like India, where mobile networks are still being rolled out to increase coverage, this type of deal has greater significance. It will help operators significantly reduce capital expenditure because it won't be necessary for every mobile operator to build aerial sites.

John Delaney and Fernanda Mello Veiga analysts at Ovum

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