In the first-ever signs of the slowdown in the telecom sector, the telecom tower companies are deferring their acquisition plans, largely attributed to the drying up of liquidity and a fall in valuations.
Barely two months ago, infrastructure majors like Bharti Infratel, GTL Infrastructure, Quippo Telecom and Reliance Telecom Infrastructure among others were either looking at acquisitions or planning to divest stake. Even though the companies would not officially comment on the status of these processes, merchant bankers involved in the deals said most of the current acquisitions are stuck at the “due diligence stage”.
According to a merchant banker, tower valuations were earlier based on the ‘market multiple’ method. Under this method, the valuation of a tower was compared with similar deals that took place in the past. But the slowdown has forced the acquirers to concentrate on cash flows and revenue per tower to calculate the valuations, which led to significant reduction in the perceived valuations of these companies.
Making matters worse is the mismatch between “expected valuations and offered valuations”, and adding to this confusion are the operational issues, he said.
According to Priyank Chandra, an analyst with Dolot Capital, “The financial crisis has led to a liquidity crunch and the companies, we believe, are finding it difficult to raise money for their planned acquisition processes. This would affect the deals in the pipeline, while the ones sealed would sail through”.
As an immediate response to the financial crisis, tower companies have started viewing cash as a key asset and financial closure of organic plans accorded higher priority, he added.
| DEALS COMPLETED EARLIER | ||
| Feb-08 | Spice-Quippo Telecom | Rs 600 crore |
| Dec-07 | Bharti Infratel* | $1 billion |
| Jul-07 | Reliance Communication* | Rs 1,400 crore |
| * (Mainly, foreign investors had invested in the two companies) | ||
Another impact of the financial crisis on telecom sector is the fall in valuations, with many acquirers seeking revaluation of the prices earlier negotiated. Telecom analysts were of the opinion that the major reason is the dipping confidence of operational synergies vis-à-vis that of valuations. Moreover, renegotiation of master services agreements (MSA) with the customers of the target companies is another hassle. India needs around 3,80,000 cell sites by 2011 to service the growing subscriber base and the companies need to add another 1,50,000 towers to reach this number.
However, Manesh Patel, a partner at Ernst & Young, had a different view. “I believe this a temporary phenomenon as tower companies are differing their acquisition plans due to the initial panic caused by the financial crisis. This gives them a sound reason to delay their takeover plans, mainly as the liquidity is drying”.
When the conditions improve, the companies will seal the deals, if required, after renegotiations, he opined.
