India’s telecom sector calls on private equity

India is the world’s second largest market in terms of mobile phone subscribers and also one of its fastest-growing. With more than 60 percent of the population still without access to telephones, there are opportunities aplenty for private equity – as recent deals show.

In August, Quippo Telecom Infrastructure, which is the telecom tower affiliate of SREI Infrastructure Finance, and Wireless-TT Info-Services, the tower arm of Tata Teleservices, completed a transaction merging the two companies.

As part of the deal, Quippo made a cash payment of INR23.7 billion ($489 million; €335 million) to the Tata subsidiary and is transferring all its towers to the latter. Of this sum, the company raised about INR 10 billion from existing investors such as IDFC Private Equity and Oman Investment Fund, Sunil Kanoria, vice chairman and managing director of Quippo Group, told PEI Asia.

He added that the remainder came in the form of mezzanine capital and debt “which was raised entirely from domestic institutions”.

What this deal shows is that there is healthy appetite among investors to partake in the telecom infrastructure growth story, which is a function of the development of the telecom sector in the country.

And private equity is no exception. This latest deal is but one example of the continued interest private equity managers are showing in the sector.

Other telecom tower companies that have received private equity investments in the past include Bharti Infratel, a wireless telecom tower infrastructure provider and subsidiary of Indian telecommunication company Bharti Airtel. Last year, the company received $250 million from global buyout firm Kohlberg Kravis Roberts and another $1 billion from India Equity Partners, AIF Capital, Temasek Holdings, Citigroup, Goldman Sachs and Macquarie Bank. AXA Private Equity is an investor in the company as well.

A few months later, Providence Equity Partners invested $640 million in Aditya Birla Telecom, a subsidiary of Idea Cellular, which besides providing telecom services, also holds a 16 percent stake in Indus Towers, a joint venture by Vodafone Essar, Bharti Airtel and Idea Cellular to provide passive infrastructure services to various mobile operators.

These are very large deals by Indian standards. And such investments are likely to continue. The growth in the number of mobile subscriptions in India over the last few years has been astounding. In April 2009, the country had 403.7 million mobile subscriptions according to data from the Telecom Regulatory Authority of India, as compared to 171.2 million connections in April 2007. That is an increase of 236 percent in just two years.

In the month of April itself, 11.9 million new subscribers were added, while 15.65 new mobile lines were connected in March.

Despite this rapid growth in the number of mobile phone subscriptions, the country’s telephone market as a whole remains underpenetrated. Even including wired telephones (landlines) into the equation, still only 38 out of every 100 Indians own a telephone.

More mobile subscriptions mean of course that there is more demand for telecom infrastructure such as towers. If deals in the last year are anything to go by, we are likely to see increasing amounts of private equity money flowing into this space.