Asia-Pacific telcos monetize towers assets through M&A deals in 2022

M&A deals for Asia-Pacific's wireless industry slowed in 2022 to 26 announced deals with a total transaction value of $8.64 billion. Faced with rising inflation and higher cost of borrowing, mobile operators have embarked on small-scale divestitures of their tower assets to tower companies to raise cash for operators' debt and capital expenditure reduction plans.

Operator consolidation and tower infrastructure deals dominated most telco M&A deals in Asia-Pacific in 2022. These trends were in response to global economic headwinds in the previous year. Inflation in many Asia-Pacific markets is yet to peak this year, so monetary policy could remain contractionary for most of 2023. This means that the effects of high costs of borrowing money seen in 2022 could continue this year.

The slowdown in wireless deals in Asia-Pacific is part of the general decrease in M&A activity for the telecommunications industry, which saw transaction value drop 52.4% from $32.88 billion in 2021 to $15.64 billion in 2022. Still, wireless deals form the bulk of telco industry deals, comprising 55.3% of the total transaction value in 2022.

Looking at M&A transaction values in the past five years, the telco industry and wireless deals both peaked in 2020. As movement restrictions following the initial spread of the COVID-19 pandemic confined people indoors, the industry saw the increase in demand for telecommunication services as an attractive opportunity, leading to a spike in M&A deals. The sudden shuttering of economic activity also led to market consolidation as larger players acquired failing competitors, thereby contributing to the increased number of deals.

Two years since the start of the pandemic, movement and economic activities in many markets returned near to pre-pandemic levels. This means that the two trends in 2020 that contributed to a spike in M&A deals no longer hold water in 2022. Instead, the telco industry was faced with rising inflation as economic activity rebounded, to which financial regulators worldwide responded with contractionary monetary policies. This led to an increase in interest rates, which meant higher cost of borrowing for the telco industry.

The telco industry is capital-intensive and is therefore highly affected by rising interest rates. This tough environment comes at an inopportune time when many operators worldwide are looking to earn returns from their previous debt-incurred investments in 5G and 4G. With this, many operators have sought to divest some of their tower assets in order to earn cash that they could use to service their existing debt.

These tower divestment deals formed most of the 26 wireless M&A deals in Asia-Pacific in 2022. While the number of wireless M&A deals in Asia-Pacific slightly dipped from the previous year, the total deal value dropped 65.0% to $8.64 billion in 2022. This suggests a shift from high-value deals in previous years to cheaper, smaller-value deals in 2022.

There were several reasons for this shift. As mentioned, financing M&A deals became more expensive in 2022 due to rising interest rates. Lenders also became more cautious in financing, with many preferring to finance smaller ventures over higher-value ones.

Despite the slowdown in M&A activity, a closer look at the deals suggests that the wireless sector, which includes mobile operators and tower companies, was making the best out of the dire economic environment it was in. Tower divestment deals are win-win solutions for mobile operators and tower companies as mobile operators can reallocate their capital to offer better mobile, especially 5G, services while tower companies gain economies of scale and stable lease revenue streams through their larger tower portfolios.

This is especially true for the Philippines, which emerged as the market with the largest wireless M&A deal value totaling $3.10 billion in 2022. Only four M&A deals contributed to this value, all of which involved mobile operators divesting tower assets to tower companies.

The Philippines' two incumbent mobile operators, PLDT Inc. and Globe Telecom Inc., sold more than half of their respective tower assets in the past year and more may come in 2023. Both companies sold their towers to raise cash for debt servicing, special dividends and reorienting their strategy in response to the entry of new competitor DITO Telecommunity Corp.

PLDT announced the sale of 5,907 towers on April 19, 2022, to two foreign-owned tower companies: 2,934 towers to Comworks Infratech Corp., a subsidiary of Malaysia's EdgePoint Infrastructure Sdn Bhd, and 2,973 towers to ISOC edotco Towers Inc., owned by Malaysia's edotco Group Sdn Bhd. The latter deal was valued at $1.47 billion, making it the largest announced tower deal in the Philippines and in Asia-Pacific in 2022. While not yet completed, this deal is set to make edotco one of the largest tower companies in the Philippines and in Southeast Asia.

Globe Telecom followed Aug. 11, 2022, with the announcement of the sale of 3,529 towers for $812.6 million to Frontier Tower Associates Philippines Inc., owned by Singapore-based Pinnacle Towers Pte. Ltd. and over 2,000 towers for $473.4 million to Miescor Infrastructure Development Corp.

Speaking about the deal, Globe Telecom CFO Rizza Maniego-Eala said, "Monetizing our tower assets is very timely because it has allowed us to keep our balance sheet healthy amid a rising interest rate environment." President and CEO Ernest Cu added that forging partnerships with tower companies could help Globe Telecom in capital expenditures and future expansions.

The pouring of foreign investment into telco infrastructure assets signals strong expected growth in the Philippine mobile industry. The Philippine government's decision to shift to a tower-company-led industry from an operator-captive model in 2019 started this surge in investments, and it may continue as the government targets building 50,000 new towers with an unspecified timeline to support the growing number of mobile subscribers in the country. 2022's tower deals from PLDT and Globe Telecom effectively placed the majority of towers in the Philippines in the hands of tower companies.

Similar deals of mobile operators divesting their tower infrastructure in order to raise cash emerged as some of the largest wireless M&A deals in Asia-Pacific in 2022.

– Japan's largest mobile operator, NTT Docomo Inc., offloaded 6,002 towers to JTower Inc. for $869.3 million March 25, 2022, aiming to reduce its capital expenditures and operating expenses.

– Indonesia's top telco, PT Telekomunikasi Selular, sold 6,000 towers to local tower company PT Dayamitra Telekomunikasi Tbk. for $670.0 million Aug. 2, 2022.

– New Zealand operator Spark New Zealand Ltd. first announced the sale of 1,500 towers Feb. 23, 2022, for $607.4 million, only to be followed by the divestment of its tower unit Spark Towerco Ltd. on July 11, 2022, for $510.2 million.

Mobile operators have also divested some of their ownership stakes amid the rising interest environment of 2022. Singapore Telecommunications Ltd.'s offloading of its 3.3% stake in India's Bharti Airtel Ltd. for $1.77 billion Aug. 25, 2022, was the largest announced wireless M&A deal in Asia-Pacific in 2022. The minority stake was previously held by Singtel subsidiaries Pastel Ltd. and Viridian Ltd. and was sold back to Bharti Telecom Ltd. Singtel plans to use the proceeds of the sale to reduce debt and finance future 5G investments. The deal reduced Singtel's stake in Bharti Airtel to 29.7%.

As a high-interest environment persists in many Asia-Pacific markets in 2023, mobile operators are likely to pursue M&A deals to reorient their portfolios and save costs. M&A deals announced so far in the first quarter of 2023 seem to follow the same pattern of ownership stake or tower divestments with the aim of debt reduction and strategy reorientation.

Wireless Investor is a regular feature from Kagan, a part of S&P Global Market Intelligence.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.