India's second largest mobile operator, Reliance Communications, said on Sunday that it has entered into an agreement to sell its cellular towers business to GTL Infrastructure, a large Indian company specialized in providing shared tower and other infrastructure services to mobile operators.
The terms of the cash and share deal were not disclosed, although Reliance said the deal was worth more than US$11 billion in a filing to the Bombay Stock Exchange. After the merger, the towers of Reliance's Reliance Infratel unit will be merged with those of GTL, though Reliance will continue to own its fibre optic network.
The merged entity will have over 80,000 towers, with Reliance Communications as a key tenant, the company said. The transaction is expected to be closed in the next six months, it said.
For Reliance, the plan to sell off its tower business is one of several plans being considered by the company to decrease its debt, and fund its expansion in a market where competition has driven down rates for voice calls at times to below Indian rupees 0.01 (US$0.0002) per second. Previously, calls were charged by the minute.
Reliance said earlier this month that its board of directors has approved in principle a plan to sell off up to 26 percent of the company's equity to strategic or private equity investors.
The bids in a recent auction for 3G spectrum went way beyond expectations, and after winning bids in 13 service areas, Reliance is planning to raise funds to retire some of its debt and fund the rollout of 3G services, said Kamlesh Bhatia, a principal research analyst at Gartner.
Reliance paid the Indian government 86 billion rupees (US$1.86 billion) last month in one-time fees for 3G spectrum. The Indian government has said that spectrum will be available to successful bidders by Sept 1.
The deal between Reliance and GTL reflects a growing trend in India for operators to start offering mobile services without setting up passive infrastructure like towers, instead outsourcing it to specialized companies,
Owning and setting up towers made business sense for operators at a time when a critical differentiator was increasing the area under mobile coverage, Bhatia said. That strategy led to the creation of vertically integrated mobile service providers like Reliance.
However, demand for shared networks is now likely to go up as operators plan to roll out their 3G networks, according to analysts. After paying large charges for 3G spectrum, operators may look to cut costs through shared infrastructure, he added.
Besides Reliance, a number of other operators have either sold off their passive infrastructure or merged them into mobile infrastructure services companies.
Earlier this year, mobile operator Aircel sold off its towers to GTL. Bharti Group, Vodafone, and Aditya Birla Telecom set up a mobile infrastructure services joint venture in 2007.
Owning towers and other passive infrastructure does not help mobile operators to differentiate any more, Bhatia said. By staying out, or getting out of the tower business, mobile operators want to free up capital to focus on their expansion, and add new differentiated services around 3G, he added.