Consolidation among customers is a bad thing in the tower business.
This week's news from the Supreme Court of India that all 122 operating licenses which the Ministry of Communication had issued since 2008 were revoked, has effectively caused immediate consolidation in the Indian cellular market. For a company like American Tower (NYSE:AMT), which pinned its growth strategy to co-locating multiple tenants on your newly acquired Indian towers, this is extraordinarily bad news. Customers of all the affected smaller operators are going to find their 2G phones not working in 4 months. Customers are signing up with the top 4 providers by the millions. The problem for AMT is that the unaffected operators in India are not material tenants on AMT's towers.
AMT's filings list their largest customer in India as Idea Cellular. Idea Cellular has just lost 13 of their licenses to operate 2G service in India, including the major urban licenses they acquired through Spice. (Here is a complete list of the revoked licenses.) The implications of this action are substantial. As I discussed in an earlier note, AMT owns less than 9,000 of the 350,000 towers which exist in India. The bulk of the towers are owned by substantial local companies with ownership ties and deep common interests with the large players (Vodafone (NASDAQ:VOD), Bharti-Airtel, BSNL, Reliance). AMT owns less than 3% of the towers in the country, with such a tiny market share it is safe to assume that many of AMT's tenants in India are among those whose licenses were revoked. AMT, of course, does not disclose its full customer list.
Furthermore, the spectrum covered by the revoked licenses will be re-auctioned within months. It is nearly certain to be snapped up by the largest players who are noticeably absent from AMT's disclosed customers in India. This is tantamount to an expedited forced consolidation in their largest growth market. The fundamental reason why the independent tower operators exist is to have multiple tenants equipment on their towers. India is currently overbuilt with more towers than exist in the entire United States, all crammed into 1/3 the amount of area to cover. The point is that the bulk of the Indian cellular market just got shifted onto networks that AMT does not benefit from.
Finally, this case points to the vulnerability of AMT in many facets of its operations in India. If you take the time to read the terms of the IP-I license which AMT holds to operate in India you may find a few surprises. Among other things, the license AMT holds in India provides for:
- LICENSOR reserves the right to suspend the operation of this LICENCE in whole or in part, at anytime,
- The licensee shall ensure that the total foreign holding in the paid up capital of the LICENSEE Company does not, at any time during the entire license period exceed 74% of the total equity.
- licensee shall post on their website the details of service level agreements [Telecom Regulatory Authority of India]
The kind of legislative free\will which the fist bullet point exemplifies is inherent in many agreements within India and other emerging countries like Ghana and Uganda, where AMT operates.
I'm not certain how AMT dances around the prohibition of foreign ownership in the local operating company, but if in fact it is less than 74%, I suppose that's a good thing given how bad the operating environment is there.
None of AMT's 7 Indian subsidiaries had any website that I could find, There are six versions of "ATC India Tower Corporation Private Limited" and "McCoy Developers Private Limited," none of which have service level agreements available.
My thesis is that the towers which AMT bought in India have low tenancy, and hence low value. I am prepared to go to India to inspect these towers to find out, but AMT does not answer my multiple calls or emails.
AMT does, however, go to some effort to break links I provide to their press releases and hire a Public Relations firm to make sure my articles disappear from Google searches. They have also recently hired (within the last few weeks) a new Director of Risk Management in their accounting department. She and others including lawyers from the company have spent much of their time looking at my personal website, analyticfirepower.com. I have offered them my help in locating accounting risks at the company but have not heard back.
In short, a bad situation for AMT in India just got worse. AMT already took a $150 million currency hit on their overseas investments, and the Indian Rupee has fallen further since. If there is in fact a link between former CFO Brad Singer's departure and the sudden change in AMT's approach to India, or if there is a link between the SEC investigation and enforcement of the Foreign Corrupt Practices Act remains to be seen. The fact that the former Telecommunications minister who was in office at the time that AMT made their investments in India is currently sitting in jail on corruption charges does not bode well. One thing is certain though, that time will tell.
AMT is due to report full year 2011 earnings on February 2. Whether it will be forced to bring up any of these issues will be interesting. Please see my earlier notes on this website for more details on AMT s accounting, as well as Insider Selling and the SEC Investigation.
AMT has gone to great lengths to portray the company as a growth story which appeals to REIT investors. The reality is that the source of much of the growth they anticipate is generated from overseas investments. The recent news from India involves the expropriation of property by a legislative body. This is not the first time or the last that this will happen in these countries, and therefore there is substantial risk involved in the growth path that AMT has chosen.
Crown Castle (NYSE:CCI) and SBA Communications (NASDAQ:SBAC) have chosen other paths, yet have lower valuations than AMT. This dichotomy is likely to change because one thing that REIT investors understand and value is having a clear title to an asset. AMT's assets in India may be expropriated at any time for any reason in the public interest "or any other eventuality."
LICENSOR shall have the right to take over the SERVICE, equipment and networks of the LICENSEE (either in part or in whole of the service area) in case any directions are issued in the public interest \ by the Government.of India in the event of a National emergency war or low intensity conflict or any other eventuality.[Telecom Regulatory Authority of India Provisions of IP-I License]
A quick review of the timeline of AMT's involvement in India:
February 2008 - Failed takeover and resulting lawsuit dropped in cryptic press release. (subsequently deleted from AMT's website)
March 2008 - Go-slow approach to India
June 2008 - CFO Brad Singer resigns
March 2009 - Acquires Xcel Telecom in India with 2,700 towers.
February 2010 - Acquires Essar Telecom in India with 4,450 towers.
February 2011 - Telecommunications Minister Arrested
April 13, 2011 - Former Indian Telecoms Minister appears in Court on Corruption Charges
June 2, 2011 - SEC subpoenas documents dating to 2007, formally investigating AMT.
A full timeline of the saga is available here.
Disclosure: I am short AMT. I have net negative delta options positions in AMT.