TMT M&A NEWSLETTER 3Q2019 INDONESIAN TOWERS Indosat Ooredoo to find investors for 3,000 towers Stefano Sorrentino, Adriano Giaquinta, Chin San Ng PHILIPPINE FIXED BROADBAND Converge ICT to connect 13 million homes to the Internet INDONESIAN TOWERS Indonesian-based telecom operator Some potential investors have already Indosat Ooredoo plans to sell ~3,000 expressed interest. As of August 2019, of its tower assets. The operator set Protelindo, the largest independent the average price for one tower unit in tower company in Indonesia (Exhibit 1), the range of USD 100 to 200 thousand, and Telkomsel, a state-owned telco, are depending on the tower location and the rumored to be interested in the towers. rental period, as well as other aspects. Indosat Ooredoo had previously com- Protelindo is well positioned to pur- pleted the sale and leaseback of 2,500 chase 3,000 additional towers thanks telecommunications towers to Tower to its balance sheet strength. In 2Q Bersama for a reported USD 519 million 2019, Protelindo reported a net debt in August 2012, i.e. slightly over USD 200 to annualized EBITDA ratio of 2.1x, i.e. thousand per tower. Today, Indosat Oore- well below its industry peers (STP’s doo is looking to raise USD 2 billion for its 4.5x and TBIG’s 5.2x). This might allow upcoming 4G CAPEX investments. The Protelindo to pursue inorganic growth operator is in the process of expanding by raising additional debt. A recent DBS its 4G network across Indonesia over the research paper shows that if Protelindo next 3 years, and this would encompass were to fund this transaction solely the addition of 18,000 4G base stations through debt, assuming that it would by the end of 2019. purchase each tower from Indosat Ooredoo at USD 125,000, its net debt / EBITDA ratio would only jump to 3.1x (still below its peers). EXHIBIT 1 Ownership of towers in Indonesia, 2019 MNO owned / operated Independent For sale ~18,152 ~17,500 ~15,272 ~14,000 ~8,600 3,000 ~6,321 ~5,062 ~5,000 >2,300 PROTELINDO TELKOMSEL* TBIG MITRATEL INDOSAT STP IBS* XL AXIATA OTHERS * Figures are as of December 2018 for Telkomsel and IBS. Mitratel is controlled by Telkom Indonesia, the controlling shareholder of Telkomsel. IBS is owned by the Sinar Mas Group, the controlling shareholder of Smartfren. Note: TBIG – Tower Bersama, STP – Solusi Tunas Pratama, IBS – Inti Bangun Sejahtera. Source: Companies annual report, Tower Xchange, DBS Bank 2019 report. 2 TMT M&A NEWSLETTER 3Q2019 Telkomsel might not need 3,000 The tower business in Indonesia has new towers. Over the past two years, it ample room to grow. Expansion of 4G is believed that the incumbent operator population coverage (currently at 82%, has been operating within its capacity, i.e. below other regional players in Asia, and is primarily replacing its 3G equip- see Exhibit 3) will boost demand for ment with 4G equipment on its existing colocation (i.e. tenancy additions) and sites. Therefore, at the moment, it does new sites, mostly in the ex-Java regions, not seem to require any additional site. where operators have accelerated As of 2Q 2019, Telkomsel has around their network expansion (most notably 63,000 more 3G/4G BTS than Axiata, Axiata and Hutchison). Analysts esti- i.e. the second largest player (Exhibit 2). mate the tower sector to grow c. 8% in FY2019 and c. 7% in FY2020. EXHIBIT 2 Number of 3G / 4G BTS in Indonesia by player Telkomsel XL Axiata 154 133 110 91 79 81 63 47 FY16 FY17 FY18 2Q19 EXHIBIT 3 4G population coverage in Asia 97% 98% 99% 99% 80% 82% 74% INDIA MALAYSIA INDONESIA AUSTRALIA THAILAND SINGAPORE CHINA Source: DBS Bank 2019 on companies’ annual report, DBS Bank 2019 report. 3 TMT M&A NEWSLETTER 3Q2019 However, there are a number of fac- In the event of this merger, the tower tors that might put the tower sector industry growth might be weaker than growth at risk, most notably a down- expected, with Protelindo suffering the ward pressure on lease renewal rentals, most as a large portion of their con- and a weaker-than-estimated demand tracts with Hutchison, which will expire for sites if the industry goes through a over the next 5 years, might not be consolidation process. renewed due to network synergies with Axiata. Tower leases are likely to be renewed at a lower cost. The bulk of tower leases Investors and tower operators will have added over 2009-2013 will be up for to diversify their revenue sources to renewal over the next 3 to 5 years, and offset the potential impact of a weaken- lease rentals are expected to decline ing demand for tower sites. Currently, at an annual rate of 2.5% until 2023. Protelindo is a good example of revenue Protelindo, for instance, has recently diversification: the tower company is renewed its lease with Hutchison at already generating 10% of its revenue c. USD 900 per month (vs. c. 1,200 a from non-tower related operations such decade ago, or 25% lower). Downward as satellite services and optical fiber pressure on blended lease rentals will deployment, and the contribution of also be fueled by the addition of micro- this segment is expected to reach 20% cell infrastructure, whose lease prices of its topline in the next 5 years. are roughly half that of macro towers. Overall, the tower industry in Indonesia Short-term demand for towers (colo- is attractive to at least 2 types of inves- cation and new sites) might be below tors: yield-hunting foreign investors expectations if industry consolidation who want to increase their exposure takes place. Mergers could lower the to the country, and domestic tower demand for towers in the short term as companies who want to expand their the merged entities typically consoli- footprint and experience economies date their existing tower bases (which of scale. In either case, unfavorable might take 3 years or longer) before industry developments such as weak giving out orders for new sites. market demand and declining lease At the moment, Hutchison and Axiata rates represent considerable risks. are rumored to be in talks for a potential For example, among others, the risk combination of their Indonesian wireless of new technologies such as high- businesses. throughput satellites (HTS), the advent of 5G (and the need for network density and fiberization in urban areas), and the potential consolidation among Investors and tower operators Indonesian mobile operators must be will have to diversify their taken into consideration. revenue sources to offset the potential impact of a weakening demand for tower sites. 4 TMT M&A NEWSLETTER 3Q2019 PHILIPPINE FIXED BROADBAND Converge ICT Solutions, a Philippine- Favorable government policy. In 2017, based fixed broadband service pro- the Department of Information and vider, has secured a USD 250 million Communications Technology (DICT) cash injection from US-based private published the National Broadband Plan, equity firm Warburg Pincus to bolster a blueprint that seeks to accelerate the the roll-out of fixed broadband services deployment of fiber optic cables and across the Philippines. The roll-out plan wireless technologies in the country, is estimated to cost USD 1.8 bn in total. as well as improve the overall internet By 2024, Converge aims to connect 13 speed and affordability nationwide. DICT mn subscribers nationwide, or roughly has also outlined a target of at least 30 40% of Philippine households, par- fixed broadband subscribers per 100 ticularly those situated in the southern inhabitants by 2024 (and at least 45 by regions of Visayas and Mindanao. Today, 2027). So far, DICT has staged a pilot run the Philippine home broadband pen- of the National Fiber Backbone (NFB) etration rate is 27%, and Converge has to boost network investments by the slightly over 200 thousand subscribers private sector. DICT will also operate and (or 1% of households). maintain the NFB related facilities and provide last mile connectivity. Converge and Warburg Pincus are bet- ting on the development of the fixed Rising adoption of fixed high-through- broadband market in the Philippines, put internet services. The fixed broad- which is likely to be boosted by at least band sector in the Philippines is still 2 aspects: a favorable government underdeveloped. The average internet policy, and a rising adoption of fixed speed in the Philippines is lower than high-throughput internet services by other developing Southeast Asian coun- unserved and underserved segments of tries such as Indonesia, Malaysia, and the population. Thailand (Exhibit 4). EXHIBIT 4 Average Internet Speed in selected ASEAN countries, Mbps Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 25 20 15 10 5 0 PHILIPPINES INDONESIA MALAYSIA THAILAND SINGAPORE Source: State of the Internet Connectivity Report, Akami. 5 TMT M&A NEWSLETTER 3Q2019 The penetration of fixed broadband Demand risk. Considering that PLDT is also low, due to a limited number and Globe, the two incumbent telecom of fixed lines, the lack of a developed operators in the Philippines, currently optical fiber infrastructure, and the serve less than 3 mn customers com- dominance of the mobile platform. bined through fixed wired broadband, However, the number of fixed broad- it is fair to assume that Converge is band subscribers has registered a aiming to reach the unserved segments significant growth over the last 2 years, of the population. Since broadband showing a ~30% YoY CAGR since 2017, adoption in this segment will be driven and the trend is expected to continue mostly by service affordability, it is in the coming years, driven by i) the likely that Converge will have to price its government agenda, ii) the investments services competitively to attract these in fiber networks and infrastructure customers.