Reliance Jio offloads towers to settle Government bill

Telecoms disruptor Reliance Jio has been forced to sell its tower assets to Brookfield Infrastructure Partners for approximately $3.55 billion.

While Reliance Jio is not feeling the pinch as painfully as its competitors, the business is facing a significant financial outlay to settle a spectrum fees dispute which has been on-going for more than a decade. With 25,215 crore Rupees (c.$3.551 billion) in compensation for the tower infrastructure business, Reliance Jio should be in a healthier position, albeit a bit lighter on assets.

“We are pleased to enter into this long and strategic relationship with Brookfield, which is one of the largest and most respected managers of infrastructure assets globally,” said Mukesh Ambani, MD of the Reliance Industries group.

“We are confident of Brookfield’s abilities to manage this large portfolio of high-quality infrastructure assets and further enhancing value creation opportunities. This transaction demonstrates the belief of global investors in the potential of India’s digital opportunity.”

Although the disposal of assets, or at least 100% ownership of said assets, is not an entirely comfortable position for the telcos to be in, it is becoming increasingly commonplace around the world, for a variety of reasons.

Telefonica has been playing with the idea of an IPO or partial sale of its tower infrastructure business unit, Altice has recently sold off 49.99% of its newly separated wholesale business and Vodafone created its own standalone tower business mid-way through the year. These are examples of asset divestment, though it is to fuel the expensive jobs of 5G and fibre broadband. The India situation is of course slightly different, though it has the telcos frantically searching for additional cash.

An argument over the total amount telcos owed for spectrum fees came to a conclusion in recent weeks, with the courts ruling in favour of the Government. Unfortunately for the telcos, this means over a decade of licence fees, interest and missed payment penalties will now have to be settled. For Bharti Airtel it has meant asking the Government for relief, Vodafone Idea have threatened to shut the whole business down and Reliance Jio is offloading its tower business to Brookfield.

While annual licence fees for spectrum are common place, such lengthy legal cases to dispute them are not. In a healthy regulatory environment, the telcos complain but generally accept the prodding and poking of authorities. Considering the friction which is being witnessed between the telcos and authorities in India, this is anything but a healthy situation. Whether it is charging too much for spectrum, favouring certain telcos or mis-managing termination regulation, the Indian landscape is quickly turning into a farce.

The Telecom Regulatory Authority of India (TRAI) and the Indian Government are slowly killing off competition and sleep-walking the country towards a monopoly.

Change is on the Telefónica horizon with towers and workforce restructure

Telefónica has announced plans to accelerate the strategy of monetizing its tower assets after getting the green light from the Board of Directors.

The woes of Telefónica have been quite apparent in recent years. Despite owning regionalised businesses which are either market leaders or at the top-end of the scale, the firm has been drowning in debt. In bygone years, it was rumoured the firm was struggling with €53 billion debts, though it does seem to have gotten a handle on things.

At the end of 2018, thanks to several cost saving initiatives, debt had been reduced to €41.785 billion. During this period the firm did toy with a number of divestments (O2 UK) and an IPO of the tower infrastructure business, Telxius. This IPO fell through, but the business unit does present a new opportunity.

Following the Board Meeting, the team is pushing forward with plans to generate more profits through monetizing both passive and active telecoms equipment. And it does appear there are profits to be made.

Telefónica currently claims to own roughly 68,000 sites globally, either directly or through subsidiaries. Of those 68,000, tower infrastructure business Telxius owns approximately 18,000, with the remaining 50,000 owned by other units within the group. 60% of these assets are located within the four major markets (Spain, UK, Germany and Brazil).

By comparing the value of these assets with market benchmarks, Telefónica believes it can generate €830 million in revenues and €360 million in OIBDA. Another attractive component is the belief these sites would only require €25 million in maintenance capital expenditure across the year.

While this strategy might be considered as a means to aid rivals, the numbers are attractive to a business which is facing financial and competitive strain. Aside from the debt which is still looming above the heads of executives, subscriptions data is not the most attractive either as you can see from the table below:

Total access (connections/subscribers on network) in millions
Year Spain Germany UK Brazil South HISPAN North HISPAN
2015 41.97 48.36 25.29 96.92
2016 41.23 49.35 25.76 97.22
2017 40.99 47.6 25.31 97.91 58.45 72.57
2018 41.55 47.09 32.98 95.3 56.91 73.56

What is worth noting is that ‘total access’ accounts for everything which is running across one of the Telefónica networks in that region. That could mean mobile, wholesale, MVNOs, TV or broadband. That said, the numbers tell a story for themselves; Telefónica isn’t really going up or down, just hovering around.

If the traditional means of making money, attracting more subscribers, isn’t necessarily paying off the debtors, Telefónica needs to think about new strategies. Monetizing the tower infrastructure assets is certainly one way to go, and restructuring the workforce is another idea which might save money across the year.

Alongside the tower monetization announcement, Telefónica Spain has also said it is currently in negotiations with trade unions concerning its workforce. In short, that means some will be retrained, some will be encouraged into retirement and others will be shown the way to the door.

“The collective agreement we signed four years ago has enabled us to make great advances and has provided us with social and labour stability during this period,” said Emilio Gayo, Chairman of Telefónica Spain.

“Now we have to be more ambitious and evolve into a more digital company that is ready for the challenges ahead.”

Although Telefónica Spain is not putting any numbers out into the public domain, reports have emerged that the workforce will be trimmed by roughly 5,000. Those over the age of 53 will be offered a ‘voluntary individual suspension plan’, while the plan is to double the training budget to reskill staff members.

With an eye on the horizon, Telefónica is seemingly preparing to future-proof its largest expense; employees. The management team anticipates more than half of sales will be through digital channels in a few years’ time, while legacy fixed and mobile networks will be shut down during the ‘modernisation’ period. This will make a number of people redundant.

In fairness to Telefónica , it is creating plans to help evolve the skill sets of employees, but with any business evolution there will always be the messy job of headcount reduction.