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| Q&A: Prahlad Shantigram, Global Head, M&A, StanChart | | 'PE interest in India continues to be strong' |
| Abhineet Kumar & Arijit Barman / Mumbai Aug 05, 2010, 00:25 IST |
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 Prahlad Shantigram of Standard Chartered Bank is the only global mergers and acquisitions head who works out of Mumbai. And, has been the man behind most headline deals involving India Inc. His team was the only financial advisor involved in the $11-billion mega merger between GTL Infra and Reliance Infratel. He spoke to Abhineet Kumar & Arijit Barman on telecom, towers and other sectors. Edited excerpts:
First Aircel, and now Reliance Infratel… Is so much of growth manageable for GTL? They seem to be in a tearing hurry.
The question you pose has two parts. Are they growing too fast? And, I suppose, are they taking too much leverage? Growing fast is a management challenge. Passive telecom infrastructure is a relatively simple business. You can have a highly decentralised set of assets, not too many employees and a discrete set of institutional buyers, which is fairly simple to manage. There is some back-end synergy which is also relatively easy to engineer. So, the management challenge is there but it is not that significant.
What about leverage?
To me, so long as growth happens, leverage is less of an issue if the levels are not excessive. Leverage is a big risk when the growth slows or there is de-growth, together with insufficient cash flows. My sense is, even after these deals, the overall debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio for the company will be well within international benchmarks. Add to that the fact that there are strong growth prospects in India – you know, with BWA (broadband and wireless auction) and 3G rollouts – and the risk is manageable.
Also, remember, operating cost in this business is low. So, as much as 70 per cent of revenue goes down to Ebitda and is available to service whatever debt you may have. If you structure the debt smartly, which means longer term with some upfront moratorium, then the financial returns are very attractive.
You don’t foresee problems with the telecom industry affecting the tower operators?
Arguably, there are too many telecom operators. Having said that, many of them are not yet tenants for the tower operators, since the extent of roll out completed by some of the new entrants is patchy. So, even if some of them were to consolidate, I think the impact on the tower operators will not be significant.
Do you see consolidation in the industry also having an impact on tower players like GTL?
Consolidation is good. That means the number of players would reduce and the survivors will be healthier. As I said earlier, if some of the marginal players were taken out of the equation, it should not have a major negative influence. So, then you have a healthier industry and you have BWA, 3G, all of which means more tenancies and growth. If all of this good stuff happens, I think it is a reasonable bet to take.
But in terms of, tenancy point of view, enterprise value per tower point of view, we are really undervalued?
Relative to the money in terms of rentals per communication site that an American Tower or Crown Castle makes we are still behind. With some of the developments I mentioned earlier such as 3G and BWA, you will start seeing tower operators making significantly higher rentals per site. With more uses of these towers and the improvement in tenancy the rental per site should go up. As that happens the valuation of these towers should definitely improve.
This whole neutrality platform, is that world over and we are following the trend or is it that in India the telecom market is so fragmented and it becomes very critical?
As they say necessity is the mother of invention. Neutrality is not ordained by the competitive behavior of the operators. The competitive behavior of the operator drives the need for lower costs and therefore outsourcing to a company that is more efficient operationally and financially. And one gets more efficient outsourcing through sharing. Given that the infrastructure is capital intensive, it is all about improving the capital efficiency and capital structure which the tower operators can put in place on the back of an assured stream of rental cash flows.
We talked at length about telecom sector consolidation. Do you see similar consolidation happening in other sectors as well?
If you believe consolidation is largely precipitated by financial stress, then I don’t see that elsewhere – at least, not imminent. Over time, you might see more consolidation in industries that are highly competitive and which do not return the cost of capital over long periods of time.
The rush for natural resources acquisitions is intensifying especially among the Indian and Chinese companies. You advise clients in both these countries. Do You see a difference in strategy among the two?
Not really. The intention is the same. People want to secure raw material supplies. There may be stylistic difference between the Chinese and the Indian acquirers since as you know Chinese companies are predominantly state owned while in India it’s a mix of some government owned and some private companies. The issue of investing in soft and / or hard infrastructure also seems a common philosophy. As companies extract natural resources from countries or regions which lack in development you will see them having to give something back to these communities…So you may need to build a port, or railroad or schools or hospitals.
The hunt for natural resources will only intensify in future. So, more M&A opportunities? Any particular region?
Of course. We will continue to see resources transactions. Our energy needs are significant. So, on the one hand, you will have acquisitions involving hydrocarbons or coal. On the other hand, you will see deals in the metals and mining space… Iron ore, copper, coking coal, etc. Regions targeted will be specific to the commodity. And, of course, dependent on the availability of good quality assets. Transportation, evacuation are equally serious issues and have a cost attached to them. So, the strategy will have to keep all these factors in mind.
How are you as an investment bank gearing up to meet these new challenges? Are you looking at more niche acquisitions like Harrison Lovegrove?
We are continuously growing our team albeit selectively. Our strategy is to focus on particular clients and service them with specific skills such as industry or deal knowledge. We now have significant global teams in a host of sectors such as telecom, natural resources, power and utilities, oil and gas and real estate. Yes, we have also made certain strategic acquisitions to build our capabilities in specific areas.. With Harrison Lovegrove (2008), we got a global oil and gas platform and we have scaled up on that. Similarly with Caznove Asia (2009), we acquired an equity platform and we are building on it in markets like India where we will scale up the team and offerings.
A bit of crystal ball gazing for 2010-11… year of inbound deals or India Inc will continue its global inorganic quest? Do you see PE players also playing a big role after lying low in the middle?
Tough to generalise. Certain sectors like pharma, industrials, financial services and retail might see inbound investments and in sectors like FMCG, resources, it will be outbound. In telecom, we might see both. Whether the investments will be organic in nature or inorganic debate is the second level issue. Also, private equity interest in India continues to be strong. Foreign investors have realised the inherent strength of the economies in the developing markets, particularly India and China. So, capital is definitely available for growth for the right type of stories.
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