Brazil’s new shape

After a few years of recession with very little organic growth and poor M&A activity, Brazil is emerging again as one of the fastest growing and most dynamic tower markets in Latin America. Its huge population of 211mn demands lots of data and a recovering economy is attracting international investors and new players. Consolidation is happening in both the telecom and tower sectors and the preparation for 5G, with an auction scheduled for November, will guarantee plenty of action. Welcome back, Brazil. 

Over the last few months, Brazil has been continuously making the headlines with an unprecedented volume of tower transactions and the market has since welcomed two very experienced and financially strong players that will probably continue scouting the market to scale their operations. Brazil proves to be again one of the most investible tower markets in CALA.

Last December, global leader Digital Colony announced the acquisition of Highline do Brasil II from Pátria Investments, a deal that follows the 2017 acquisition by SBA Communications of the original Highline portfolio, which included 970 sites between rooftops, small cells and some macro-sites. Highline II’s current portfolio includes 315 sites, around 180 BTS orders and a particularly interesting set of partnerships and exclusivity agreements with shopping malls, real estate owners and hospitals to provide indoor connectivity. Digital Colony’s investment marks the entrance of another consolidating force in Brazil and considerably shifts Highline’s strategy, which will now be looking at organic and inorganic growth opportunities more aggressively.

Also in December, Telxius acquired 1,909 sites from Vivo for around US$153mn – a move that strengthens the towerco’s position in the market while releasing some of Telefónica’s financial pressure. The acquisition better prepares Telxius for the 5G transition as the acquired portfolio has a fundamentally urban profile, with 82% of the towers located in metropolitan areas and 52% of them in São Paulo and Rio de Janeiro, where MNOs will initially concentrate their 5G rollout efforts. Further, the year ended with SBA Communications acquiring 1,313 sites from Grupo TorreSur, who might be listening to more proposals for its remaining 5,200-sites portfolio.

2020 continued the trend and last month, the Conselho Administrativo de Defesa Econômica (CADE) finally approved the acquisition of Cell Site Solutions (CSS) by IHS towers, setting the entrance of the African-based player into Latin America and adding around 2,290 towers to the company’s global portfolio of more than 25,000 sites. IHS will bring its international expertise and financial capabilities, so we cannot rule out the possibility of more consolidation moves from the African leader in the short-term. New players are hungry and in need of scale.

Recently, TowerXchange has also learned that urban towerco Skysites has closed the acquisition of around 600 cell poles and small cells from local players Telesite and Pronext, a move that strengthens the company’s position as a unique partner for urban densification and 5G rollouts. Skysites has now a portfolio of more than 1,000 sites between rooftops, poles, small cells and some macro-sites – as well as a set of exclusive agreement with real estate developers and owners across Brazil’s main cities.

The country’s M&A’s pipeline anticipates plenty of action over the next few months. In fact, Oi’s mobile business and its remaining 700 towers are up for sale and several towercos are evaluating a potential acquisition. Additionally, the entrance of IHS Towers and Digital Colony represents a new opportunity for private equity investors to make an exit from their current Brazilian investments in small and mid-scale towercos. About 3,000 towers are currently owned by independent towercos that could consider a buyout under the right circumstances. Banks, lawyers and advisors are gearing up for a busy season.

After overcoming bankruptcy, Oi SA is in the process of sorting out its financial issues and as mentioned, the company has decided to sell its mobile business, although it will continue to operate its fixed services. Consolidation is likely also in the MNO sector, with both Claro and TIM now emerging as potential buyers. In the meantime, Oi has sold its 25% stake in Unitel to Angola’s State-oil company Sonangol for US$1bn and the telco plans to use the proceeds of the sale to reactivate its business in Brazil by raising its cashflow.

The other three operators need to remain competitive thus they are expected to continue deploying, while the approval of the new telecom modernisation bill – the PLC 79 – will eliminate several restrictions that has been slowing down network investments for years.

Despite Telefónica’s Central American departure and the continuous sale rumors of more units, Brazil remains its most lucrative and strongest regional operation and the MNO is set to commit to more investments in the months to come. In the last 12 months, Vivo has increased its stock value by 22% while Telefónica’s global value has decreased by 20%, with its Brazilian arm holding 48% of the MNO’s global value. Vivo has been focusing on efficiency across its infrastructure assets while massively investing in fibre. The company has implemented several cost-saving initiatives, from sustainable energy strategies to automation, contract re-negotiation and new technology investment for their towers. The industry expects Vivo to continue leading the Brazilian mobile market and that can’t be done without a solid network.

In December, América Móvil consolidated its position in Brazil after antitrust regulator CADE approved Claro’s acquisition of Nextel for US$905mn. The deal confirmed Claro as the second MNO in Brazil after Vivo and added around 3.5mn connections to its 56.6 million subscribers – based on GSMA Intelligence figures. Nextel also strengthens Claro’s network capacity and coverage, especially in São Paulo and Rio de Janeiro. Claro is currently absorbing Nextel’s operation while also focusing on its network upgrade and optimisation as well as leading the development of the biggest private renewable energy project in the country. Last November, América Móvil’s Chairman Carlos Slim announced an investment of US$7.2bn to boost capacity across its Brazilian infrastructure while also pursuing new areas of business such as energy generation and cloud services.

TIM is also ready to spend some money and its CEO has recently confirmed that the operator is prepared to take part in the consolidation process. TIM, who has the largest 4G coverage in the country, expects to benefit from that development and rely on its current network when preparing for 5G. Further, the company has beaten its estimates and declared a net income of US$174.5mn in 4Q19.

Telecom Italia’s subsidiary also signed a memorandum of understanding with Vivo to expand the sharing of infrastructure between the two companies, which is becoming a common trend in Brazil. The telcos agreed to share 2G networks on a nationwide basis and 700MHz 4G networks in localities with fewer than 30,000 residents. Moreover, they will also evaluate other synergies around efficiencies and cost reduction in operations and maintenance including electricity and site rentals.

Although all four operators will spend carefully while waiting for the new auction, 3G and 4G coverage in rural and remote areas will continue driving demand for traditional macro-sites. São Paulo, Rio de Janeiro, Brasilia and other urban cores will experience a considerable increase in poles, shorter structures and camouflage solutions, while macro-sites will also be needed to enhance capacity and complete 4G rollouts. Additionally, highways will be a relevant focus as the new regulation is pushing MNOs to improve coverage across busy roads.

Towercos foresee overall revenue increasing in 2020. We are likely to witness some organic growth but co-locations and amendment revenue on existing sites are likely to deliver the most results for towercos. MNOs won’t be massively deploying new sites but they are heavily investing in MIMO antennas and bringing a lot of new, active equipment to existing towers. After the auction, the country’s biggest to date, MNOs will need to move forward with their new strategies and Brazil will experience the biggest telecom infrastructure boost of the last decade.

Earlier this year, Brazilian telecom regulator Anatel raised some concerns among key stakeholders by announcing a delay on the 5G spectrum auction that was initially scheduled for March. Now, the institution has finally approved the terms of the auction, which is undergoing public consultation. Anatel has also announced November as the new date for the bidding process.

The regulator has already solved some issues regarding potential frequency interferences and rules of spectrum use and has added additional 100MHz in the 3.5GHz band in the meantime. As it stands, the government will award spectrum in the 3.5GHz and 26GHz bands for 5G, while using the 2.3GHz and 700MHz for 4G. Three national licenses will be auctioned and each operator will be allowed to buy 140MHz in the 3.5GHz, while small carriers will also be eligible to participate in the process.

The next few months will be crucial for MNOs as they plan their spectrum investments as well as start mapping out future rollout and capex requirements. In the meantime, data demand continues to create pressure on QoS and densification plans. To contextualise, since 2015 the average Brazilian mobile user has increased its monthly data consumption from 644Mb to 3.7Gb in 2020 (Source: Statista).

Brazil is one of the most advanced countries in Latin America in terms of new technologies and innovation. In fact, the country’s fibre segment has been experiencing a huge growth over the last two years and towercos cannot afford to be left out of the hype – not with 5G around the corner.

Blackstone-backed Phoenix Tower do Brasil (PTB) has been one of the first towercos to enter the sector with the creation of Phoenix Fibre do Brasil, a separate business unit that complements its tower offer. PTB’s fibre subsidiary is already deploying FTTH black fibre across 12 Brazilian cities. Furthermore, last year Blackstone made another strategic move and acquired K2 Tower, the biggest independent small cells provider in Brazil — a deal that initiated PTB’s convergence plans in preparation for the imminent 5G future. While PTB absorbed K2’s macro-sites, the company will continue operating a portfolio of around 500 small cells independently, complementing Phoenix’s offering with all kinds of lower visual impact solutions.

Equally, American Tower is also betting on fibre in Brazil. Back in 2018, the company acquired a fibre portfolio from the state utility in Minas Gerais and last year, the towerco closed a partnership with VIVO to deploy FTTH across 40 cities in the state.

Brazil’s main cities are home to a large population and are getting crowded with high buildings and skyscrapers, making it impossible to deploy macro-sites and – to a certain extent – even rooftop solutions for densification purposes. Major urban areas are the perfect test-bed for small cells development in Brazil, and while macro-sites will be the main driver for growth across rural and suburban areas, the country will experience a huge increase of IBS, DAS and small cells for indoor coverage, densification and 5G.

Consolidation and diversification are the two main ingredients of the (not-so-secret) sauce to succeed in Brazil’s 5G era.