Latin America: the U.S. Tower Industry in Fast Forward

Jim Eisenstein was among the founders of American Tower back in the nineties. From four towers and a shared sense of a booming market opportunity, he went on to become one of the leaders of the tower industry in North America. Jim has since transferred his passion for towers to the latest tremendous growth market, Brazil, where he currently serves as Chairman and CEO of Grupo TorreSur.

TowerXchange: As one of the patriarchs of the  independent tower industry, how did this notion of renting capacity on towers to multiple tenants first come about?

We all came into the tower business from different paths, but for me, it happened thanks to the radio industry.

In the early nineties, our family was selling its radio stations to a radio group based in Boston. When we sold the stations, we decided to keep our four broadcast towers. The decision to keep them was based on the fact that we had multiple tenants on each towers in addition to the radio stations, and they were providing significant revenue. This was back in 1995 and the Government had started talking about auctioning six PCS licenses, which suggested we could attract even more tenants, so I thought it might be wise to keep the towers.

Steve Dodge, who was Chairman of American Radio and became a great mentor to me, told me that many of their radio stations also had tenants on their towers, and we agreed to combine our towers with theirs and create a quasi-venture capital structure within American Radio, which we not surprisingly called American Tower.

Growing the tower business, though, was a direct function of the explosion of the wireless business in the U.S. Once the PCS license auctions became a reality, we realised we had the opportunity to be an early entrant (and hopefully a leading player) into the emerging wireless tower business.

The tower industry had and still has today two huge barriers to entry. One was the zoning limitations for competing structures where an existing tower was already in place. The other was the substantial capital needed grow the business to scale. Steve’s Midas reputation on Wall Street gave us early credibility and tremendous access to capital and the zoning of sites became only more difficult. So the more of the right towers in the right locations we owned, the more protected we were. We knew that the co-location model worked and understood its potential. We knew we could  make a decent return on an individual tower with one tenant, a good return with two tenants, and a significant return with three or more tenants.

TowerXchange: How do those early days of the U.S. tower industry compare with the early days of the Latin American tower industry, particularly Brazil? And how has the towerco business model been adapted for Latin America?

The entrance of tower companies into Latin America has happened at a slightly later stage of wireless deployment compared to the U.S. By the time tower companies arrived in Latin America, carriers had already built out their 2G networks. Since then, though, we have experienced a much more rapid growth than occurred in the United States. Brazil, in particular, has been like the U.S. tower industry in fast forward.

To give you an idea of the growth curve, at the end of Q3 2010, American Tower had developed about 1,500 towers in Brazil and our company, Grupo TorreSur, had just been created. Since then, we have completed six  transactions and our portfolio is currently 6,094 towers. American Tower now has approximately 7,200 sites, SBA now operates around 5,200 towers in Brazil and BR Towers has approximately 4,000.

This means that in three years, around 23,000 of an estimated 60,000 towers have been sold in Brazil. The speed and volume of growth in the tower industry is definitely much greater than in the U.S.

The tower company model has been adapted very quickly in Latin America. We believed that Brazil, in particular, presented all the right macro factors for us. It is a good country in which to do business, carriers are still in the middle of building out their 3G networks, 4G is coming right behind it, which in turn presents a vast array of opportunities for us. Brazil is also a very competitive market. Out of the five carriers active in the country, four of them have 18-28% share of the market.

Brazil’s carriers are fiercely competitive but also have a great need for capital to build out these new 3G and 4G networks. Tower monetization allows the carriers to shed non-core assets, garner the funds to build these new networks and concentrate on their core competencies. This has allowed for the dramatic growth of the tower industry. Given the fact that Brazilian wireless carriers are probably six to eight years behind U.S. carriers in terms of rollout and technology migration, there is hopefully a very long runway for tower company growth.

With carriers in the midst of their 3G implementations and slowly beginning their work on 4G, the potential revenue growth for tower companies is much more significant in Brazil than in the United States. In the U.S., network build out is largely complete, and most 4G projects are currently focused on cell densification, whereas in Brazil we are still in the comparatively early stages of tower market maturity.

TowerXchange: What are the key differences between Latin America and the US in terms of how towercos make money? For example, how does the balance of new tenant vs amendment vs build-to-suit (BTS) revenue compare? 

Our main focus, much like any tower company, is to grow our business organically by additional placing tenants to our towers. The second focus, also very important to our growth, is what what we call “expansion” revenue (the equivalent of “overlay” or “amendment” revenue in the U.S.), where existing carriers on our towers add additional equipment to an existing site. We also look to grow our company by acquisition of towers and we have been quite active in this over the past three years. Right now, there aren’t many greenfield (BTS) projects in Brazil because carriers are very heavily involved in 3G expansions and colocations - the greenfield market will likely become more important to the carriers once they need to build in-fill and capacity sites for their 3G and 4G footprints.

TowerXchange: What factors could significantly change the shape of the tower market in Brazil?

Carrier consolidation, the possibility of TIM selling their towers, towerco consolidation, and regulatory reform could all change the shape of the market. I think the market in Brazil will continue to evolve for the next few years.

TowerXchange: With almost 40% of towers in Brazil having already been sold to independent towercos, how many more towers could be sold?

While Nextel has divested its entire tower portfolio, Telefonica has sold approximately 5,000 sites and Oi has sold close to 10,000 towers, there are still more towers to be sold. Both Oi and VIVO still own some of their towers and TIM may sell its sites. Historically Claro has viewed its towers as a strategic asset so it remains to be seen whether they will part with them.

TowerXchange: Out of the 6,094 towers that Grupo Torresur currently owns and operates in Brazil, how many are in urban areas and how many are in rural areas? And what role can towercos play in enhancing connectivity in rural areas?

More than 70% of our towers are located in high density, urban areas. The remaining 30% are concentrated in suburban areas or along major transport corridors. These towers are most often near highways or major secondary roads.

We feel very good about our portfolio and are working closely with the carriers to enhance connectivity in rural areas, in accordance with the plans set out by ANATEL.

TowerXchange: We hear financial analysts talk a lot about driving towercos to scale - what size of portfolio constitutes “scale” and how do economies of scale manifest for towercos?

Every company, of course, sets its own parameters with regards to the notion of scale, but we feel we are in a good place at the moment. When we decided to begin operating in Brazil, our original business model required us to achieve a portfolio of 1,500 towers to operate efficiently. We’ve been fortunate, though, to grow our business considerably larger than that.

TowerXchange: How many people does Grupo Torresur employ? What functions are kept in-house and what is outsourced?

Right now, we employ fewer than 40 people. We try to run a lean organisation, keeping sales, accounting and what we call LAPM - Lease Administration and Property Management, in house.

The other operational functions, such as repair and maintenance, are outsourced to highly reputable business partners.

TowerXchange: Is Grupo TorreSur focusing purely on towers, or is the company getting involved in rooftops, DAS, transmission and even active infrastructure sharing?

Right now, GTS is focused purely on towers. We have looked at DAS opportunities but for now we haven’t pursued it. And we aren’t active in transmission or active infrastructure sharing.

As for rooftops, we’ve only acquired them where required in concert with buying towers - only a very small proportion of our portfolio is rooftops.

TowerXchange: What is your personal opinion about the potential synergies between DAS and towers?

There are certainly some synergies, particularly on the sales side. The customer is still the wireless carrier, whether they’re deploying their network on towers or on indoor or outdoor DAS. But there is a lot of complexity in owning an active network.

In the United States, there are some areas where macro sites simply cannot be built, forcing carriers to use DAS to enhance their network. DAS is certainly an important complement to the tower industry; however, in Brazil there is a lot to be built in terms of macro-sites and carriers and towercos are more focused on that first.

TowerXchange: How attractive is Latin America for investment in the telecom tower business? Can you tell us about your attracting investment from Providence Equity?

Brazil is a very attractive destination for investors due to the strong topline growth potential. Both U.S. towercos and private equity firms have seen how the market is performing and look at the country with interest.

Providence Equity has significant expertise in investing internationally and understands the tower industry very well. For me, it is a great opportunity to partner with one of the preeminent private equity firms in the world.

TowerXchange: We know that tower transactions are a product of leaseback rate, term, tenancy ratio and a host of other factors, but in general are the prices being paid to acquire Brazilian towers justifiable? For example how do you see the relative Return on Capital Invested compared to BTS opportunities?

I believe that prices being paid are justified. Assets are valued more than anything on the basis of their growth potential. If you look at topline growth in Brazil, it is dramatically higher than in United States. Companies see Brazil as a good place to invest money because of the dramatic growth we have experienced to date and the anticipated growth to come.

If returns were only the same or only marginally better than in the US, then there would be no point in investing internationally, incurring the risks of doing business abroad. But so far returns have been quite strong and shown us continued very strong potential, and we are glad to be part of this industry.

TowerXchange: How interested is Grupo Torresur in pursuing opportunities beyond Brazil?

We are very happy to have invested in the tower business in Brazil and are focused right now on the country’s tower industry growth and expansion.

That said, we are always looking at opportunities in other Latin American countries. We are assessing very carefully the key elements that make investments attractive for us, such as macro-economic factors, where the carriers are in their deployment of 3G and 4G, the regulatory environment, our ability to achieve scale and the expected returns.

If the right opportunity were to present itself, we’d look at it very closely.

Jim Eistenstein will be speaking at the TowerXchange Meetup Americas at 11:30am on Wednesday 21 May during the Towerco keynote panel. The TowerXchange Meetup Americas will take place 20-22 May in Orlando, Florida, in co-location with PCIA Wireless Infrastructure Show.

Contact me at aneri@towerxchange.com for more information and to sign up for the Meetup.