The Brazilian towers market has been capturing investors’ attention, with ten major tower transactions since 4Q 2011 and approximately 7000 new towers expected to be built during 2014. A peculiarity of the market is the distinction between the players focusing on the buy-and-leaseback market, and those focusing on the build-to-suit market. In this article, we examine the value drivers for both these segments of the tower space.
Buy and leaseback: the attractiveness of towers varies considerably between portfolios
In recent transactions in Brazil, tower portfolios have been sold at an average price of USD175 000 per tower (see Figure 1). This suggests that Brazilian towers are valued at a premium to those in other emerging markets, which have typically had lower valuations. Acquisitions have been limited to four large tower companies: American Tower, BR Towers, Grupo TorreSur and SBA Communications.
Figure 1: Major tower acquisitions in Brazil, 4Q 2011–4Q 2013
Figure 2: Sources of value for buy-and-leaseback tower transactions in Brazil
Build to suit: the market may represent an opportunity for mid-sized towercos, although it is not without challenges
Historically active in the construction industry, most MNOs are now streamlining operations and subcontracting to third-party partners to develop build-to-suit projects. Larger towercos are focusing on buy-and-leaseback transactions, which represents a potential opportunity for mid-sized towercos such as Brazil Tower Company, Cell Site Solutions, Highline do Brasil, QMC Telecom and T4U Tower Management to get involved in the attractive Brazilian market.
However, in the Brazilian context, the dynamics of the highly competitive build-to-suit market do not always maximise value creation for towercos. In fact, mobile operators contracting towercos to develop greenfield projects often achieve heavily discounted lease rates as part of the deal and negotiate generous cancellation terms in the contract. This can have an adverse effect on the long-term valuation of such assets. Moreover, greenfield projects require as many as seven different licences from state and local governments. Brazil has not yet achieved a unified legal framework for new tower installation, although a new Lei das Antennas (Law of Antennas), which could simplify leasing and permitting, is in draft form.
Conclusion: understanding the portfolio specifics is key to assessing value
On the whole, the Brazilian telecoms tower industry is an appealing market with proven growth potential. However, it presents considerable challenges, particularly for the build-to-suit market, such as the absence of a unified regulatory framework, uncertainties in light of recent MNO consolidation rumours, as well as a highly competitive base station market.
Given the significant variations in tower valuations in the Brazilian market, it is absolutely vital to develop robust understanding of the attractiveness of the specific portfolio being considered – using cost per tower comparisons is clearly insufficient. Having undertaken more than 70 engagements in the tower sector in the last 3 years, Analysys Mason has deep expertise in assisting clients to understand the value of tower portfolios, and is considered the leading advisor in this space.
This article has been co-authored by Arianna Neri and Brian Burns, a Manager at Analysys Mason, the specialist adviser on telecoms, media and technology (TMT) worldwide. Please check Brian’s profile here
