C-level perspectives from CALA’s leading international towercos

Probably the most influential panel of international tower industry leaders ever assembled formed the keynote panel session at the recent sell-out TowerXchange Meetup Americas. This commentary draws on remarks shared by that illustrious panel, as well as useful tidbits gleaned over coffee or beer during the course of the event! As such, please don’t ascribe any of the commentary contained within this report to specific participants in the panel.

Respected telecoms infrastructure analyst Jonathan Atkin, Managing Director at RBC Capital Markets moderated the panel.

First to introduce himself was Kurt Bagwell, SBA Communications’ International President. SBA Communications is a 25 year old wireless infrastructure firm, active internationally for the last five years. With SBA’s latest acquisition from Oi, the company now has almost 6,800 towers in Brazil and 2,000 across Central America, accumulated through five acquisitions and various build to suit (BTS) programmes.

American Tower’s (AMT) LatAm CEO Olivier Puech heads up CALA’s largest portfolio of independent towers. AMT entered Mexico in 1999 as the first of twelve international markets in which the firm now operates, seven of which are in CALA (plus South Africa, Ghana, Uganda, India and Germany). With the acquisition of BR Towers’ 2,530 owned towers plus exclusive rights to an additional 2,110, AMT’s CALA portfolio now totals around 30,000 towers, more than a third of which are in Brazil. AMT also has substantial portfolios in Mexico, Colombia and Costa Rica, just under 500 towers each in Chile and Peru, and 58 towers in El Salvador. AMT has completed acquisitions from carriers such as Nextel and Telefonica, as well as acquiring towercos such as GTP and BR Towers.

Phil Kelley, SVP Corporate Development, is Crown Castle International’s (CCI) go-to guy on International strategy. CCI owns 40,000 towers in the US, mostly accumulated through acquisitions but supplemented by BTS. CCI also owns 12,000 DAS and small cells in the US, 1,700 towers in Australia, and has entered and successfully exited the UK market.

Marc Ganzi recently sold GTP to American Tower for US$4.8bn. He now runs Digital Bridge Holdings, which has expansion plans in the US and an interest in international opportunities. Mark also runs Mexico Tower Partners, which operates 600 towers accumulated through acquisition and BTS.

One of the co-founders of American Tower, tower entrepreneur Jim Eisenstein is currently Chairman & CEO of Grupo TorreSur (GTS). GTS has accumulated 6,100 Brazilian towers through six transactions and some BTS.

Daniel Seiner, CEO, represented Torres Unidas, a Berkshire Partners’ portfolio company. Torres Unidas have around 400 towers in Chile, acquired from Telefonica and BTS, and 350 in Peru. Further acquisitions and an entry into Colombia are in the pipeline.

Every carrier has its own decision tree governing if and when to divest towers. Macro drivers can be important, particularly if they affect towercos’ access to capital markets and low cost capital, but data demand remains the number one driver, as the upgrade and densification of networks will often motivate a carrier to consider divesting non-core assets. When those two forces come together, low cost capital for buyers and a need for cash release on the part of sellers, you tend to see a spike in the volume of tower transactions.

Comparing the functioning of the sale and leaseback and trade acquisitions market in CALA with the neighbouring North American region, the most obvious differences are in the availability of comprehensive data on portfolios for sale, the high speed at which transactions progress in CALA, and the quality of assets themselves.

The mature tower industry in the US has accustomed carriers and their advisors to have comprehensive legal and site specific documentation ready for pre-tower transaction due diligence. In contrast, tower companies with experience of tower deals in the CALA region suggest a need to ensure underlying ground leases are in good order, particularly in markets where public registries work slowly – if they exist at all. Ensuring the assignability of contracts with existing tenants is another concern, as is the quality and completeness of permits and drawings related to the assets themselves.

Another key difference between tower deals in North and South America is the speed of transactions. Driven by the accretive nature the sale of non-core assets, some tower deals in Brazil are being completed in just four weeks from start to finish, leaving little time for due diligence. So a lot of work goes into the structuring of deals, such as the inclusion of swap rights and reserved space clauses in the MLA.

The trend for the sale of towers from carriers to towercos tends to be accompanied by a parallel trend toward outsourcing of build to suit (BTS) programmes. BTS opportunities in CALA are sometimes brought to market through formal RFP processes and e-procurement platforms, alternatively personal relationships with carriers can help towercos land BTS contracts.

At times, competitive forces function to ensure the independent tower industry delivers an efficient BTS service at a fair price. At other times, the major towercos accuse the smaller towercos of value destructive discounting (such as offering a free lease for the anchor tenant for a limited period), to which the smaller towercos counter by accusing the larger firms of ‘cherry-picking’ sites most suitable for co-location sales, leaving them only tough to permit, sites with no obvious second tenant.

Ultimately there is a role in the CALA tower industry both for major towercos with the technical and financial capacity to deliver large projects, and a role for nimble, efficient smaller towercos able to turnaround projects swiftly.

One thing all the towercos could agree on was that investors appreciated the organic growth narrative and margins generated by BTS, deep discounting notwithstanding. There was also some suggestion that the CALA region needed more capacity to execute BTS projects, hinting that opportunities can still be found by new entrant towercos.

It’s important to bear in mind that the sale and leaseback and BTS markets are intrinsically linked. If a carrier divests all its towers, then it will usually transfer all it’s skilled staff and organisation knowledge of building and maintaining passive infrastructure to the towerco, forcing that carrier to outsource subsequent BTS programmes. That said, BTS is only ever the second best option after co-location.

One towerco reported that in Brazil it can take up to three years to obtain the necessary licenses and permits to develop green field projects.

Many telecom regulators in the CALA region are attempting to simplify the legal and regulatory environment for carriers and towercos, accelerating permitting processes with a goal of making it easier to extend and densify networks. However, the leaders of the CALA tower industry had a mixed verdict on the helpfulness of CALA’s telecoms regulation reform, which in some cases was felt to be instigating laws more complicated than maintaining the status quo.

For example in Chile recent regulatory reform was designed with the aim of simplifying procedures, but failed to provide clear implementation guidelines, hence leaving it to local authorities to interpret implementation, leading to unpredictable outcomes and in many cases making it even harder to build towers.

Ground lease aggregators are starting to pop up in CALA, starting in Brazil and Mexico. The major towercos are on the front foot with full time teams extending and buying out leases in every market, not so much as a defensive measure but because it’s a great use of capital regardless.

In many CALA markets, where contracts are structured to pass land lease expenses to anchor tenants, ground lease aggregators are a threat to carrier margins not to towercos as it doesn’t affect their P&Ls.

While it’s dangerous to generalise, the quality of towers can sometimes be an issue in CALA. In Mexico for example, most portfolios were developed as turnkey projects by OEMs for a single tenant only. In the worst cases, towers are barely able to handle their existing load, let alone co-locations! Augmentation capex is going to be higher in situations such as this. There are also plenty of robust towers in CALA, for example in Costa Rica most towers have been built to international quality standards. However in some other CALA markets, towercos may at times find themselves deciding whether each tower has the potential for augmentation or whether it is more convenient to decommission and build a new tower.

Brazil contains the full range of towers; from new towers equipped to co-locate two to four tenants, to corroded towers that need decommissioning in the near future. The quality of assets accounts for some of the variation in the cost per tower paid for Brazilian towers. The panel concluded that augmentation capex requirements in CALA are often lower on a per site basis than in the US, which can have positive implications for the time lag between portfolio acquisition and the addition of further tenants.

The rollout of fibre is releasing valuable wind loading capacity from towers in rural Brazil and Mexico as it enables heavy microwave backhaul dishes to be removed.

Like the rest of the world, CALA’s carriers have congested networks in areas of high population density, but in CALA there are few solutions in place to ease these capacity pinches. Carriers often have target lists of buildings, venues and transportation hubs where they want extra capacity, but the few DAS in CALA are mostly single carrier solutions. There are not as many multi-carrier DAS as in the US (where CCI for example has 12,000 DAS). Multi-tenant indoor DAS could be a huge opportunity for CALA’s towercos. Outdoor DAS may be a longer-term opportunity as there is so much demand for macro cells to be fulfilled first.

Is carrier consolidation a concern? Not in the long term. To compare again to the US market, where the consolidation from six to four national carriers caused some initial turbulence in the tower industry, but in the long term having fewer, more credit worthy carriers competing against one another drove demand for co-locations while reducing counterparty risk. Both the US and Brazilian telecom regulators are now struggling with the debate as to whether four carriers or three is ideal, but towercos are insulated against consolidation by long term contracts. A degree of carrier consolidation may take place, including in the largest CALA tower market Brazil, however it would be wrong to assume that a merger of two carriers would necessarily result in widespread decommissioning of towers as networks are already overcrowded.

To what extent are sellers of emerging market towers and towercos competing with opportunities in North America for capital from the ‘Big Three’?

An opportunity in emerging markets has to look really good to compete with opportunities in North America, where there is still ample opportunity for value creation through co-location sales and tenancy ratio improvement, and where the ‘Big Three’ (AMT, CCI and SBA) can always deploy capital to buy back more of their own stock.

There is a threshold of perceived country risk below which the listed US towercos will be unlikely to go. This creates an opportunity for local emerging market towercos to benefit from the arbitrage between the perceived and the actual risk of buying and building emerging market towers, particularly as their operational experience deepens and their ability to understand and mitigate those risks improves.

Typically publicly listed international towercos will bid directly only for selected, lower risk, opportunities in emerging markets. When they do bid, established North American towercos bring with them both cash and the trust of the capital markets, meaning they have a lower cost of capital than private equity-backed towercos. This makes them formidable opponents in an auction. However, the ‘Big Three’ have the discipline to walk away from frothy markets where the premium for being a first / early mover takes the price beyond their valuation - AMT, CCI and SBA have all bid for a lot more international opportunities than they’ve won.

Ultimately, the ‘Big Three’ US towercos, and other potential trade buyers such as Bharti Infratel and Protelindo, may be perfectly content for emerging market towercos to ‘do the hard work’ in cleaning up tower portfolios, establishing market lease rates, and growing a diverse portfolio to mitigate counterparty and country risk, at which point trade buyers may consider paying a fair premium to acquire selected businesses. However, emerging market towerco entrepreneurs should not formulate exit strategies predicated on trade sale - it is unlikely AMT, CCI and SBA will want all the towers.