By Arianna Neri, Head of Americas and Asia, TowerXchange. Upon arriving in São Paulo and driving from the airport towards the city centre, clashing views of modern rooftops filled with antennas and favelas fill my eyes. Despite the unusual proximity of shanty-houses and multi-millionaires’ condos, the overall feeling is the one of a contemporary metropolis where smartphones are becoming prevalent at a rapid pace, just like everywhere else in the world. Although not quite like home in Italy where driving and generally walking is proving impossible nowadays as people are not looking ahead anymore but constantly scrolling down their Twitter and Facebook feeds, the Brazilian middle class I spotted by the beach, in coffee shops and driving seemed pretty well connected! And here are some of my findings by delving deeper into the local telecom and tower industry.
To satisfy their ever-growing data hungry customer base, Claro, TIM, Vivo and Algar Telecom all bid and won 700MHz blocks during the recent 4G auction. At the same time, and as part of the 2012 2.5GHz spectrum auction requirements, carriers are working hard to reach 100% rural coverage by the end of this year. Not an easy task in a country where the permitting framework is referred to as the biggest obstacle carriers, towercos and managed service providers face in deploying greenfield projects.
Permitting is the number one problem
In fact, during my trip to Brazil which took me to meet key stakeholders from carriers, towercos and managed service providers in both Rio de Janeiro and São Paulo, one fact appeared as quite striking: everyone, when asked what was the main challenge they were facing in their daily job, mentioned permitting.
We all know that permitting can be quite tricky in Brazil, especially since all the municipalities are involved in the process. However, I didn’t expect everyone to feel so strongly about it. It appears that the new Lei das Antenas will be able to speed up the process but in a country with 5,570 municipalities, the swift implementation of a new law and its terms isn’t always easy. Some stakeholders set targets to build over 4,000 new sites in 2014 but achieved slightly over half of them and mainly due to regulatory and permitting limitations.
While carriers and towercos are working side by side to deploy new sites in rural as well as urban areas - especially in Rio in preparation of the 2016 Summer Olympics - I took a look at some of the trends likely to drive the industry forward in the next few months.
Not a lot left to grab - towercos set to mature
With the last transactions of 2014 involving respectively Oi-SBA and TIM-AMT, it didn’t take me long to realise that there shouldn’t be much left to acquire for towercos. Right now, towercos are generally busy performing accurate due diligence on the portfolios they’ve acquired in the past 12-24 months, and swap rights are still be in place for them. Therefore, carriers need to retain enough towers to satisfy any swaps and the whole process usually takes about three years.
We can estimate that at the end of the due diligence phase, some carriers will be left with small portfolios of sites which are too poor quality to be sold. The long term solution could be decommissioning but to date, we don’t foresee this as a viable option, considering the coverage and capacity needs of the country.
It’s safe to say that Brazilian towercos are entering a more mature phase. A time for the industry to stabilise and find its balance. TowerXchange have seen valuations peaking and we’ve analysed quite extensively the premiums some towercos paid to gain their leading positions. So are they now just focusing on build to suit (BTS) and have nothing left to buy?
Quite the opposite, I’d say. If the excitement of sale and leaseback deals with carriers is fading, a handful of companies are likely to become acquisition targets in the near future. In fact, whereas AMT and SBA keep scaling up, a significant gap is being created between them and Brazil’s indigenous independent developer towercos, which TowerXchange generally refer to as middle market towercos.
A separate comment must be made about Grupo TorreSur which was able to build a strong portfolio of 6,000+ towers in Brazil and was believed to be up for sale over the last few months. However, GTS’s valuation seems to have scared potential buyers off and the company is reportedly now back on track with a strong pipeline of BTS projects until the opportune time to reassess it’s next steps.
With significant and yet smaller portfolios of 50-500 towers, Brazil’s pool of middle market towercos is leading the way in the development of BTS projects in several regions, as well as diversifying their revenue stream with the involvement in several DAS and small cells initiatives. However, it seems like common knowledge that each of these companies is potentially up for sale and are just waiting for the perfect time to leverage their growing portfolios and valuations. The usual suspects will surely consider every possibility they have to keep scaling up, as recently showed by the acquisition by AMT of BR Towers - a full-value deal that still contributed to AMT’s explosive growth pattern over the past 12 months.
So while towercos are entering a more mature and possibly less dynamic phase of their business, with due diligence being performed, swaps to take care of, regulatory worries and an eye on restructuring some of the SLAs with the carriers, the race towards acquisitions is far from over. And as long as middle market towercos will continue growing their portfolios organically via BTS projects, we believe major towercos will keep looking closely at them.
Top four becoming three?
In the meantime, carriers, freed from the burden of managing large tower portfolios, shift their attention to their core business while keeping an eye on creative ways to enhance their coverage.
In fact, TIM and Telefonica, although with different approaches, are working very strong on their 4G LTE projects, developing micro-sites and alternative solutions in metropolitan areas and the overall outlook of their business seems quite positive.
TIM has been performing well lately and is retaining a very strong second position in the market, closely following Vivo. Although facing some internal changes now that its tower business is being outsourced, the company is keeping a very close eye on innovation and its recently developed biosites - lamp posts with seamless antennas - are just one of the exciting products TIM is working on. And the company’s push for small cells will be eased by the fact that the inspection tax (Fistel) for small cells with power from 1W to 5W has been eliminated this past December in a bill which TIM strongly supported and lobbied for.
At the same time, the rumours about TIM’s potential merger with Oi have not been denied by either party. However, it seems clear that whereas for TIM a merger could mean an even stronger position and a chance to become leader in the market, for Oi at this stage consolidation could be the only recourse.
Oi didn’t bid at the recent 700MHz auction. In the absence of 4G spectrum, its debt situation might not be sustainable for long. However, its assets are attractive; its nationwide footprint is still quite strong and includes infrastructure such as several thousands of kilometres of fibre optics. However, the sale of PT Portugal is key to Oi’s future and is far from an easy transaction since the €879 million default earlier in 2014. In a recent statement, Oi announced that through the PT sale the company “…will also reduce leverage and gain financial flexibility and investment capacity. In addition, it will enable itself to participate in the expected consolidation process in Brazil, which has the potential to capture material synergies and economies of scale, as well as to increase competitiveness.”
Although partially admitting its intention to enter a merger process, rumours suggest that other carriers could be more inclined to each acquiring a portion of Oi’s business by splitting it into three separate entities. Whether that is an actionable solution, only time will tell.
In the meantime, Claro appears to be playing a different game with its long term strategy of retaining its tower portfolios and generally playing solo. Thanks to its own 6,000+ asset base and solid financials, the company retains a strong third place in the market. Gossip around the creation of Carlos Slim’s own towerco in Mexico have been spreading but just as much as América Móvil’s statement back in July about its intention to sell off assets in its portfolio. And beside the spin off of Sercotel Holding, for now nothing has changed. But if the company’s Mexican strategy to carve out a towerco pays dividends, even though their hands were forced, the strategy (or the regulatory pressure) could be replicated in other countries and Brazil could surely follow.
Still number one in the market and exuding positivity through its majestic high rise in downtown São Paulo, Telefonica/Vivo ended 2014 leading the way in terms of 4G coverage (40.6%) and reached out to 140 municipalities with its newly launched services. Having pioneered the divestiture of their tower portfolios, with the first transaction dating back November 2010 when the company sold 1,500 towers to GTS, Vivo has since then been able to leverage its flexibility and speed to market and personally, I had the clear perception the company is very well tuned with the current state of the market and able to separate itself from the competition while keeping an eye on the possible movements of TIM and Oi on the merger side.
Still number one in the market and exuding positivity through its majestic high rise in downtown São Paulo, Telefonica/Vivo ended 2014 leading the way in terms of 4G coverage (40.6%) and reached out to 140 municipalities with its newly launched services
My predictions for 2015
If I had to bet money on a few big moves for the months to come, I’d definitely put Oi being up for sale this year as number one - although conditioned to a PT Portugal sale. BTS will continue to represent the most intense and possibly frustrating tower industry activity in the country, with several thousand sites yet to be deployed in rural areas and Rio in need of a makeover ahead of the Olympics. Second bet; as Brazil’s middle market towercos achieve scale, expect them to be picked off by American Tower and SBA in strategic acquisitions. Expect the premium paid for a multi-tenant tower in Brazil to remain high – they’re going to continue to cost $100,000 to build and $200,000 to buy! For the same reasons, expect more new entrant BTS-centric towercos in Brazil. While Brazil needs so many more macro towers, that will remain the tower industry’s focus, expect towercos large and small to increasingly engage with IBS and small cells, particularly in Brazil’s “vertical cities” in the South.
From the carriers’ perspective, co-location is becoming “muscle memory” – something they do without thinking about it. Infrastructure sharing is no longer a strategy to be discussed around boardrooms – it’s the new norm in Brazilian network planning. Building and operating towers is becoming, for everyone except Claro, someone else’s problem. This, of course, is a good thing for towercos.
The permitting process will remain the number one obstacle to the expansion of Brazil’s tower industry, even though the Lei das Antenas represents a step in the right direction. I would even go as far as suggesting a closed door meeting gathering key parties from towercos, carriers, the regulator and anyone else involved to discuss options (TowerXchange will be happy to facilitate this!) Finally, I’d say that while Brazil’s Big Three towercos are maturing and transactions slowing, with portfolios diligently assessed and integrated, and swaps performed, operators might be looking beyond passive infrastructure and start discussing active infrastructure sharing and other creative ways to enhance their coverage.
