Just when we thought 2014 was going to remain a relatively quiet year for the CALA tower industry, American Tower delivered some much needed excitement with the acquisition of TIM towers in Brazil for a reported US$1.2bn in a sale and leaseback (SLB) deal.
TIM’s willingness to sell their passive infrastructure assets had been rumoured for quite some time and, with the current strength of the US dollar offering a virtual discount, this deal wasn’t a real surprise. American Tower was always the most likely a potential buyer and the company has consolidated their position as the largest towerco in Brazil and in the CALA region.
American Tower has trebled its asset count in Brazil in 12 months
American Tower’s Brazilian portfolio grew to approximately 7,000 towers last December thanks to the acquisition of 2,790 towers from Nextel and 500 towers from Z-Sites. Its recent BR Towers deal, which includes 4,640 sites, recently closed bringing American Tower’s portfolio over 11,000.
Likely to be finalised in Q1 2015, the TIM deal will transfer between 5,240 to 6,480 of TIM Cellular S.A. towers to American Tower which will then own some 17,000 to 18,000 towers in Brazil, more than all the country’s other towercos combined.
Reportedly, Claro is a tenant on 1,240 TIM towers and retains the right of first refusal (ROFR) on them, therefore the American Tower-TIM deal on this portion of the portfolio won’t be concluded until the expiration of the ROFR.
In a press release, American Tower stated that the acquired towers “will generate approximately 435 million Brazilian Reais (approximately US$ 171 million at the current exchange rate) in annual run rate revenues (which includes ground rent pass-through and existing collocation revenue), and approximately 191 million Brazilian Reais (approximately US$ 75 million at the current exchange rate) in annual gross margin.”
American Tower’s stock is value up 42% over the course of the 2014, net income up over 10% and quarterly revenue up 20% year-over-year.
Figure 1: American Tower’s Brazilian portfolio has almost trebled in size in deals announced in H2 2014
Ten thousand towers in one week
In addition to the TIM portfolio, American Tower entered into an agreement with Bharti Airtel in Nigeria to acquire over 4,800 towers via a SLB deal.
American Tower announced deals for over ten thousand towers over the course of 48 hours and is ending the year with approximately 70,000 sites worldwide, of which 41% are in the U.S. but the majority are now owned internationally.
Combining organic growth and expanding tenancy ratios with targeted strategic acquisitions, American Tower is maintaining an impressive growing pattern, and confirming its leading position in the tower industry in the Americas and worldwide.
Figure 2: Example tenancy ratio growth (American Tower Brazil 2002-13)
TowerXchange commentary on the American Tower – TIM deal
American Tower loves Brazil. And with good cause. They’ve already proved that they can drive tenancy ratios above three in ten years in the country (see figure 2). According to Chairman, President and CEO Jim Taiclet “there are currently 4,400 subscribers per cell site location in Brazil compared to just 1,500 per cell site location in the United States,” which speaks to both the pent up demand for co-locations, and to the potential for significant organic growth.
With this latest acquisition, assuming Claro waives it’s ROFR on 1,240 of the towers, American Tower will bring their Brazilian tower count over 18,000, representing approximately 25% of the tower assets in the country, and giving AMT a significant scale advantage over the next largest towerco in Brazil, SBA Communications with 6,700 towers (pending the closing of the latest Oi deal).
American Tower’s acquisition from TIM looks like a fair valuation for both parties when compared to the benchmarks established by other transactions in the country in the last two years (see figure 3). Telecom tower sale processes in Brazil tend to be succinct affairs, attracting a familiar group of bidders who are both fiercely competitive yet disciplined enough to walk away before valuations get frothy. The lower cost of capital for American Tower and SBA Communications means the publicly listed US giants secure most of the large opportunities (although Crown Castle were rumoured to have looked long and hard at a recent trade sale in Brazil, before ultimately passing on the deal). The strength of the listed towercos may price out the smaller local players from SLB and major acquisitions, although in this case it was widely rumoured the PE-backed towerco Cell Site Solutions (CSS) made a compelling case as a viable counter-party to TIM.
Figure 3: Comparison of Brazilian tower transactions announced in the last two years
More pessimistic commentators than TowerXchange would point to ongoing discussions about the potential merger of TIM and Oi as a source of potential downside for the Brazilian tower market. Indeed over the same weekend as TIM’s Brazilian tower sale was announced, owners Telecom Italia noted that they had “empowered management to examine in depth the options for a possible integration” between TIM and Brazil’s #4 ranked MNO Oi. TowerXchange feel any reduction in the number of credit worthy tenants would be short-lived, with the Brazilian regulator clearly keen to attract a new market entrant fourth play, and imminent spectrum auctions offering the opportunity to forcibly restructure the market to reinstate the current competitive balance.
