Argentina’s telecoms tower industry is notable for its overall lack of activity, with third-party towercos eschewing the market in favour of lower risk countries in Latin America. In this analysis, Business Monitor International’s CALA tower expert Jake Grant shares his view of a tower market fraught with contradictions; an attractive, balanced triumvirate of MNOs, a recent spectrum auction with one of the region’s highest 3G penetration rates, offset by global headline grabbing political and currency risk. When will the Argentinian tower industry kick off?
The sale of telecoms network infrastructure to third-party tower companies has been a key theme in the industry over the past three years. In Latin America, mobile operators such as Telefónica and NII Holdings have followed this trend, offloading tower assets to the likes of American Tower Corporation and SBA Communications in markets including Brazil, Mexico, Colombia, Chile, Peru and others. Argentina is the notable exception to this trend, despite the presence of Telefónica and, until recently, NII Holdings in the mobile market. American Tower and SBA Communications report no holdings of towers in Argentina, while the former owns and operates over 32,000 tower sites and the latter over 8,500 in the rest of the region.
Argentina the exception in a growing towers industry
This is despite many of the conditions in Argentina that would point to potential success for third party towercos entering the market. Argentina is the second largest country in Latin America in terms of geographic size and fourth in terms of population. This would make it attractive for mobile operators to sell tower infrastructure to third-parties in order to reduce the burden of expansion into large rural areas of the country. Further, Argentina’s mobile market is characterised by fierce competition between three national operators, which has driven one of the highest mobile penetration rates in the region, for both basic subscriptions and 3G connections. Telecom Personal, Claro and Movistar are within 4.3pps of one another in terms of market share as of Q314. Nextel holds the remaining 3.5% share of the market and does not boast the national presence of its rivals, making it a minor player by comparison.
The uncertain regulatory environment and ongoing macroeconomic problems including currency devaluation and high levels of inflation have conspired to keep third-party towercos out of Argentina, in favour of lower risk markets. Import restrictions and quotas also add to the underwhelming business environment, making it difficult for foreign companies to bring in the parts and equipment needed.
Fierce competition driving high mobile development
Market share (%), 2011-2014
Political risk scaring off investors
BMI believes the greatest risk is posed by mounting government intervention. The administration of President Cristina Fernández has intervened both directly and indirectly in business operations as part of its left-wing, nationalist policy. The government has nationalised several companies across various industries and has entered into acrimonious arbitration processes in order to pay compensation to the companies affected. This is true of the telecoms sector also, where the government cancelled a September 2012 auction of 3G spectrum and awarded the frequencies to state-owned ArSat. The company held this spectrum, amounting to 25% of total 3G frequencies, for two years without utilising them in any way, before they were eventually auctioned to the three major mobile operators at the end of 2014. In addition to the move to award ArSat with spectrum, the government has also threatened to renationalise operators and suspend sales of new subscriptions if they failed to improve their quality of service, as well as forcing the breakup of media conglomeration Grupo Clarín.
The nationalisation threats are particularly worrisome and serve to keep out third party towercos, for fear that their assets will be seized by the government for unfair compensation. Complaints regarding quality of service were in part due to the lack of 3G spectrum available to mobile operators, given that these frequencies were held by ArSat for two years.
The uncertain regulatory environment is also noticeable in the ongoing sale of Telecom Italia’s entire controlling stake in Telecom Argentina to investment firm Fintech. A US$960mn deal was agreed in November 2013; however, since then, TI has been forced to extend the sale completion deadline twice, as it awaits regulatory approval. In October 2014, TI gave Fintech 30 months to complete the deal but Argentina’s communications ministry (SECOM) has been slow to offer its support.
Latin America 3G/4G penetration
Changing telecoms and macro environment to spur towers interest
With the auction of 3G and 4G spectrum in October 2014, the market for third party towercos could potentially be turning a corner. Argentina has been one of the last markets in the region to award 4G spectrum to mobile operators, and now all three of the major players have access to these frequencies. This will result in expanded investment strategies for Personal, Claro and Movistar as they look to roll out infrastructure across the country. These capital expenditure budgets may require mobile operators to sell off tower and infrastructure assets to third-parties in order to raise funds for their 4G LTE deployment strategies.
The auction coincides with the Argentina Lower House approving a draft bill in December 2014, proposing reforms to the country’s previous telecoms law which had been introduced in 1972. The bill had already been approved by the Senate on December 10, and will now go before the executive branch, where it will wait for its enactment by President Cristina Fernandez. The stipulations of this reform include the creation of the Application of Information Technologies and Communications Authority (AFTIC), which will be responsible for controlling and regulating all matters relating to Information Technology and Communication (ICT) and other related services and players in the ecosystem. It remains to be seen what kind of powers the new regulator will have and how independent it will be but it should at least resolve problems with delays to policy and the Telecom Argentina acquisition.
Economic growth in Argentina will remain tepid in the coming quarters, with a recession in H214 giving way to a subdued recovery in 2015. We expect the election of a new government in the October 2015 national elections to see a return to more orthodox, business-friendly economic policies, generating an increase in fixed investment over a multi-year timeframe. BMI also believes a settlement with bondholders will also take place during 2015, improving the outlook for investment. However, unwinding Argentina’s economic imbalances will be a prolonged affair with another peso devaluation expected in 2016 and we do not anticipate a significant acceleration in growth until 2017 at the earliest. We forecast real GDP growth of 1.0% in 2015 and 2.5% in 2016, following a projected 0.2% contraction in 2014.
While the business environment has prevented the entrance of tower companies into the market, we believe wide-scale changes in the government, the telecoms sector and the regulator could bring in the likes of American Tower during 2016-17.
