Contrasting the international acquisition appetites of AMT, SBA and the world’s other major towercos

By Kieron Osmotherly, Founder & CEO, TowerXchange With the recent publication of American Tower (AMT) and SBA Communications’ (SBA) quarterly results, I thought it might be timely to contrast their international strategies, comparing where they have an appetite to deploy capital and under what terms. As we consider the implications of AMT and SBA’s acquisitiveness, and consider the handful of other towercos worldwide with the financial and ‘digestive capacity’ to execute US$500mn+ tower transactions, we start to see a distinct map of potential acquirers in tower ‘mega-deals’ on each continent, which itself has implications for MNOs considering the sale of assets.

Apart from where we are quoting data and anecdotes from AMT and SBA’s site lists, quarterly and annual reports, conference calls and investor conference presentations, the entirety of this editorial is TowerXchange’s own opinions, and is not based on any conversations with AMT or SBA executives.

American Tower has invested more aggressively in international markets than any other towerco in the world. At the time of writing, 40.9% (40,066) of American Tower’s sites are in domestic markets, with the majority, 59.1% (57,898) international, inclusive of the pending acquisitions from Verizon (domestic), Airtel in Nigeria and TIM in Brazil. According to analysis provided by RBC Capital Markets, 37% of AMT’s pro forma annualised site rental and management revenues will come from international markets, again inclusive of the aforementioned three pending acquisitions. AMT generated core organic growth of nearly 13% internationally, with Brazil experiencing record levels of lease demand (Brazil delivered core organic growth of over 19%) but with the highest level of organic growth coming in Ghana at 40%. This compares with domestic organic growth of 7%. AMT plans to build 2,600-3,000 new towers internationally in 2015, compared to just 150-250 in the US.

While SBA Communications’ has less exposure to international markets than American Tower, the percentage of site leasing revenue SBA brings in from overseas has more than doubled since 2013. 13.5% of SBA’s site leasing revenue came from their international portfolio in 2014 (up from 6.3% in 2013). At 31 December 2014, 62.3% (15,124) of SBA Communications’ sites were in domestic markets and 37.7% (9,168) international, inclusive of the most recent acquisition from Oi in Brazil.

US$40bn market cap giant American Tower’s international strategy is more aggressive and expansive than SBA Communications’. AMT is driven by a double digit growth narrative that they probably cannot fulfil in a domestic market with finite remaining acquisition opportunities – while there are smaller tower portfolios that can be rolled up, and AT&T and US Cellular each retain 4-5,000 towers, the US tower market is 70% penetrated by towercos. As they look abroad for growth, American Tower seem comfortable with the scale of their international business exceeding that of their domestic, diversifying their portfolio across five continents. International expansion has brought AMT into less mature markets, offering a longer runway for growth – AMT’s tenancy ratio across their comparatively mature domestic business was 2.5 (preceding the Verizon acquisition), international tenancy ratios average just 1.5.

SBA takes a more selective approach to international expansion, focusing to date on Central and South America. SBA has self-imposed a 25-30% cap on non-US$ denominated revenues, which suggests the relative scale of their international footprint could double in revenue terms in the coming years.

While SBA has no shortage of options to raise supplementary funds should the right opportunity arise, SBA’s 2015 US$1bn warchest may be utilised for share repurchase as much as for acquisitions. SBA has a history of selective, smaller transactions, and may continue to expand internationally a few hundred towers at a time. In comparison, AMT deployed over US$3bn in international acquisitions in 2014, headlined by the acquisition of ~4,800 towers from Airtel Nigeria for US$1.05bn, and two mega deals in Brazil with BR Towers (US$978mn) and TIM (US$1.2bn).

In the Q4 2014 earnings conference call, AMT President, CEO and Chairman Jim Taiclet stated that AMT’s international business had “been able to deliver strong organic core growth over the last several years significantly above that of the U.S. This reflects the aggressive network deployments of large multinational customers like Telefonica, MTN, Vodafone and many others across our international footprint and has been complemented by average gross margin conversion rates excluding pass-through of about 80% since 2010.”

Taiclet continued: “While we continue to expect solid contributions to organic growth from existing assets, we also expect that under-marketed portfolios like Airtel Nigeria when they’re closed by us will help generate very strong revenue growth going forward. The growth rates indicated on the chart (included in this article as figure three) for BR Towers, TIM and Airtel are the average annual revenue growth rates we expect each portfolio to generate over the next five years” (transcript excerpt courtesy of Seeking Alpha).

 

First let’s emphasise where AMT and SBA won’t be competing to acquire towers in 2015. There will be competition for tenancies and tower builds as Brazil gears up for the Olympics and for the 700 MHz 4G auction, but we won’t see the volume and scale of tower transactions in Brazil that we saw in 2014. Towercos already own 71% of Brazil’s towers. Brazil is essentially ‘sold out’ of sale and leaseback opportunities, with the possible exception of a handful of remaining Oi towers. Maturing BTS-centric ‘middle market’ towercos could be selectively acquired, although most remain two to three years away from the scale envisaged in exit strategies. The largest independent player, Grupo TorreSur, seems to have stood down from their rumoured sale and resumed build to suit activities.

Similarly, there’s not much left to buy in Mexico, with Telcel’s towers the last remaining substantial operator-captive portfolio, but destined to be carved out into América Móvil’s own towerco. The entry of AT&T into Mexico will stimulate substantial BTS programmes, and again there are a handful of smaller towercos that could be acquired, although none has a quadruple digit tower count.

So if the battle won’t be fought in Brazil and Mexico, where will AMT and SBA seek to deploy acquisition capital in CALA? 2015 may be a year too soon for much activity in the virgin tower markets of Argentina and Uruguay. However, at a recent TMT investor conference, SBA CEO Jeffrey Stoops talked about targeting inorganic international growth along the Pacific Coast side of South America where SBA is not currently active. “We’d like to find an opportunity where we can go in with 200-300 towers so we can be EBITDA positive from day one,” said Stoops. “There are some possibilities in each of those countries where that could happen, but I don’t have anything imminent or concrete yet.” While an unfavourable regulatory environment continues to dissuade investment in the otherwise attractive Chilean tower market, we expect several hundred, potentially thousands of towers to change hands in Peru and, in particular, Colombia in 2015.

While American Tower (571 towers) and Torres Unidas (~350 towers) are active in Peru, joined at a smaller scale by Torres Andinas, NMS, Torresec Peru and a handful of other local towercos, the market is far from fully penetrated by towercos – TowerXchange estimate that less than 20% of Peru’s ~6,000 towers are owned by towercos. There is tremendous fuel for organic growth in Peru, with Telefónica having launched 4G earlier in 2014, and Claro doing likewise on a 1,900 MHz band previously used for 2G. Entel’s acquisition of Nextel had already stimulated their investment of capex, farther increased with the launch of their own 4G service. Meanwhile, a regulatory regime that had previously seen many tower permitting processes falter in municipal approvals, is increasingly being driven from the top by a regulator that has acknowledged a need to add 50-100% more towers to densify and extend Peru’s network, and that has even proposed changes to the Telecommunications Act to enable the installation of antennas on public buildings.

However, competition to acquire assets between AMT and SBA may be most intense in Colombia, where again AMT is already present with 3,589 sites, joined by Centennial, Continental, NMS, Torres Andinas and formative portfolios being developed by Phoenix Tower International and Torres Unidas, among others. While Colombia is awash with towercos, only AMT has a quadruple digit tower count in a market where towercos own a little over 4,000 of the ~20,000 towers in the country. Another parallel with Peru is the rollout of 4G in Colombia, with programmes well under way from Claro, Movistar, DirecTV and the newly merged Tigo-UNE. The Avantel rollout is another driver of organic growth for Colombia’s towercos.

AMT and SBA may be the favorites to win any tower ‘mega-deal’ processes in CALA, but don’t rule out Jimmy Eisenstein’s GTS, nor should one rule out the formidable combination of Macquarie, Marc Ganzi and his team at Digital Bridge.

While American Tower are unique in having towers on every continent except Australia (and Antarctica!), to paraphrase Jeffery Stoops at a recent conference, it would take something quite dramatic to persuade SBA Communications to invest outside the Western hemisphere in 2015. So if AMT’s main rival for towers in the Americas isn’t a recurring rival in tower auctions, who is?

 

In Africa, only IHS has been able to go toe-to-toe with American Tower to win mega-deals, although Helios Towers Africa and Eaton Towers are driving to scale and are highly investible platforms in their own right, which might be able to raise the capital to bid alongside AMT and IHS should another US$bn portfolio become available in SSA (MTN South Africa?). American Tower had ample opportunity to diversify their African footprint during the recent Airtel tower sale, but were content to focus solely on Nigeria, so TowerXchange don’t expect to see the American Tower flag planted in the maps of too many more SSA countries in 2015.

In Europe, Abertis recently announced a US$0.77bn deal with Wind in Italy, a portfolio AMT reportedly also bid on. Abertis is set to become an even more formidable rival if the IPO of their tower business enhances and separates their acquisition warchest from the broader Abertis infrastructure business. With TDF retrenching into their domestic market, Abertis and AMT seem like the most obvious tower mega-dealers in Europe. The pipeline of European tower opportunities may move slower than in emerging markets, but a different pool of large private equity, institutional and pension fund investors has an appetite for the asset class, adding further bidders to any processes.

Asia is a more complex landscape. AMT may be the only buyers with mega-deal digestive capacity in the seller-rich Indian market, where the owners of operator-led competitors such as Indus Towers, Bharti Infratel and Reliance Infratel need cash to bid in forthcoming spectrum auctions where reserve prices total US$10.2bn. India’s independent towercos Viom Networks (42,000 towers), GTL Infrastructure (29,432), Tower Vision (8,600) and Ascend Telecom (4,000) might all be open to offers, each for different reasons. In October 2014, AMT’s President of Asian Operations Amit Sharma told the Economic Times of India that the company were open to consider M&A opportunities, and that he expected the number of towers in India to double to 800,000 in the next five years.

AMT might face more competition for mega-deals elsewhere in Asia. edotco has to date focused on carving out assets from the Axiata empire, but they could make a run for a tower mega-deal in Southern or Southeast Asia. Perhaps the only market that might already be too mature for AMT or edotco is Indonesia, where Tower Bersama, Protelindo and STP compete for the assets. STP and Tower Bersama seem content to remain focused on their domestic market, where Tower Bersama’s partnership with Telkom could force Protelindo, which has a lot of AMT wisdom in its management DNA, to look farther afield. So auctions for tower mega-deals anywhere outside of Indonesia in Asia could include any combination of AMT, edotco and Protelindo among the favorites.

And what of Myanmar? Consolidation among the six towercos engaged in the “last greenfield rollout” may create an opportunity to enter the market at its formative stage, should American Tower have appetite for the country risk and operational complexity that accompanies the opportunity to participate in this increasingly co-ordinated, shared rollout. However, the fragmented way in which the tower build was shared among Myanmar’s towercos means there will be no portfolios of a scale sufficient to be classified as a mega-deal until 2017.

Alongside South Africa, another market which might be a long-shot for SBA Communications to join American Tower at the bidding table would be Saudi Arabia, where one tower sale process is under way and a second may follow. Tower transactions have failed to be consummated in the Middle East on many occasions in the past of course, but if the Saudi towers do come to market, winners probably need not look beyond the steel and grass business model.

American tower has shown themselves to be increasingly prepared to engage with the complexity of emerging market towers, having started out with energy costs as a pass through in SSA, AMT now offers a full DC service in Uganda and Ghana, and will do so from the get-go in Nigeria once the Airtel assets are transferred. Quoting AMT President, CEO and Chairman Jim Taiclet in his most recent Quarterly investor call, “in our African markets and in India, we’ve developed market leading fuel and power management solutions to improve the reliability and operating efficiency of electrical power, increasing the attractiveness of American Tower sites to both existing and prospective tenants.”

A reluctance to engage with energy logistics is one of the principle reasons for SBA’s relatively conservative international expansion, restricted to date to markets where power is a pass through and where electrification is all but complete.

Divesting towers to specialist towercos can release substantial capital while improving operational efficiency. But if you’re a stakeholder in an MNO that is considering selling a portfolio of towers with a valuation over US$500mn, bear in mind that you’re selling into a distinct and shallow pool of prospective buyers on each continent, with the aforementioned towercos occasionally joined by a handful infrastructure funds with an appetite for this asset class.

With a finite market of buyers, timing can be critical. Less attractive tower opportunities can queue up behind more readily digestible portfolios. For example, the sale and leaseback of 15,000+ Airtel towers in SSA drew a lot of towerco management bandwidth away from other opportunities, particularly those made available on a less attractive ‘manage with license to lease’ basis. Timing is even more critical when it comes to avoiding ‘last mover disadvantage’; while the premium paid for first movers’ towers is moderated if fast followers follow fast, any market has a finite number of prospective tower tenants, and most tower markets mature with towerco penetration of 70-80% – last movers risk their assets being devalued or stranded on balance sheets.

Tower sale processes are in competition with share repurchase programmes, which represent an attractive alternate use of SBA and AMT’s warchests, as well as being in competition for a finite amount of acquisition capital from a finite number of buyers. While most of the world’s leading towercos are focused on one or perhaps two continents (meaning a process in CALA isn’t effectively in competition for capital with one in Africa) this does not apply to American Tower, which is active worldwide. It’s almost axiomatic to say that if you want to divest US$500mn+ worth of towers, you probably want AMT bidding to maximise your valuation. MNOs considering divesting towers to raise capital must be mindful of the time it takes to execute these transactions, should endeavour to bring asset registers and site documentation up to date, and should seek proven advisors to help them navigate the process.

American Tower and SBA Communications are driven by different investment criteria as they diversify into international markets. American Tower is voracious in the pursuit of growth, and is building a global portfolio across over 13 countries (so far) which meet their investment thesis. American Tower’s low cost of capital, willingness to deploy billions of US$ per year on the right international assets, willingness to push beyond the geographical limits of the ‘steel and grass’ towerco model to provide AC and DC energy service, and willingness to dilute their domestic market focus to a greater extent contrasts with SBA Communications. SBA Communications has finite appetite to engage with the complexity of the towerco business model in emerging markets, and has placed a nominal cap of 25-30% on the scale of their non-US$ revenues.

While it might be amusing to setup this editorial as a face-off between American Tower and SBA Communications in International markets, the reality is that they may seldom find themselves bidding on the same auctions, at least outside of CALA.

Meet senior executives from AMT, SBA and the other leading towercos in CALA at the TowerXchange Meetup Americas, April 28-29, Hollywood, FL.

Eagle eyed readers will have noted the exclusion of the third of the ‘Big three’ publicly listed US towercos, Crown Castle International (CCI), from this analysis.

CCI has the most cautious attitude toward international markets of the three US towercos. While CCI have successfully entered and exited the UK market, they appear poised to do likewise in Australia. CCI have been tempted to consider unsolicited offers for 100% of the equity in their portfolio of 1,772 Australian towers. However, readers shouldn’t put two and two together and assume AMT would be in pole position to acquire the assets – the tax regime in Australia would enable a local infrastructure or pension fund to put the CCI assets into a REIT, and the relatively slow growth, stable revenues seem better suited to such a counterparty than they do American Tower’s more aggressive growth narrative.

CCI has not yet put capital to work in emerging markets, nor have they joined the battle for Brazil. Despite oft-voiced rumours of negotiation to buy their way into Brazil via the acquisition of GTS in 2014, CCI ultimately held fire on the deal and remain content to invest capital into domestic opportunities, including a substantial DAS and small cells business, and stock repurchase. That said, TowerXchange consider CCI to be a potential MVP currently ‘on the bench’ of the international tower market – we don’t rule out the possibility they could enter the game at some point in the next 12-36 months.