Tower sharing trend drives bullish Telesites outlook

Telesites will be able to capitalise on a leading number of towers, strategically located assets, and growth trends towards 3G, 4G and MVNOs.

Global trends in the towers and telecoms industries indicate a bullish outlook for América Móvil’s proposed towers spin-off and the Mexican mobile market. Telesites will be able to capitalise on a leading number of towers, strategically located assets, and growth trends towards 3G, 4G and MVNOs.

América Móvil has outlined its plan to spin-off its Mexican wireless communication towers business into a separate listed company named Telesites. This move is in-line with regulation classifying América Móvil’s mobile unit Telcel, as being a “preponderant economic agent” and mandating the operator to reduce its market share below 50%. Telesites will build, install, maintain and operate different types of towers, opening them up to all actors in the market, which have traditionally struggled to compete due to lack of coverage.

The spin-off will allow its competitors Telefónica and AT&T to access about 90% of Telcel’s total towers when finalised in May/June 2015, up from around 45%. BMI has previously highlighted the importance of tower sharing in Mexico as being a critical component to market growth (see ‘Telecoms Reforms Present Opportunities For The Tower Industry’, January 15 2014), as Mexico is one of the lowest penetrated mobile markets in Latin America, through Telcel’s dominant hold over the industry. The preponderant position of América Móvil was built on its access to a national network, with the company having little motivation to share infrastructure and allowing its competitors to eat into its market share. Furthermore, the lack of an effective policy on infrastructure sharing made it difficult to obtain permits, resulting in smaller players facing serious difficulties in deploying their networks.

By opening up 90% of its towers, the prospects for mobile market growth are greatly improved, as Telefónica, and AT&T through its purchase of Nextel and Iusacell, will instantly be granted access to millions of potential new customers. Through a combination of lower prices, 3G/4G and value-added services, this should help drive competition and market growth in Mexico, becoming one of the fastest growing markets in the region over our forecast period. América Móvil is also planning a sale of Telcel’s assets in order to reduce its market share to below 50% but has so far struggled to gain interest. Opening up its towers infrastructure may help to attract a bidder, as the costs for an initial network roll-out will be significantly reduced.

3G/4G Growth (%), 2014-2019

 

While the increased competition will hurt Telcel’s market position over the next few years, we have a largely bullish view on the decision to spin-off Telesites. In part, this is due to general trends in the telecoms industry, which are moving towards tower-sharing as coverage becomes universal and demand for data services increases. For mobile operators, selling passive infrastructure to third-party tower companies provides an initial capital injection, as well as reduces costs such as land rent, fuel and maintenance, which are taken on by the towercos. These costs become cheaper as they are divided among a number of mobile operator tenants, rather than just one operator paying for all the upkeep and upgrades. Tower companies such as American Tower, Crown Castle International and SBA Communications have grown extremely well over the past five years, consistently outperforming the S&P 500 Index.

Telesites will be exposed to similar trends in Mexico and in particular the expectation that more towers are needed to handle the increase in mobile data and expand to more rural areas. In 2013, the Mexican Federal Telecommunications Commission estimated that Mexico required a four-fold increase of base stations, which would result in an increase from 20,000 to a total of 80,000, creating an important growth opportunity for Telesites. A study from the World Bank estimates that Mexico needs approximately 70,000 new towers to reach 90% coverage. More capacity is also needed for the introduction of MVNOs expected during 2015, with Telcel already signing partnerships with fixed-line phone company Axtel and a unit of retail and banking company Grupo Elektra.

Share Prices Rebased To 11/04/2011 (%)

 

Telesites will be in a prime position to expand 3G and 4G tower sites, increasing coverage across the country. It will also be the largest third-party company in terms of number of sites, with its 10,800 towers ahead of second-placed American Tower’s 8,716, followed by Mexico Tower Partners (MTP) and Inversiones e Infraestructura Mexicana en Telecomunicaciones (IIMT) with around 600 and 180 sites respectively. Telesites’ tower assets will likely be more strategic in location due to Telcel’s dominant position, creating a risk for these smaller players that they may lose business from Telefónica and AT&T.

The spin-off is therefore a win-win for both the Mexican telecoms industry and América Móvil/Telesites. We would expect América Móvil’s share price to fall in the short-term period after the listing of Telesites in May/June 2015, as the company is essentially losing the value of its towers assets. However, we hold a bullish view on the outlook of Telesites once it is listed, as it should be able to capitalise on growth within the Mexican market in-line with global trends. América Móvil operates throughout the Latin America and Caribbean region and the early success of Telesites could prompt it to explore the spin-off of its towers in other markets also.

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