Chile tower market heats up

The CALA tower land grab is gravitating toward the three countries on the Pacific Coast; Chile, Colombia and Peru. How investible is the Chilean tower market? With the ‘Towers Law’ having stifled many tower build programmes, at the same time increasing the value of existing towers, what are the prospects for a substantial sale and leaseback in Chile? This analysis combines TowerXchange’s own research and commentary with insights learned from the Chile round table at the recent TowerXchange Meetup Americas.

By most metrics, Chile is the most mature mobile market on the Pacific Coast of South America, boasting 147% SIM and 51% mobile broadband penetration (Source: GSMA Intelligence, Q4, 2014). Chile is host to three credit-worthy prospective BTS / co-location / sale and leaseback counterparties in Movistar, Entel and Claro, and features a well-balanced competitive environment to stimulate capital investment.

Having recently come through a spate of legal challenges, Chile’s operators are now selecting equipment providers to rollout 4G on newly acquired 700MHz spectrum, spectrum which came with extra coverage obligations including connecting 1,281 remote regions. This supplements the 2.6GHz band which all three operators have utilised to launch 4G. Participants in the Chile round table at the TowerXchange Meetup Americas expected 4G to drive a surge in lease ups (often at lower tower heights than existing tenancies), and large scale new build programmes within 24-36 months.

In terms of prospective non-traditional MNO tenants, there is not much outside Chile’s core urban areas, where a public safety group has some tenancies, while Santiago is home to the usual smattering of local USPs, fixed wireless and last mile players.

 

Chile’s broadcast infrastructure assets are not really “in play” as prospective telecom co-location sites. Chile’s broadcast network typically consists of large towers perched on Chile’s mountains overlooking the big cities – while a handful may be of use for telecom co-location, most are too distant and too high to be of much to RAN planners and, with decent fibre connectivity in Chile, broadcast assets would be unlikely to be used for backhaul.

There might be a “cash flow opportunity” rather than a “growth opportunity” associated with Chile’s broadcast infrastructure, and that probably means the assets are of minimal interest to towercos.

A tower entrepreneur with recent experience of the licensing regime in Chile reported that a towerco license was required, that fees were reasonable, but that the process took considerable time. In some ways, a licensing barrier to entry can be a good thing – keeping out players too small to add significant value.

However, the principle topic of conversation around Chile’s regulatory environment concerns Law No. 20.599, commonly known as the ‘Towers Law’. The Towers Law has suppressed Chile’s build to suit market with its onerous restrictions on building in saturated or sensitive areas, its somewhat heavy-handed attempt to mandate infrastructure sharing, and its requirements both to invest in camouflage, and at times to compensate local communities. While the ‘Towers Law’ has stifled tower build rates in the short term (market leading towerco American Tower reported a net increase in their Chilean tower count of <1% over the last two years), strict zoning rules tend to have an aggregate positive impact on the tower industry as they force network planners to share existing structures, even at sub-optimal locations, rather than build their own.

Another effect of the Towers Law has been to reward local knowledge; as one independent developer put it “getting a tower built in Chile is no more challenging than it is in the wealthy suburbs of the US, demanding a similar sensitivity to aesthetics. While it’s tough to permit large volume BTS programmes, strict zoning protects and adds value to the tower once built.” Most commentators agree; if you can prove a tower is needed in Chile, you can get it built, although you may have to be prepared to invest in camouflage.

In TowerXchange’s experience there are four priorities for the healthy regulation of tower markets – here’s how Chile fares against each:

• Fair, fast licensing of towercos: average

• Permitting regime that protects the zone around existing towers yet expedites new builds, ideally incorporating a ‘shot clock’ or similar: below average

• Regulator should not interfere with market pricing of tenancies: above average

• Clearly defined real estate law with online land registry: above average

Economic headwinds, which suppressed foreign investment into Chile in 2014, appear to be easing. Chile is host to a very modern economy and capital city, generating the kind of disposable incomes that facilitate consumer investment in mobile devices. Smartphone penetration will pass 50% in 2015, and Chilean users are sophisticated users.

With pricing in UF (Unidad de Fomento, a unit of account indexed daily against inflation), investments in Chile are insulated against inflation and currency risk.

Independent tower companies are generally recognised as an established business model, so local commercial debt availability is good, with round table participants reporting debt could be sourced in Chile with interest rates in high single digit percentages.

Using the words of one Chile round table participant to sum up: “as long as you have more conservative expectations for growth, Chile is a safe place to park capital and from which to repatriate capital.”

At first glance at a map of Chile, the simple observation occurs: this is a long, skinny country, with lots of terrain to cover and lots of sites needed. There are currently around 8,000 towers in Chile, but the majority are concentrated in Santiago, Viña del Mar, Antofagasta and Valparaíso – thousands more towers are needed, particularly in rural areas.

All-in, a green field, ground based tower is reported to cost US$90-120,000 in Chile, depending on location and logistics, while lease back rates are reportedly in the US$800-1,300 range, depending on what equipment is being hung. Treat those costs and lease back rates as “back of envelope” estimates – such data is both confidential and subject to huge variation depending on circumstances, so it is always difficult to elicit hard numbers.

Ground leases and energy costs are both a pass through to the operator, and grid power is both extensive and reliable.

American Tower is the largest of Chile’s towercos, with 1,159 towers reported in Q1 2015, followed by Torres Unidas with around 480 on their current tower map, and Torres Andinas. TowerXchange are tracking a couple of prospective new entrant independent developers.

There have been a couple of tower deals in Chile, although too long ago to set a meaningful valuation precedent today. In early 2012, American Tower announced the acquisition of 558 towers from Movistar for US$96mn (US$172k per tower), while later that year Torres Unidas acquired a further 400 towers from Movistar in a deal whose terms were not disclosed.

Informed estimates suggest the tenancy ratio on the Movistar towers acquired in 2012 was very close to one at acquisition, with just a few bi-lateral swaps to convert, and might be as high as 1.5 today (Q2, 2015), although it should be noted that neither American Tower nor Torres Unidas would verify that number.

While co-location revenues have reportedly grown steadily, the Chilean tower build market is about to emerge from a period of relative stasis. For example, the largest towerco in Chile, American tower, made zero net additions to their Chilean tower count in the twelve months to April 2015, and added just nine towers in the preceding twelve months. Despite the challenges presented by the Towers Law, no-one expects this building hiatus to continue – Chile simple needs a lot more towers for 4G – indeed the regulator has required the most recent spectrum auction winners to make commitments to connect 1,281 remote regions. Quoting Jake Grant of BMI in a recent edition of the TowerXchange Journal (my italicisation): “In order to meet these commitments, the three main operators will need to invest heavily in infrastructure, expanding their current portfolios by three to four times their current size. With higher costs of construction due to the Towers Law, operators could look to divest non-core tower assets to third parties in order to fund this heavy capex burden”.

 

So which stakeholders are most likely to sell Chilean towers, thus offering the most obvious path to scale for any aspiring new entrant towerco?

Claro has no history of divesting towers and, with the formation of Telesites, seems more likely to transfer Chilean tower assets to their own towerco rather than auction them on the open market. It is believed that Movistar Chile has a few tower assets remaining on their balance sheets, having divested almost 1,000 towers in 2012, with subsequent builds largely undertaken by their towerco partners. Telefónica has a long history of tower sales, so a further modest tower transaction from Movistar would not be a surprise. This leaves Entel as the most likely counterpart in any substantial Chilean tower transaction. Entel are still building their own towers sometimes, at other times issuing search rings and having towercos build new sites, although they are not working exclusively with any apparent preferred partner.

In terms of strategic acquisitions, American Tower is almost always a buyer not a seller, especially in an attractive market like Chile, so don’t hold your breath for their 1,159 towers to become available. The management team at Torres Andinas have a successful track record of “building to flip”, so their assets could probably be acquired for the right price, albeit their Chilean portfolio remains small. Torres Unidas have the backing of Berkshire Partners, which gives them access to capital to drive to scale, although they may be more likely to seek to exit in around three to five years. With an estimated 1,080 towers in the three most attractive West Coast tower markets, and with towers permitted and built with co-location in mind from the outset, the Torres Unidas assets are already looking attractive!

Chile round table participants felt there were opportunities to deploy more DAS in Chile, but not at scale. One of the three leading MNOs reportedly has only 20 robust DAS in shopping centres.

Investment in Chile is a priority for American Tower, and potentially for SBA Communications, which means it’s also a fertile market for independent developers to build-and-flip. But SBA is not going to achieve scale in Chile, nor are American Tower going to defend their market leadership, by rolling up a few hundred independent towers – the next sale and leaseback deal may well define which towerco leads the Chilean market.

Entel’s need to raise capital for 4G, and their need to deleverage after the acquisition of Nextel Peru, could provide the impetus to monetise their Chilean towers, particularly whilst the Towers Law has inflated the value of existing assets. American Tower and SBA Communications may seem to be jockeying for position in a race to 5,000 Chilean towers, but both have the discipline to walk away from overpriced deals. Chile may be an attractive market, but there are bigger fish to fry, so if the price isn’t right, AMT will stand pat and SBA will invest elsewhere.

TowerXchange simply don’t see the compatibility of Chile’s current Towers Law with the country’s need for over 10,000 towers to densify networks for 4G and to meet the obligations to connect 1,281 remote regions set out in the recent spectrum auction. The regulator cannot fine Chile’s operators if the main reason they struggle to meet coverage obligations is because they cannot permit enough new builds fast enough, nor build economically.

Whether or not the Towers Law is amended, with the Chilean carriers’ 700MHz spectrum supplementing the 2.6GHz already rolled out, the country’s towercos are posed for a surge in co-location sales and amendment revenue in 2016-17, so there is pressure on a sale and leaseback taking place sooner rather than later.