CALA’s thriving middle market towercos

At the TowerXchange Meetup Americas held in April in Hollywood, Florida, key executives from top middle market towercos operating in the CALA region gathered and shared their views on the status of the CALA tower industry, opportunities for new market developments and the effect of AT&T entrance on the shape of the Mexican market.

The middle market towerco segment in the CALA region has been rapidly expanding over the course of the past few years. Established tower builders are driving toward scale, and new build to suit (BTS) firms have been formed by experienced telecom and tower professionals from Mexico all the way to Brazil and Chile.

During the middle market towerco panel, leaders from seven towercos took the stage to discuss the dynamics of the CALA region from a BTS perspective, moderated by analyst Jon Atkin from RBC Capital Markets.

On stage, TowerXchange gathered top representatives from Innovattel/Torresec, Torres Andinas, Catalina Inc., IIMT Mexico, Square1 Infrastructure, Torrecom and Brazil Tower Company - seven firms representing the BTS industry in Brazil, Colombia, Chile, Peru, Ecuador, Puerto Rico, Mexico, Guatemala, Nicaragua and Costa Rica.

Innovattel / Torresec operates in Puerto Rico, Ecuador, Peru and Colombia and owns 200+ sites across all these markets. The company was created by Manuel A. Aviles, an entrepreneur with a passion for telecom infrastructure, who took the stage during the panel.

Torres Andinas is active in Colombia and Peru while assessing market opportunities in Ecuador and Chile. Focused on the west coast of Latin America, the company was represented by Eric Ensor, its COO.

Catalina Inc. is a newly formed towerco focused on the Costa Rican market. José Escobar, its President, joined the panel and shared insights gathered after several years of operations in the country with GTP and TOCSA.

William Ritchey, Executive VP of IIMT, was on stage representing the Mexican towerco. With a growing tower portfolio (250+) and the right to use towers owned by the electric utility company, widely known as CFE, IIMT is one of several BTS firms currently active in Mexico.

Dan Ryan is a serial tower entrepreneur who has already launched ventures in South Africa and Myanmar. Now assessing opportunities on the west coast of Latin America via his company, Square1 Infrastructure.

Torrecom is a U.S.-backed towerco with operations in Mexico (approx. 150), Guatemala (80+) and Nicaragua (90+). Maria Scotti, the company’s CEO, has been active in the wireless space since 1992 and is now in charge of the company’s expansion in the tower and small cell business.

Last but not least, Brazil Tower Company is purely focused on the Brazilian market where it has so far built 300 towers and expects to reach 1,000 by the end of 2015. Dr Chahram Zolfaghari, the company’s CEO, joined the panel and shared his views on the country’s supply and demand dynamics.

Here is an overview of key findings these experienced professionals shared with us at the second TowerXchange Meetup Americas.

Mexico is currently undergoing crucial changes as a result of the creation of Telesites by América Móvil and the entrance of AT&T through the acquisition of Nextel and Iusacell. The towerco community has great expectations for AT&T’s role as a disruptive and positive force in the local market and local towercos expect an increase in BTS projects.

That said, Mexico is still in need of plenty of new infrastructure to achieve optimal coverage - William Ritchey from IIMT referred to a total of as many as 80,000 tenancies being needed in the country - so the path towards a modern infrastructure system is still a long one.

In terms of Nicaragua, one of the main news has been the start of a much needed regulatory reform process. The country is experiencing dynamics such as infrastructure sharing for the very first time and the regulator was simply not equipped for it. Maria Scotti from Torrecom reported that one of their main tenants, Telefonica, has been extremely active in the BTS space - a process in line with Telefonica’s strategy of not owning sites and being a pioneer in divesting its tower portfolios and outsourcing to towercos across the CALA region. Torrecom also mentioned that Nicaragua and Guatemala are both shifting from 3G to 4G testing which for towercos should mean more BTS projects to ensure proper coverage in underserved areas and adequate capacity in dense urban areas.

Touching upon Colombia, the BTS market is very active and the market has been developing very fast over the past couple of years. However, it is also extremely competitive due to the presence of so many towercos. In fact, TowerXchange reports that as many as eight towercos are present in the country including American Tower, Torres Andinas, Continental Towers Corp, Innovattel, NMS as well as new entrants Phoenix Tower International and Torres Unidas.

In neighbouring Peru things have been developing at a slower pace due to local politics but to date, the market is expanding and is moving in a positive direction.

Lastly, when discussing Brazil, Chahram Zolfaghari, CEO of Brazil Tower Company commented that the BTS landscape has changed significantly over the last twelve months. In fact, almost all carriers have embraced the BTS model which resulted in BTS firms sharing almost equal portions of the market.

Furthermore, the imminent purchase of GVT by Vivo is likely to have an impact on the BTS market as large mergers tend to create a significant slow down in activities for the carriers. The announcement of the approval of the deal by of CADE, the Administrative Council for Economic Defense, was released this past March.

Lastly, Brazil’s recently approved Antenna Law is creating a single process for all municipalities to release permits for greenfield projects. Players active in the Brazilian market judge this change as highly positive for the overall shape of the industry. TowerXchange previously reported that the effects of this law will very much depend on the swift adoption by each municipality of the new text.

Most of the Mexican telecom infrastructure is in good condition but is over ten years old, which creates tension with the usual habit of carriers to load as much technology as they can on a tower, often with minimal regard for its usefulness. This dynamic requires a double effort, from carriers to really pay attention to which equipment they load onto a tower, and from towercos to reinforce existing assets and build stronger towers taking into account future load requirements.

Carriers have reportedly already invested over US$10bn to operate in Mexico, but the market is now looking even more promising thanks to the entrance of AT&T and the creation of Telesites. However, the Mexican tower market has hitherto been characterised by a lack of communication and cooperation between players such as América Móvil’s Telcel, Telefonica’s Movistar, Iusacell and Nextel; it remains to be seen whether the entry of AT&T and creation of Telesites might open up more infrastructure sharing and other opportunities.

It will take some time for AT&T to figure out their total network asset base and they will definitely need to bid in the next spectrum auction to further enhance their position in the market. Panellists agreed that it will take at least six to eight months for the company to understand the market, its dynamics and what are the next necessary steps.

The perceived risk is that AT&T will stop working with quite a few vendors in the near future as they re-assess their business model and asset base before starting any BTS activity. However, up until now, Nextel has been operating as usual and continuing on with its BTS plans, as are Iusacell. Panellists agreed that the Mexican model is very different to what AT&T is used to and it will take the company quite some time to adjust and get up to speed, especially when it comes to permitting and regulatory issues. Therefore, while waiting for AT&T to become fully operational, towercos might end up with less business in the short term, but expectations are quite high for the mid-term.

Panellists had different takes on the shape of the CALA tower market and whether that can be treated as one or not. Generally speaking, regional operators such as América Móvil and Telefonica seek multi-country vendors able to work with them throughout the region.

Eric Ensor, COO of Torres Andinas commented that each country presented very different conditions in terms of country risk, political framework and regulatory environment. For Torres Andinas, each market where they operate - namely Brazil, Colombia, Chile, Peru and Ecuador - is very different and has to be treated separately.

With regards to a possible replication of Telesites’ model in other countries beyond Mexico, it was pointed out that the reality of Telesites will be hard to replicate throughout the region. In fact, Claro doesn’t necessarily have the capacity to build as much as they’ve done in the past and especially, as widespread as in Mexico. Therefore, it was felt that it was likely that Claro would continue to rely on third party towercos to fulfill their BTS requirements in the future.

Forex risk is definitely on top of the list and all towercos on stage agreed that it is the biggest risk they have to take into consideration. In fact, once invested, it can be very hard and financially inefficient to take money out of a country.

Another issue is represented by security and in Torrecom’s experience, Guatemala is a typical example of a country where it can be hard to develop projects, especially in remote areas. On the other hand, Torrecom encountered less problems in Nicaragua. On the security side though, the CALA region doesn’t present as many security challenges as TowerXchange has encountered in SSA, for example, at least in the most developed CALA countries where towercos tend to operate.

A chapter of its own should be devoted to Argentina which was mentioned by panellists as a very attractive country for the competitive dynamics within its telecom market. However, its currency risk, political instability and overall future outlook haven’t allowed any towerco to make an entry yet.

José Escobar commented that co-location is a key driver in Costa Rica. Costa Rica’s carriers primarily operate following a BTS model as they are so swamped by data demand that building passive infrastructure is not a priority. Carriers in the country - and throughout the Central Americas - are desperate for more capacity and coverage and this creates the perfect storm for towercos, also thanks to a very favourable regulatory environment.

The future for middle market towercos is perceived as quite positive. In fact, as consumers keep purchasing new technology, demand for new products and enhanced networks is occurring much faster. And this is where towercos and their expertise come into play, stronger than ever.

In markets such as Colombia and Peru - where both Innovattel/Torresec and Torres Andinas operate - BTS is the prevalent line of business. Carriers are still in charge of most of the projects and towercos serve them on demand. However, the relationship between carriers and towercos is maturing and changing regulatory environments contribute to the acceptance of the independent towerco model. Deep changes at a regulatory level might push carriers to cooperate with towercos even further, especially since penalties in case of failure to meet coverage requirements can be very high.

In Brazil, the demand is such that tens of thousands of sites are needed to ensure the right level of coverage and capacity. As shared by Chahram Zolfaghari, Brazil Tower Company is able to build around 500-600 sites per year and this is in line with others BTS firms in the country. However, supply in Brazil is heavily outweighed by the demand. Brazil Tower Company insisted that their strategy is to reach out to areas with zero coverage. By doing so, the probability of gaining new tenants without marketing their portfolio is very high.

CALA has a uniquely mature class of middle market towercos, with over twenty BTS-centric towercos supplementing the build capacity of American Tower, SBA, GTS, MTP and Telesites, who own the region’s largest portfolios and who, along with Phoenix Tower International, appear the most likely buyers of any middle-market towerco inclined to monetise their assets.

It’s a good time to be a manager or an investor in a middle-market towerco in CALA. Regulations are being reformed to ease permitting and encourage investment in telecom infrastructure, and demand for towers and tenancies is strong. The mindset of CALA’s carriers has shifted to a preference whereby they generally prefer to lease rather than build, and prefer third parties to build and own assets where necessary.

However, the increasingly competitive landscape for middle market towercos means this is not a market for the feint-hearted nor for unproven management. Tremendous capital value can be created by building a portfolio of robust assets in unique locations on soundly negotiated, readily transferrable leases. But at the same time, capital value can be destroyed if middle market towercos succumb to the temptation to deviate too far from the established business model in order to differentiate themselves and win business.

2015 will be about driving to scale. 2016-17 will see a wave of middle market towerco acquisitions, which will be very rewarding to towercos, and their investors, who stick to the established towerco playbook.

For more information and insights on each towerco, you can read the following interviews:

Brazil Tower Company: click here or issue 11 page 75

Catalina Inc.: click here or issue 10 page 165

IIMT Mexico: click here or issue 7 page 76

Innovattel/Torresec: click here or issue 12 page 81

Square1 Infrastructure: click here or issue 10 page 105

Torrecom: click here or issue 9 page 123

Torres Andinas: click here or issue 9 page 140 and issue 13