Liberalisation creates strong market for Costa Rican towercos

Nicholas Van Slyck is a lawyer by training and a skilled entrepreneur whose Costa Rican towerco was sold to SBA Communications back in 2010. Since then, he has worked for SBA as General Manager for the Costa Rican market and has recently spoken with TowerXchange about the characteristics of this small and yet exciting market, plus some compelling insights into what it takes to succeed as a small towerco with an exit strategy.

TowerXchange: Nick please tell us about your background and career path.

I would describe myself as an internationalist by trade. I started my professional career as a U.S. Peace Corps volunteer in Honduras and then spent three years with an NGO involved in the promotion of democratic institutions across Africa, Latin America, South East Asia and Eastern Europe.

After completing an advanced degree in international public and private law, I relocated with my family to Panama in 1999, where I founded a billboard company, Colite Outdoor. By 2004, the company had over 200 structures across Central America, from Panama to Guatemala. This business was sold in 2014.

In 2008, I transitioned to the tower industry, intrigued by an interesting article I read about it. At the time, Costa Rica was holding a referendum regarding the possibility of joining CAFTA-DR (the Dominican Republic-Central America Free Trade Agreement) and one of the requisites to join was the liberalisation of insurance and telecom sectors.

Once the resolution to join CAFTA-DR was approved, I got involved in the creation of a business plan for a start up towerco, Alta Vista Towers, along with an equity investor. Alta Vista Towers was acquired by SBA in November 2010 and I have acted as the General Manager for SBA in Costa Rica ever since.

TowerXchange: As a tower entrepreneur who has completed a successful sale to a U.S. listed towerco, what lessons would you share with other entrepreneurs with a similar exit strategy?

As an entrepreneur, I noted many similarities between the outdoor advertising and tower businesses. Therefore, when I created Alta Vista Towers, I felt I was quite knowledgeable with regards to how to create valuable assets while complying with rules and regulations, whether they were towers or billboards.

PAPER - Get the paperwork done right: it’s really important to have strong ground leases and good tenant agreements in place, especially if you plan on eventually selling the business.

ASSETS - Don’t cut corners on the construction: I have seen quite a few entrepreneurs opting for cheap solutions when it came to building sites. But in the long run, this strategy won’t pay off. Building robust, multi-carrier towers with plenty of capacity will position your business on the right track to be acquired at a fair price. If a buyer has to reinforce your towers, this will have a negative impact on your ROI.

PERMITS - Ensure your permits are in place: some towercos start building sites without the necessary permits in an attempt to speed up the process. But permits create immense value for your portfolio and, especially in a place like Costa Rica where sometimes as many as eight or nine permits are needed, you’d better get things right from day one.

RATES - Negotiate the right rental rates with tenants: I have seen some small towercos agreeing very low lease rates in an effort to gain business but again, this strategy won’t pay off and will affect the payout on exit. Aim for good, fair market rates with all your tenants.

GROWTH - Lease up: a good tower professional needs to keep an eye towards acquiring a second, a third and even a fourth tenant if possible. That’s where the real value is. If your plan is to build single tenant towers in rural areas with limited lease up potential, you might want to re-think your business model.

TowerXchange: You’ve been active in Costa Rica since 2008, before the market liberalisation, can you talk us through the evolution of the mobile and towerco industry?

Costa Rica changed so much since 2008 it’s hard to sum it all up.

When I arrived in July 2008, coverage was lacking. Mobile penetration was just over 30% and there were no prepaid lines. The first mobile I had was via a friend who owned a company and had an extra line. Both my wife and I had a phone in the name of a third party company as we couldn’t even transfer the lines into our names. This is how bad things were.

Now there are more lines available than people need or use. Penetration is constantly growing and is now around 130%. It’s normal to drive around to see people from all sorts of social and economic backgrounds checking their phones. The change is just tremendous.

In 2010, ICE rolled out their 3G network and that represented a huge leap forward with new sites being built at a fast pace. Coverage and technology improved massively, and that simply raised the bar for any carrier willing to participate in spectrum auctions. Since then, standards have been consistently improving, penetration is rising and the latest technology has been rolled out.

When Movistar and Claro switched their networks on, suddenly Costa Rica was flooded with lines and handsets and competitive pricing plans for the consumer. It was unprecedented and such a change for the public.

Open competition was a key factor. In fact, it pushed ICE to get ahead of the auction with a robust network, equipped with the latest technology. I don’t think the market would have transformed this fast otherwise.

TowerXchange: Sutel has never ruled out the possibility of welcoming a fourth operator in the market - do you see that as a realistic possibility in the near future now that 4G is being deployed?

The initial 2010 auction was held for three licences but received bids only from Claro and Movistar. To be honest, the Costa Rican market is well served by three carriers and I don’t foresee the entrance of a fourth player in the near future.

A fourth player would need to make substantial investments to be able to grab any meaningful share of the market, considering how solid the existing carriers are. It’s important to remember that there are only 4.8mn people in Costa Rica, which means a finite potential for subscriptions. Plus, geographical conditions don’t help as mountainous areas require a lot of sites to achieve decent coverage. The investment for a new player would be very high.

TowerXchange: Are the main MNOs all embracing co-location? And are they supplemented by tenancies from non-traditional MNOs?

The co-location model has been embraced by all carriers, with some more active then others. The sharing model is a new concept which was introduced in 2010 and, in spite of its recency, it is now quite deeply rooted and accepted.

At the time of the auction, ICE already had a lot of towers so their needs weren’t even comparable to those of new entrants Movistar and Claro.

In addition to the carriers, there are a handful of secondary and tertiary clients. They don’t represent a huge portion of our business but they remain important customers, and there are maybe four to five other companies which require co-location services. I see this as a growing trend.

TowerXchange: A small country with plenty of competition… SBA, AMT and then middle market towercos such as TOCSA, Catalina and PTI being acquisitive - is there enough business for everyone in Costa Rica?

Costa Rica is a relatively small market and BTS activities have considerably slowed down over the past couple of years. Back in 2011-2012, towercos were extremely busy with plenty of build outs but now things have changed. However, there are still some BTS opportunities for towercos that really understand the legal framework and complex regulatory and permitting environments, which is one of most complex we know of.

I think it would be quite difficult for an inexperienced towerco to come in and expect to get a lot of business, especially since competition is already quite fierce. You see, companies like SBA with solid regional relationships can leverage them in various markets. Small, entrepreneurial towercos would have an uphill battle against the larger, more entrenched towercos with their regional relationships with carriers.

TowerXchange: TowerXchange estimated that Kölbi owns at least 1,000 sites and Claro approximately 450 - do you think Kölbi will divest them anytime soon, and do you think Claro could extend the Telesites business model to Costa Rica and run their build programmes through their own towerco, potentially making their assets available to multiple tenants?

I don’t see ICE divesting anytime in the near future. Being a State-owned organisation, any kind of sale would be very complicated and time consuming, plus it would require a lot of effort in terms of government lobbying. There are very powerful and influential unions within ICE and I am inclined to assume they wouldn’t be in favour of such a divestiture.

In terms of Telesites, I don’t think it will be a competitive reality in the near future, primarily because of the aforementioned complex regulatory and permitting environment. It would be quite hard for them to enter the market without any local experience and really make an impact, especially since there are already quite a few towercos with the right track record and know-how.

TowerXchange: José Escobar (Catalina) shared with us his views that at least 2,000 new sites are needed in the country. Do you agree with that figure?

I think 2,000 new sites is an overly optimistic estimate, in light of the recent flow of BTS activity. There is definitely room to grow but I would be a bit more conservative than that.

To date, towercos are still very much focused on supporting carriers in covering the national territory with macro sites but I can see that heterogeneous networks will be an appropriate solution in certain metropolitan areas. However, we need to wait for carriers to evolve their business need to see a real expansion of small cells and DAS.

TowerXchange: How much of the land under your sites do SBA own in Costa Rica? And is the trend moving towards trying to acquire most of it? If so, how is the purchase process?

SBA developed a very aggressive ground-lease buyout programme back in 2011 and has worked on it ever since. To date, we own a substantial amount of the land underneath our towers. In fact, we strongly believe this is a great way to deploy our capital and we will continue to pursue the land ownership as a strategy.

We reserve the right of first refusal in case a landowner decides to sell the land under one of our towers, so we are well protected against ground lease aggregators here in Costa Rica.

TowerXchange: Please tell us about the quality and availability of grid power to Costa Rican cell sites. 

Power isn’t an issue in the country as the national grid is quite reliable and complete. I can count on one hand the number of power cuts we had in our house last year.

Sometimes carriers do use backup power generators on backbone and hub sites but this is just an additional measure to protect their operations.

The real challenge is that there are as many as eight energy distribution companies in Costa Rica and this can have an impact on the time required to connect a site. This is a factor to take into consideration when working on your project timeline and it very much depends on who you are working with as an energy provider.

TowerXchange: How would you summarise your views and experiences of the Costa Rican tower market?

We are quite happy with the results of our ongoing investment in the Costa Rican tower market.

First of all, the fact that the co-location model is widely accepted makes it relatively easy for us to do business here and acquire new customers. Secondly, Costa Rica is one of our most stable international markets in terms of legal framework, land ownership, permitting regulation et cetera.

You will always find a few municipalities opposed to telecom towers, wherever you do business. We are working with them t help carriers get their network up and running while spreading knowledge about the industry. Four years ago, there were quite a few municipalities, I’d say a third of them, opposed to permitting new towers but things have been progressing in the right direction.