Keynote insights from AMT, SBA, GTS and Digital Bridge Management

It doesn’t happen every day: four executives representing the top towercos in the CALA region in terms of size of portfolio, geographical footprint and company valuation, debated the future of their industry at the second TowerXchange Meetup Americas. Jonathan Atkin, Managing Director of RBC Capital Markets moderated a panel discussion between Kurt Bagwell, President, International at SBA Communications, Jim Eisenstein, CEO and President of Grupo TorreSur, Marc Ganzi, CEO of Digital Bridge Management (which owns a controlling stake in Mexico Tower Partners) and Alejandro Messmacher, CFO LatAm, American Tower. Here is a summary of what we learned during this exclusive session.

Grupo TorreSur (GTS) is an independent towerco active in Brazil with a portfolio of approximately 6,300 sites accumulated through six acquisitions since 2010 and supplemented by BTS. Jim Eisenstein, its CEO and President, is a pioneer of the U.S. tower industry and is one of the original co-founders of American Tower.

Marc Ganzi is a serial tower entrepreneur who sold Global Tower Partners to American Tower for US$4.8bn in 2013. Marc retained the Mexican towers from GTP, known as Mexico Tower Partners, or MTP, now with 1,278 towers, as a key component of his latest venture, Digital Bridge Management. Digital Bridge is also an investor in Vertical Bridge (with 2,400 towers in the U.S.), Q Towers (with 320 towers in China), with interests in other towercos worldwide.

American Tower (AMT) is the largest independent towerco in the CALA region, with 33,395 towers across Brazil, Colombia, Chile, Peru and Costa Rica. After announced deals close, AMT will operate 98,877 sites across Europe, Africa, Asia, North and South America. Alejandro Messmacher is in charge of AMT’s financial performance in LatAm.

SBA Communications runs a portfolio of over 24,500 towers in the U.S., Brazil and Central America, where SBA is the clear market leader. Its HQ is in Boca Raton but SBA is now organised via six local offices which contribute to harnessing local talents. Kurt Bagwell, President - International, represented SBA on the panel.

The four market leading towercos represented on the panel are always seeking the right transaction to grow their portfolios and TowerXchange’s data on the last four years of M&As illustrates the wave of tower transactions in the region. However, the CALA region has been relatively quiet over the past few months in terms of sale and leaseback deals, also in light of various regulatory and carrier consolidation events which forced carriers and towercos alike to pause and assess their next moves.

As an example, Mexico’s Telecom Reform Act, the creation of Telesites along with acquisition of Iusacell and Nextel Mexico by AT&T have been disruptive factors changing the shape of the Mexican industry. For now, towercos are sitting back and waiting to see what happens next but most stakeholders predict a wave of new build and co-location generated by AT&T, and supplemented by government wholesale LTE and public safety networks, in the future.

Mexico Tower Partners was formed in 2013 and has grown considerably thanks to 27 small acquisitions. On the BTS side, the company has completed about 300 sites and has now 127 under development for all major carriers.

Whereas amendment revenues have been positive in Mexico especially thanks to LTE overlay, there hasn’t been as much activity in 2015 in terms of new co-locations.

In Brazil, Grupo TorreSur saw an increase in its BTS activity over the past six months and expects to have built 2,000 new sites by the end of 2015. Jim Eisenstein commented that BTS is likely to be their core activity in 2016-2017 but added that the M&A side has been quiet in 2015 mainly due to the scarcity of carrier portfolios available for sale. In fact, only Claro retains a significant amount of towers in Brazil - but isn’t expected to sell - hence towercos will refocus on growth through new builds. (Editor: or on the acquisition of other towercos!)

Continuing uncertainty around the possible consolidation of Oi and TIM seems to have caused their capex to decrease, although Vivo and Claro are still investing substantially in new sites and network upgrades and Sky has been driving significant lease-up revenue.

Kurt Bagwell commented on SBA’s activities which have been mainly focused on the closing of the recent Oi deal (1,641 sites). SBA company scaled from zero to 7,000 Brazilian sites in two years and now is focusing most of its attention on integrating those assets. Bagwell agreed that Vivo is still driving both BTS and new lease revenue in Brazil and that Oi has been a very quiet fourth player over the past few months.

Commenting on its Central American activities, Bagwell explained that SBA built over 200 towers over the past year in the region. With as many as 40mn residents across the region, Central America represents significant potential growth for SBA and carriers are far from done in terms of reaching optimal coverage and capacity, which allows towercos to still seize opportunities such as the 100 new sites being built in Costa Rica.

American Tower stressed that the fundamentals remain very solid in Latin America. 3G and 4G deployment and new spectrum availability contribute to an overall expectation of solid growth over the next 24-36 months. Messmacher highlighted that the company is still in an acquisitive mode, following its successful 2014 acquisitions and that, in spite of some carriers experiencing financial difficulties, other Brazilian operators are still investing in their networks.

Mexico’s recent telecom reform is the only real piece of telecom reform that Mexico has ever experienced and it has already had a significant impact on the tower market with América Móvil’s carve out of their towers into Telesites.

Over the next few months, AT&T will be integrating the operations of recently purchased Nextel and Iusacell but when ready, the new organisation will become a key player with huge investment power. The company is bringing to the table its U.S. experience in offering competitive packages, unprecedented incentives and superior handsets. If successful in introducing subsidised handsets into the country, AT&T would substantially disrupt the Mexican carrier market as we know it.

On the other hand, Telefónica’s near term strategy for Mexico is yet to be defined. On one hand, the operator is focusing on rural coverage but also devoting its attention to small cells. Unable to compete with Telcel’s strong macro-coverage strategy, Telefónica is planning to tackle indoor coverage and has issued a comprehensive list of 25,000 buildings they would like to cover. However, so far, Mexican towercos haven’t gotten much involved in IBS.

Telcel remains the top performer in Mexico with focused and disciplined operations and a strong capex plan focused on LTE expansion. The company is investing in greenfield projects as well as amendments and new co-locations and its outlook for the future is still very positive. Concluding on Mexican carriers, it was noted that AT&T is a very serious competitor to Telcel and in the near future it could outpace Telefónica and become the second player of the country.

Panelists agreed that there is potential for DAS and small cells in Mexico. Mexico is still heavily underserved in terms PoA per subscriber with the U.S. average at 1,000 subscribers per site and the Mexican average around 2,500. DAS could therefore represent an ideal solution for metropolitan areas, major cities, indoor locations et cetera but to date, although interested, carriers are still primarily focused on building macro sites.

Once more, the entrance of AT&T is mentioned as a disruptive factor. By creating real competition among players, they will force everyone to work the extra mile to enhance coverage and improve on the quality of networks and services.

According to Messmacher, AT&T will take up to three years to fully assess what they can do with the networks, assets and people they have acquired in Mexico, so a comprehensive modernisation process is likely to take some time.

Up until now, Telesites hasn’t really made any move towards opening sites for co-location. Therefore, it’s very hard to comment on whether it will really achieve independence or will remain a financial engineering exercise similar to the creation of Reliance Infratel in India.

On the other hand, Ganzi added that Carlos Slim has proven to be a formidable competitor in all industries and has always played for first place – hence the assumption that Telesites will be a strong organisation once fully operational.

To date, Telcel is still working with towercos as Telesites won’t be able to support the nationwide network rollout by itself and both American Tower and MTP are still securing new business with the carrier. In spite of the carve out, to date, Telcel retains anything between 2,800 to 3,700 of strategic sites on their books, possibly representing their microwave, fibre and switch facilities. Therefore, the carrier is still playing hard to retain its advantage against competitors.

According to panelists, Telesites’ model won’t expand into other countries any time soon.

The creation from scratch of the new broadband network could be in the hands of either Ericsson or Alcatel Lucent and plans seem to be moving faster than in the U.S., where FirstNet is in charge of building the first high-speed nationwide network.

According to the panel, Ericsson’s consortium released an RF plan including 12,000-14,000 sites of which 65-70% would be co-locations and 35% greenfield and rooftops. Less information is available on the second consortium and its plans. (Editor’s note: the Mexican government has subsequently suggested that 8,000 sites will be adequate).

The Government would like to select the winning organisation before October 2015 to proceed with the funding before the end of the year. Search rings and network design would take place during 2016 and the actual execution in 2017. The plan is therefore moving along relatively quickly and panelists commended the Government for its push towards a serious modernisation of the telecom sector which is changing the shape of the industry.

With offices in five Central American capitals, SBA Communications has been organically expanding in the region and is now working with all major carriers such as Claro, Telefónica, LIME, Tigo and Digicel. SBA commented that carriers tend to treat each local market differently but the towerco has succeeded in establishing a stable relationship with most local opcos the region and is now experiencing more demand than ever for new builds, amendments and lease ups.

To date, SBA has 350 BTS projects in process, which is a substantial number in light of the scale of the region. Lots of towers are required in light of the geographical conditions of the region, where mountains and hills jeopardise the quality of the signal.

On the carrier side, ARPUs have been steadily declining so now the time could be right for some consolidation. However, carriers don’t seem to be inclined to divest their towers yet, so SBA’s M&A attention has been focused on independent developers and their assets.

Meanwhile, American Tower decided to deploy its capital elsewhere and divested 60 Panamanian towers to Phoenix Tower International back in October 2014 for an undisclosed amount.

After buying Millicom’s towers back in 2011, American Tower entered into a joint venture agreement with a subsidiary of the operator. However, the attempted venture didn’t go through and, as commented by Messmacher, Millicom exited the JV shortly after its announcement back in 2013.

AMT still operates over 3,400 sites in Colombia and remains the largest towerco in the country. When asked about its potential interest in the Pacific coast, SBA’s Bagwell commented that the company’s plans are to keep expanding and countries like Colombia, Peru, Chile and Ecuador are all on the radar. On the other hand, Bagwell added that Argentina is still far from investible due to political, financial and country-risk.

The west coast of Latin America presents the right macro conditions for towerco investment, with most countries hosting at least three carriers or more, relatively low country risk and strong economics. TowerXchange expects SBA Communications to enter one or more west coast markets in the near future.

You can read more detailed coverage of the tower markets in Colombia, Chile and Peru in the round table reports also featured within this edition of the TowerXchange Journal.

Brazil presents considerable opportunities for larger towercos looking at acquiring small to mid-sized independent developers’ portfolios. Moreover, BTS projects as well as amendments are still high on the shopping lists of carriers.

Panelists agreed that the towerco landscape is divided between larger towercos and a middle market of BTS-focused towercos which could sometimes be willing to accept tougher conditions from carriers in order to scale their businesses and acquire new clients.

Eisenstein commented that their BTS portfolio has been growing at a pace and under terms that the company always felt comfortable with, which sometimes meant they were prepared not to work on certain projects offered on less favourable terms. Bagwell agreed on this point and added that accepting tough conditions is a risky business in the long run as it could harm independent portfolios’ sellability in the future.

According to SBA, the Brazilian market is almost ready to welcome a new wave of M&A, with independent towercos selling their portfolios or even their entire business to larger entities.

With an average of over 4,000 subscribers per tower, Brazil is still far off from achieving its capacity needs and American Tower added that so far, its BTS business has been consistently growing thanks to the constant demand for new sites. In spite of the presence of 10 to 15 BTS firms, Brazil remains an underserved market where 3G is yet to reach full capacity and 4G has only just started to be deployed.

AT&T’s investments in Brazil: where is Sky heading?

Demand for towers and tenancies from Sky was significant in Brazil even before AT&T’s investment, thanks to a growing customer base and a bold expansion plan primarily in São Paulo, according to Eisenstein. Panelists agreed that players like Sky and ON Telecom rep-resented a growing supplemental source of revenue beyond Brazil’s four traditional carriers. American Tower went on to comment that the AT&T - DirecTV deal was a U.S. driven business which could be replicated in other countries. If AT&T was to eventually take a turn towards a fixed wireless strategy, the potential for involvement of the tower industry would increase.

DAS is an optimal solution beyond indoor locations such as shopping malls, airports and public buildings, however the industry for now is focused on iDAS (indoor DAS) more than oDAS (outdoor DAS). AMT’s Messmacher stressed that carriers need to seek alternatives to offload networks, and that DAS, small cells and other products are the ideal alternative.

The Brazilian telecom industry is still active in investing ahead of the 2016 Olympics but there isn’t much time to get projects done and investments in stadiums and other venues are competing against other priorities such as network rollout. This capex dilemma is helping motivate carriers to get towercos involved to provide them with the capacity to execute all these short term project priorities.

In CALA, whereas AMT is actively looking at DAS, SBA highlighted that for now, its priority is to integrate its existing tower portfolio and focus on macro-sites while keeping an eye on alternatives such as DAS.

Argentina is a country that presents all the right conditions from a telecom industry perspective, with three solid carriers, the early adoption of the co-location model, an upcoming spectrum auction and the potential for a nationwide network, Ganzi highlighted.

On the other hand, the country’s political situation is extremely complicated to say the least, and international investors aren’t keen to even consider a move under these risky conditions. Once invested, it would be impossible for international companies to take out cash to be redeployed in other markets.

It would take a change of mindset and a move to ease foreign investments as well as a radical shift in the political regime for any international towerco - especially for listed ones - to even consider Argentina as a market.

Ganzi stressed that Cuba could become the next Costa Rica and reminded the audience that as recently as five years ago, the Central American country had one carrier and extremely low penetration rates. Currently thriving, Costa Rica is one of the most successful markets not only in Central America but in the entire CALA region. Cuba has a larger population than Costa Rica and, should reforms take a positive turn, could represent a tremendous opportunity for the CALA tower industry.

What towercos need to see changing is the speed and consistency of permitting and of permitting processes. It’s too early to assess the success of the new Brazilian Antenna law, although panelists agreed it was definitely a step in the right direction. That said, the implementation of the law by each municipality is what will make the difference.

The tower industry is interested in promoting regulatory best practices and streamlining the way companies invest in infrastructure. Governments are starting to perceive the advantages and benefits of the co-location model.

Other countries such as Chile are perceived by some as being over-regulated with regulatory change having cause more harm than good. Whereas Costa Rica created a definite process which could be time consuming but consistent, thus very rarely fails to result in a positive outcome.

In Mexico, the regulator is strongly in favour of rules like the Brazilian shot clock, whereby if the local municipality doesn’t reach a decision within thirty days, a permit is automatically granted. If created, a law mandating co-locations would be a huge push forward for the industry, and the Telecom Reform Act already includes a passage regarding portions of lands being made available to telecom, hence technically facilitating the ground lease process. But in practice, towercos are yet to assess the efficiency of these rules.

One thing is clear: towercos benefit from transparency of permitting processes especially since in the past, thousands of towers had been built without the necessary permits and are now either stuck in the hands of carriers or being transferred with a very heavy bureaucratic burden.

Towercos take a more rigorous approach to permitting as their final goal is to ensure their assets are investible. Whereas early deals were made with safety nets such as swap clauses, increasingly towercos are conscious of permitting and most of them have permit compliance teams that deal with nothing but the associated processes and paperwork.

Comparing expected tenancy ratios for a tower built today in five years time

Since towercos are often reluctant to talk about their actual tenancy ratios, moderator Jonathan Atkin asked a great question to gauge the towerco leaders’ personal views of potential tenancy ratio growth. If a new tower portfolio were built in your country today, what would you anticipate the tenancy ratio to rise to within a five year period?

Ganzi’s expectations for Mexico were around 1.35-1.45. Grupo TorreSur plans to achieve 1.8-2.0 in Brazil, while SBA expected to reach 1.5-1.8 in the same country. American Tower estimated an average across its CALA regional operations around 1.5-1.7 but stressed that these figures would be higher in Brazil than Mexico.