Mexico: a tale of two cities

TowerXchange is excited about Mexico like everyone else in the industry. But let’s be realistic. AT&T is likely to be great news for everyone but its network plan is yet to be finalised. Telesites has made international and local headlines but hasn’t been approved yet by IFT (which stated in recent news that the session to discuss the approval isn’t likely to happen in July), and the shared LTE network could mean thousands of new towers, but plans are still unclear. To shed some light on what’s really happening in Mexico, we’ve reached out to two of the most knowledgeable tower people in Mexico: MTP’s CEO José Sola and Marc Ganzi, CEO of MTP’s lead investor Digital Bridge Holdings.

TowerXchange: José, please share with us the latest developments in MTP.

Mexico Tower Partners has been growing steadily over the past couple of years. Our headcount grew from 11 people in 2013 to the current count of 40. Every year we’ve been doubling our staff, which is a good sign.

On the other hand, MTP is still a very lean towerco and we outsource most of the site acquisition and construction work to a network of trusted partners. I’d say 80% of our workload relates to managing the existing portfolio while the remaining 20% of the time we spend dealing with outsourced contractors.

Over the past few years, we have built strong relationships with third party companies that serve us with what is known in the U.S. as a build to flip model. We basically work with local towercos that build towers to then sell them to us. This is an extremely efficient model especially since these partners tend to find it easier to work in difficult regions, have an experienced approach when it comes to Mexican logistics and are very reliable in terms of time to market.

Thanks to this lean and efficient structure, we have both the capacity and resources to build up to 500 new sites per year. And we are able to guarantee our clients a fast and yet high quality service thanks to our long standing expertise and the quality control we do on outsourced partners.

TowerXchange: How do your investors perceive the Mexican market and MTP performance?

Digital Bridge created MTP with Macquarie Mexico Infrastructure Partners. Digital Bridge is one of the leading global investors in communications infrastructure with five different investments in tower companies around the globe. Macquarie is an experienced investor here in Mexico with its Mexican Infrastructure Fund and is very familiar with our business model and the tower industry both in Mexico and at an international level. Both Digital Bridge and Macquarie have always seen Mexico as a good opportunity and have been our founding equity partners since day one.

Our investors perceive the changes happening in the Mexican telecom industry as very positive and trust that we are well positioned to make the best out of the entrance of AT&T. On that note, AT&T is a great disruptive element in the telecom landscape. MTP was founded at the end of 2011 and the Mexican market has been pretty quiet since then. Expectations were extremely high in terms of deployments from carriers but in reality most projects have been kept on hold while waiting for the telecom reform to happen. Therefore, I’d say we are coming out of a sequence of disappointing years for the industry in light of the conservative approach carriers took, but the outlook from 2016 looks bright.

The entrance of AT&T has brought a breath of fresh air in the market. Expectations are higher than ever and in general, there has been a change in the mood of investors who are now eager to look at plans for the next three to five years.

TowerXchange: How did the entrance of AT&T and the creation of Telesites change the build to suit dynamics? And what are MTP’s expectations for the future?

To date, we only have three clients in the BTS market. On one hand, most of Telcel sites will be built by Telesites so we are left with residual projects with them. Telefónica has been very quiet over the past year and we believe they are now analysing the impact of AT&T on the market before making a concrete plan of action. Their 2015 has been very slow in terms of deployment so we cannot really guess what their plans for 2016-2017 will be.

On the other hand, AT&T is a real potential opportunity for us and we expect to do a significant amount of work with them. They are working very ambitiously and already expect to build 800 towers during the course of 2015. In theory, their 2016 plan should be ready by September and they’ve already launched an RFP for equipment which is clearly a positive indicator.

TowerXchange: Beside the creation of Telesites, are there additional measures being taken by IFT that are easing towercos’ activities?

I don’t think there is a real interest in further regulating the industry for now.

One thing we are trying to do is to create an Association among key players to promote certain regulatory changes and push for infrastructure sharing in Mexico. However, this hasn’t been a priority of the regulator and so far little has been done on this front. I think IFT won’t have an interest in looking at the tower industry in the near future beside deciding on the approval of Telesites.

However, permits can be a significant problem for Mexican towercos and this is something we are trying to address. There is a lot of uncertainty when it comes to the procedure to follow as there isn’t a federal regulation on it. Everything is done at a municipality level and there are as many as 2,438 of them in the country! Each of them has their own rules and it can be extremely difficult to comply and even find out what the rules are! This is an element that needs to be addressed quite urgently along with clarifying the rules regarding zoning.

Right now, the regulator is very focused on implementing and monitoring various measures of the telecom reform that affect the role of the preponderant player in the wireless space, such as the elimination of interconnection rates, whereas infrastructure is less of a priority, especially since the creation of Telesites.

TowerXchange: What kind of uplift does the 700MHz shared wholesale LTE network provide in terms of organic growth and co-location potential?

It is estimated that the shared LTE network will require a minimum of 8,000 sites to operate. This is an ambitious project that will require the joint effort from the managing operator, financial sponsors and OEMs. Whoever wins the project will want to minimise the deployment of new sites by using as many existing sites as possible in order to have the network up and running swiftly. However, it is anticipated that there will be also demand for new sites to complete the project.

TowerXchange: Did the entrance of a new strong player such as AT&T stir the arrival of new towercos in the country?

Yes. In fact, we are now seeing a variety of small, relatively inexperienced players setting up towercos, and they are putting huge pressure on prices. In fact, these companies are offering their services at very low rates which we fear could become the new benchmark carriers use in their selection of BTS partners.

We see these rates as artificially low and honestly, I assume the quality of these projects must be compromised to stick to those budgets! It is critical that carriers understand the difference in quality of work of serious and committed towercos such as MTP.

We believe that carriers do care about quality of service and expertise, especially in a complicated market like Mexico. So our track record is a critical differentiator when it comes to negotiating with them. No one wants to work with a partner that isn’t qualified to execute the project, and which has shaky financial backing.

It’s a fact: everybody loves the tower industry these days. It’s an attractive and profitable business and we all know it. But it’s not for everyone and it’s not easy. As soon as a towerco is granted a project, they have a certain value in their hands. The simple assignment of the project is a huge cheque but then you need to prove yourself and be able to finance the build, contract the right partners, deliver the project within the deadlines and pass a variety of quality control tests. Only towercos with experience succeed after the assignment phase, this is a fact!

MTP is certified under the Foreign Corrupt Practices Act (FCPA) which is extremely important, especially for U.S. companies. So we are in a great position to work with the likes of AT&T and can ensure we have strong plans in place to comply with FCPA guidelines. We perform yearly reviews of our standards with our internal committee, we organise workshops with specialised law firms to instruct new team members on FCPA standards, and we perform audits and background checks on vendors and subcontractors. This process is time consuming and yes, could delay our operations, but we see it as an extremely important component of our credibility in the market.

TowerXchange: Thanks for joining us Marc! What is your view on the arrival of AT&T, the shared LTE network and the creation of Telesites both as an expert in towercos, Mexico and as the lead investor in MTP?

Mexico is really a tale of two cities and the present time demonstrates it more than ever. You have AT&T which is clearly amazing news for everyone in the market and tower companies like MTP, American Tower and Telesites will surely benefit.

The transformation of Nextel and Iusacell into one stronger entity pleases us all. And who wouldn’t be pleased with expected capex by AT&T in Mexico reported in the range of US$3bn? If we translate that figure into macro-sites, we could project as many as 8,000 new co-locations and towers just to put AT&T at parity with Telcel. We all know that Telcel has been building quite aggressively at a rate of about 1,000 new sites per year. So AT&T has a lot to do if they want to achieve coverage parity.

In Mexico, we are all eager to find out more about the Red Compartida (or shared LTE network) project for which two separate consortia are bidding. This could be another considerable revenue stream for towercos in the country, since 80% of the sites needed (which could be around 8,000, although some rumours suggest as many as 15,000) would be co-located on MTP, American Tower and Telesites’ existing infrastructure. The rest of the sites will be greenfield and that could result in 1,500 to 2,000 new towers being built.

But as I was saying, Mexico lives a double reality of good and bad news and if we look at the numbers, 51% of Mexican mobiles still work on 2G or 3G. The demand to switch to 4G is growing by the second but we aren’t there yet. And Mexico tracks behind regional standards with regards to most indicators, from SIM penetration (82%%