The guiding principles of American Tower’s international strategy

Hal Hess, EVP International and President, EMEA and LatAm, American Tower generously granted TowerXchange an hour to pick his brain about American Tower’s international market evaluation criteria, the evolution of the emerging market towerco business model toward provision of power as a service, and his views on growth opportunities in SSA, MENA, Latin America and Europe.

TowerXchange: What have been the guiding principles of American Tower’s International expansion?

When we initially launched our International business in 1999-2000 in Mexico and Brazil it was largely exploratory. Mexico was a natural extension beyond our domestic business, and Brazil was the largest economy in Latin America. With the recession in 2000-1 everyone retrenched. We still had our businesses in Mexico and Brazil but we didn’t invest further in new international markets.

Following our SpectraSite merger in 2005, we made a strategic decision to pursue international expansion to complement our U.S. business. We felt there were certain, predominantly developing, international markets that were especially attractive. These markets were in much earlier stages of wireless development than the U.S at the time, but we felt strongly they were poised to replicate a similar growth path over the long term. As a result, we made the decision to start deploying capital in these markets in order to position ourselves to be key beneficiaries.

In terms of guiding principles of international expansion, we have a three pronged threshold test:

1. We’re looking for markets with a relatively stable political and macro-economic environment. No emerging market is as stable as the U.S., so we’re looking for environments in which we can operate with a degree of certainty when it comes to rule of law, enforceability of contracts, land rights, and certain other factors.

2. We’re seeking markets with robust wireless sectors. Multiple operators, strong, but rational competition, and attractive metrics such as growing wireless penetration, long term subscriber growth, and an accelerating pace of wireless adoption and data growth are all things that we look for.

3. Finally, we look for a compelling transaction opportunity. This includes a high quality counterparty, well-located, structurally sound assets, and an attractive valuation. We also need to ensure that we have sufficient internal operational capacity to effectively execute on the opportunity.

Passing all these threshold tests is necessary for us to be confident in our ability to deliver our business plans and meet the risk adjusted return thresholds for each market.

For example, while American Tower has invested in South Africa, Ghana, Uganda and Nigeria, in other African tower markets we have yet to be able to find opportunities which satisfy the aforementioned threshold tests. In some instances we declined to participate in processes because of concerns about political or macro-economic environments. In other instances we declined to participate because of timing; a new market entry on top of multiple recent acquisitions posed too much organisational risk on our capacity to execute. However, in most cases it was simply a function of valuation – we weren’t able to get comfortable with the price necessary to emerge as the successful bidder, while still meeting our return criteria.

 

TowerXchange: It’s notable that almost all of the tower transactions to date in Africa have been with tier one MNOs. Is there a market for tier two MNOs to monetise their towers in Africa?

There is an opportunity, but since tier two MNOs typically have smaller portfolios, we become more sensitive to how compelling the market and transactions are. In Nigeria, for example, MTN, Airtel and Etisalat recently divested tower portfolios of thousands of assets, whereas the tier two MNOs’ portfolios number in the hundreds.

Second, although acquiring assets from a tier two MNO may result in heightened credit risk, this can be partially offset as it probably means a greater proportion of future leaseup will come from tier one MNOs.

Finally, it’s easier to roll-up tier two MNOs’ assets in an existing market where it’s an incremental add on. It will be more difficult to justify the investment to enter a new market on the back of an acquisition from a tier two MNO as we need a minimum scale to justify the investment and the commitment of resources. One way to address that would be to operate several smaller markets through a central location – for example in Latin America, our Chile, Peru and Costa Rica businesses have the majority of operational back office functions run centrally.

TowerXchange: How are the capabilities of American Tower’s operations enhanced when operating in a market like Uganda or Nigeria where DC power service is provided in addition to ‘steel and grass’? Is the full service power model adopted out of necessity in Africa and India, or are American Tower open to providing power+tower in other emerging markets?

While the full service power model was initially adopted out of necessity, the emerging market tower industry has evolved in a way such that people have realised the full service power model can be a competitive differentiator if you can do it well. We have found that it can also be a way to generate additional revenue and profit.

Whilst we were closing our transaction with MTN in Ghana it became obvious that, given the power challenges in SSA, you cannot have a successful tower business unless you can provide power to meet SLAs. When you appreciate that in emerging markets our MNO customers’ subscribers are primarily prepaid, the economic cost of downtime quickly becomes apparent.

We feel that we have put together the leading power solutions team in Africa, supplemented by power solutions proven in India. So our full turnkey power value proposition in Africa has moved from a necessity to the delivery of market leading capabilities over the last four years, and we now see it as a source of competitive advantage. Ensuring that our customers’ uptime SLAs are achieved frees them to focus on their core business.

American Tower has also assembled a cross regional power team, comprised of representatives from our Africa, India and Americas businesses, to monitor best practices to improve efficiency and to create additional opportunities to provide power as a service.

The opportunity for us to provide power as a service declines as the reliability and consistency of the local grid increases – for example in Mexico the grid is reliable enough that power is not an issue, and is largely provided by our customers.

TowerXchange: What is American Tower’s philosophy for investments in energy efficiency? For example, when acquiring a new portfolio of towers in a market where you’re providing power as a service – such as Nigeria – is your preference to squeeze every last runtime hour out of legacy energy systems, or is your preference to upgrade equipment and optimise energy efficiency as soon as possible?

We’re in the latter category, but you can’t replace everything on day one after an acquisition closes. However, investing in energy efficiency is very much part of our business plan in Nigeria. We plan to upgrade power management systems on most sites to maximise efficiency in the long term, a few remote sites perhaps notwithstanding.

At the end of the day it’s about meeting the expectations of our customers and being able to get comfortable with our investment thesis. The entry into any new market is a function of an opportunity matching our return targets, and if the business model assumes a level of investment in power infrastructure, that impacts valuation. Indeed, that may be one of the reasons we couldn’t justify reaching the valuation thresholds necessary to secure the assets in certain emerging markets.

TowerXchange: Given American Tower’s lower cost of capital than private equity backed towercos, are you more inclined to invest your own capital in energy efficiency or are you open to partnering with ESCOs?

We’re comfortable investing our own capital in energy if we see a long term return, but we’d look at any possible partnering solution where the economics and value proposition were compelling. So our appetite to partner with ESCOs depends on market specifics and service costs.

TowerXchange: It seems like the independent towerco business model is penetrating into MENA, with the maiden transaction in Egypt recently and further opportunities in KSA, Kuwait and, potentially, Algeria. Do you see MENA towers as a growth play or as more of an infrastructure-play, given that many markets are host to only two or three carriers?

We believe there could be an opportunity in MENA, and we will look at each opportunity and market but look through the lens of those three threshold tests I mentioned earlier. For example, the political environment remains of concern in certain MENA markets.

We’re active in other markets with only three MNOs, so that factor alone would not preclude our participation in MENA towers, although this is indicative of the finite potential for long term leaseup, which will influence our appetite for, and valuation of, MENA towers.

 

TowerXchange: Moving on to LatAm and one of your maiden international markets: with the creation of Telesites, ~91% of Mexico’s towers are now owned and operated by towercos. What impact do you feel this will have on the market?

We see it as an affirmation of the opportunity for the towerco business model in Mexico, signaling the growth potential of the market over the next five to ten years. Telesites will make the market more competitive, but there are several unanswered questions about their operating behavior, so the specific impact of the creation of Telesites remains unclear. Telesites maintains heavy ownership connections to América Móvil and in our experience operator controlled towercos typically do not match the third party revenue potential of true independent towercos.

TowerXchange: Some of the other key stakeholders we’ve spoken to about the Mexican tower market had suggested that the market’s true growth potential was stymied by uncertainty concerning how the regulator would address the preponderance of Telcel. Do you therefore feel the full organic growth potential of the Mexican tower market could now be realised?

Until Telesites is fully up and running and until the preponderance issue is resolved (for example, we still don’t know whether there might be a new market entrant or one or more MVNOs), there is still uncertainty in Mexico so it’s not yet ‘business as usual’.

However, with AT&T’s acquisitions of Iusacell and Nextel, they have publicly said they’ll start investing in Mexico, so we do expect this to partially unlock pent up demand.

TowerXchange: Will Mexico’s 700 MHz wholesale LTE network present another significant opportunity for tower market growth, if so when?

Until we have clearer picture of the how and what of the wholesale network, I’m not sure you can estimate what the impact will be, much less when. I understand the logic of what the Mexican government is trying to do, but it remains unclear how it will evolve in terms of who owns the network, who builds it, and the value proposition and economics for parties participating in its development.

I recently met with the regulator and was impressed with the way they’re thinking about this; it is very logical, serious and driven by good intentions. However, huge challenges remain to be overcome when you’re fundamentally changing the way a business model is structured. With the execution challenges ahead, there is a chance of delay, and it could look very different by the time Mexico’s wholesale LTE network ultimately is deployed.

TowerXchange: Although American Tower will have over 18,000 Brazilian towers when the remainder of the TIM towers close, it seems to me that there is a ‘long tail’ of disaggregated, independent tower developers in the country. Given that most of Brazil’s operators have sold their towers, how do you find value when rolling up selected independent developers?

Most of Brazil’s towers owned by tier one operators have been sold. Carriers typically retain some towers for strategic reasons or because the legal characteristics of those sites are so complex that they were initially not saleable. Eventually the internal view of the strategic importance or the legal characteristics of those towers change and they come to market, but there are not significant numbers left in Brazil other than with Claro. That said, based on the demographics and current subscriber per cell site density, we believe Brazil still needs a significant number of additional sites. We see a long term opportunity to build more sites and, frankly, for smaller companies to build sites and sell them to larger towercos.

When evaluating strategic acquisitions, our fundamental framework doesn’t change – the valuation must yield projected returns above specific market and transaction thresholds. When acquiring an existing towerco, a proportion of growth potential has inevitably been realised and priced in. We were able to get comfortable with the valuations of BR Towers and Z-Sites, which we’ve acquired in recent years in Brazil, and PTI’s acquisition of T4U illustrates there are still opportunities for strategic consolidation, but our appetite remains transaction-specific.

TowerXchange: Is it a reasonable generalisation to suggest a hierarchy in which American Tower would prefer to deploy capital into organic growth, followed by sale and leasebacks to acquire assets with greater leaseup growth potential, then strategic acquisitions where much of the growth has been realised and priced in?

It is a generalisation, but it’s generally true. On an asset level basis there may be more upside in build to suit, but it obviously takes less time to buy than build 5,000 towers. The acquisition of carrier-owned assets, or the strategic acquisition of a towerco, gives us the ability to accelerate the realisation of a market’s economic potential. But at the end of the day it all comes down to valuation.

TowerXchange: How much appetite does American Tower have for further inorganic growth in CALA beyond Brazil and Mexico - within countries on the West Coast for example?

As a company one of our highest inorganic growth priorities is to expand within our existing markets. We’re already in Chile, Peru and Colombia where, if the valuation makes sense, we definitely have an appetite to expand and enjoy more benefits of scale and increasing relevance to our customers.

We have a healthy appetite for new markets but I wouldn’t say we’re aggressively pursuing any specific new markets in Latin America right now.

We feel Argentina could become interesting in the long term depending, among other things, on the outcome of upcoming elections.

Our relationships with Telefónica and Millicom also could give us the opportunity to expand into other South American markets, but wherever they are, new markets and smaller add on acquisitions would have to provide incremental value in order for us to pursue them.

TowerXchange: Is there an optimal time, perhaps in terms of country risk and the maturity of a tower market, for American Tower to enter a new market?

The optimal time depends on the size of the market and our appetite for risk. I personally am not opposed to looking at virgin markets like Myanmar and Cuba, but from a shareholder value perspective it is a challenge to invest in the early stage of an evolving tower market when the pace of development remains unclear – that can be a tough threshold for us to overcome.

TowerXchange: American Tower has a foothold in Europe with 2,031 towers in Germany - what do you like about Germany that made it your maiden market, and what is your appetite for further acquisition opportunities in Germany?

We liked the opportunity in Germany because of the size and economic stability of the market, the absence of other independent towercos, and an attractive valuation that allowed the portfolio to yield over 8% on day one. The acquisition made economic sense for us despite the acquisition of E-Plus by Telefónica - we knew this was a likely scenario, so when we structured the transaction we made adjustments to be able to meet our objectives. Our German business continues to perform above the expectations we set out in our acquisition business case.

We are very interested in further transaction opportunities in Germany, provided of course they meet our investment criteria. We feel it may make sense for an independent towerco to be involved in the consolidation and rationalisation of the other national tower portfolios.

We also bought into Germany so we could see how the European tower market evolves from the inside, and figure out the right long term plays to create shareholder value.

TowerXchange: Given the maturity of the European tower market and the amount of parallel infrastructure, many of the European towerco business plans we’ve seen feature a significant decommissioning play – how convinced are you as to the potential to create value by rationalising tower networks?

I think the decommissioning play, which I interpret more about cost management and EBITDA growth, theoretically makes a lot of sense in mature markets. The challenge is to understand the economics of decommissioning as it represents another layer of risk and uncertainty. On top of forecasting future leaseup growth, you now have rationalisation risk – there is no certainty that the upfront capital you’re committing and the cost saving potential of decommissioning you are counting on will yield returns within your forecast timescale. The cost of taking assets out of the ground, and extricating oneself from leases (which is where most of the cost resides) is seldom clear until you start executing. If you’re committing capital to decommissioning, your return on remaining assets has to compensate.

Our understanding is that in some markets decommissioning is proving significantly more challenging than anticipated: costs are higher than estimated, which typically results in projects taking much longer than expected to complete and to realise savings.

That said, there will be decommissioning processes in many European tower markets, and that will have to be taken into account in our valuation modeling. Decommissioning could be a legitimate extension of our historical business model – if we can get comfortable with the economics, we’re interested in participating in the process.

TowerXchange: How do you see the broader European tower market evolving?

The European tower market is very dynamic right now. Historically we had seen very few pure wireless towercos: Arqiva, TDF and Abertis had hybrid wireless, broadcast and transmission business models. But, given the recent acquisition of the Wind assets by Cellnex and the successful Inwit and Cellnex IPOs, everyone in European wireless is rethinking their long term opportunities.

I think the European MNOs increasingly recognise their tower assets as something they can divest or IPO, so we may see more M&A and public listings of telecom infrastructure assets over the next few years, generating public currency to use for expansion.

TowerXchange: Do you see broadcast towers as natural bedfellows with telecom towers, or will the latter remain American Tower’s focus for the foreseeable future?

We don’t necessarily see international broadcast towers as a natural bedfellow. The broadcast and transmission business operates on lower margins than telecom towers. We have some broadcast towers in our portfolio, but telecom tower assets, and extensions like indoor DAS, will remain our primary focus.

By the end of this year, we will have more than 125 iDAS systems in our International portfolio and, while oDAS and other small cell installations have not historically been a significant component of our international business, we will continue to explore such opportunities in order remain the primary infrastructure provider to our customers.

Hal Hess in a member of the TowerXchange Informal ‘Inner Circle’ Advisory Board. Hal is scheduled to speak on the towerco CXO panel session at the 3rd Annual TowerXchange Meetup Africa, taking place on October 1 and 2 at the Sandton Convention Centre, Johannesburg. For more details visit our website at: www.towerxchange.com/meetups/africa