The Brazilian tower sector: the current economic downturn and the opportunity it creates

Jim Eisenstein and Jose Varela run one of the most successful towercos in Brazil, Grupo TorreSur, with its 6,300 towers located in São Paulo and across the country. In this interview, they’ve agreed to discuss with TowerXchange the status of the Brazilian tower industry in light of the current economic downturn, as well as the opportunities still available for disciplined yet well capitalised towercos.

TowerXchange: Do you expect BTS to be the core of your activity for the next two years? And if so, what are your targets in terms of new builds?

Build-to-Suit is certainly an important component of our activity, but our core focus will always be on adding new co-locations on our existing portfolio of towers and adding equipment on sites on which carriers have already deployed.

In terms of targets, we have a certain range of new towers we’d like to build each year, but we are much more focused on building good towers rather than just towers. So we’d rather build fewer great sites than try to hit an artificial target number.

BTS represents a meaningful part of our growth over the next couple of years, but the most important business area for us is to grow organically our existing portfolio. We will keep building new sites but looking at the economics behind each project. One of GTS’ core strength is how careful we’ve always been with how we invest our money.

TowerXchange: How many towers or tenancies are required to deliver full economic coverage and a high standard of QoS in Brazil?

I think it’s hard to determine what constitutes good service or full economic coverage for each carrier. But with greater data usage, there will continue to be an increased need for greater capacity, which in turn will continue to require the need for more sites. We think the easiest way to look at it is to compare Brazil with the United States, where there are an average of 1,100 subscribers per site versus over 4,000 subscribers per site in Brazil. I don’t think we are likely to see the Brazilian rate go down to anywhere near 1,100 in the short or intermediate term. However, Brazil certainly needs a substantial number of new sites over the next five years, not just to add capacity but also to enhance coverage.

TowerXchange: What is your take on the effect of Brazilian economic uncertainty on the local tower industry? 

The economic downturn has significant effects on the overall Brazilian business environment. However, I’d say that the crisis has probably affected the wireless industry less than other sectors, especially since wireless devices are not considered a luxury or a desire anymore, but rather a necessity. Having said that, there is a negative impact on the wireless industry which is starting to have effects on the tower sector as a result. We have been fortunate not to experience much of the pain to date, but with the carriers now feeling the effects of the crisis more than they have over the past couple of years, the reduced capex allocated to new projects will have an impact on our sector too.

This crisis will also potentially precipitate consolidations not only among carriers but also towercos, which could create opportunities for us. Times like these present opportunities for some companies and I think this is the case for GTS. Thanks to our large portfolio of sites, we are able to offer creative solutions to carriers looking at expanding their networks and reducing their capex. But the same might be challenging for smaller companies with less substantial portfolios.

Carriers began selling their tower portfolios in 2010. These carriers have made the fundamental decision of leasing versus owning their sites. And as towercos are becoming more and more sophisticated, carriers trust us not only to own and operate their sites but also to develop sites for them. This is particularly important at times when the carriers have capex constraints. The economic crisis has solidified their thinking that for each tower they don’t have to develop on their own, they can co-locate on someone else’s site with a far smaller burden on their capex. In that regard, this difficult period is contributing to the leasing versus owning decision.

TowerXchange: Whilst the devaluation of the Brazilian Real has inevitably slowed the flow of capital from the US to the Brazilian tower industry, does it open up opportunities for domestic Brazilian investors to get more involved? Are there Brazilian investors with an appetite for towers?

Every difficult situation presents an opportunity for some. Some companies might need to sell and accept a lower valuation and this would present the right conditions for investors willing to enter the market at a competitive price. But I think it’s fair to say that no tower owner would look to sell when the market presents difficult conditions.

I think any investor, whether international or local, always looks at their potential returns. Those looking at investing in Brazil right now are definitely willing to take risks, but they also have the opportunity to garner some very significant returns down the road.

TowerXchange: When we spoke with Dr Zolfaghari of BTC last, he said that every towerco in Brazil beside AMT and SBA has an exit strategy… Do you agree with his view?

I can’t comment on how other tower companies might think, but it’s fair to say that any company backed by private equity at some point will be looking for an exit, either through a sale, merger or a public offering.

TowerXchange: How do you foresee the consolidation of Brazilian towercos playing out – how many towercos does Brazil need in the long term?

Drawing a comparison with the U.S., there are a multitude of successful tower companies beyond the three large public ones (editor: Crown Castle, American Tower and SBA Communications). I don’t think there is a right number of towercos for the U.S. and I don’t think there is a right number of towercos for Brazil. Every company is different and each company has its own goals.

We haven’t done any significant acquisitions since the middle of 2013 and chose not to go after certain deals which we didn’t think would provide the appropriate ROE for our investors. We would like to believe that these were the right decisions, but time will tell.

Much will depend on whether a towerco has the option to wait or their investors are looking for liquidity.  As Jimmy explained, the consequences of each decision in the tower business - such as entering or not entering into a deal - tend to show themselves after a period longer than many other businesses. Therefore, all business decisions made in previous years will have repercussions in the next year or so. That’s why it’s key to have a very clear strategy and to know how to create value, not only in the short but also in the mid and long term.

TowerXchange: After the AMT-TIM transaction, what is left to acquire - if anything - in Brazil? And considering that Claro still retains its portfolio, would you expect the carrier to carve out its towers and create a Telesites branch in Brazil?

At one point, América Móvil might decide to carve out their sites and either create a spin-off company or sell to a third party. This would be their decision of course, but beside those assets, there isn’t that much left to buy in Brazil.

TowerXchange: Are you seeing more ‘special structures’ integrated into the Brazilian network? We’re seeing a growing portion of infill sites in Asia and Europe being fulfilled through ‘Smart Poles’ / lamp-posts and microcells – are they starting to be used in Brazil?

I think that the need for macro sites in Brazil is such that carriers aren’t likely to start focusing their primary attention on microcells or DAS in the near term. There are still far too many areas where macro sites are needed for capacity, in-fill and coverage, but at some point well down the road, carriers will start focusing on alternative options.

There are some companies offering sites to deploy microcells but I don’t think the market is there yet, at least not in a way to achieve scale. We are likely to see carriers continue to focus mainly on macro sites in the short term.