The sleeping beauty

After two years of non-stop news, I lately found myself longing for events to report on, as if the CALA tower industry had fallen into a dormant state. While it’s definitely true that the Brazilian economic (and political) situation is affecting industrial production as a whole, we’ve too often made the mistake of identifying the CALA tower industry with Brazil as a function of its importance as a market, where transactions happen in the order of thousands of towers, and everything is always on a grand scale.

In recent months, we were forced to shift our attention beyond Brazil and realise that there’s so much beyond it. From Mexico to Colombia, Peru and Argentina, the tower industry is far from dormant. It’s just not offering lots of news in terms of sale and leaseback transactions but to an alert eye, the region is not sleepy but just reshaping, with most towercos involved in less newsworthy BTS activities rather than acquisitions.

Here is a roundup of updates from the regional tower industry.

Telesites was listed on the Mexican Stock Exchange (BVM) on December 21 with an opening price of Mex$13 (US$0.76). During the first day of trading, shares peaked at Mex$13.38 to then fall by 10% on the following day. And since then, the stock has failed to recover and closed at Mex$11.00 as of January 29.

Five weeks have passed since Carlos Slim’s towerco started trading so it is too early to fully judge its performance but so far the company has met with a lukewarm response from investors. Lucio Aldworth, analyst at Banamex-Citi, speaking to Mexican financial newspaper El Financiero explained that “taking into account the debt transferred by AMX (editor: US$1.4bn) as well as the official goals set by Telesites, the capitalisation implies multiples of 19.9x with respects to the EBITDA projected for 2016, a 13% premium compared to the valuation of its more established U.S. competitors.”

Could it be that the goals set by Telesites are simply too bold or is the company going to prove itself as the leading towerco in Mexico (and beyond) both financially and operationally?

According to regional news outlets, Telefónica might go beyond the announced carve out of its tower business in Europe and follow América Móvil’s steps in Central and South America.

Mexican financial news site Bolsamanía published an article on January 13 stating that the telecom giant could be considering carving out its tower portfolio across CALA by opening an infrastructure sharing business across the region.

What is certain so far is that Telefónica has already created two new European entities, Wireless Towers, to transfer its 11,500 Spanish towers alongside Submarine Telecom, which will own all of its submarine cables and fibre (more details can be found in our European news section).

Telefónica owns assets in most CALA countries and by carving out its passive infrastructure business, it would create the first entity to operate in countries such as Venezuela and would become CALA’s most diverse towerco with operations in Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Argentina, Ecuador, El Salvador, Guatemala, Nicaragua, Panama, Uruguay and Venezuela.

So far, TowerXchange tracked down eleven Telefonica’s transactions in CALA which resulted in the sale of 9,076 towers in Brazil, Colombia, Mexico and Chile between 2011 and 2013 (plus several transactions prior to 2011).

According to the Financial Times “Towns and cities across Brazil are being forced to scrap the annual carnival parade as the country is braced for what is expected to be the worst recession since at least the 1930s.” And in a country where the carnival is more of a way of living rather than a festivity, this speaks volumes about the extent of the financial and political crisis that is hitting Brazil.

In the midst of the crisis, carriers are coming up with cost effective plans such as the rumoured merger between Oi and TIM and the infrasharing agreement between TIM Brasil, Vivo, HI Mobile and Claro, which was recently approved by competition watchdog CADE.

And what are towercos doing in the meantime? I have always backed the idea that middle market towercos would scale their businesses to the “right” level to then sell to the likes of American Tower (AMT) and SBA Communications. An opinion shared by most experts in the industry such as Dr Chahram Zolfaghari, CEO of Brazil Tower Company who smartly said “In Brazil, other than AMT and SBA, everyone has an exit strategy”. But I don’t think now is the time when AMT and SBA are likely to commit to huge investments to acquire their fellow competitors… A risky business at a time when, according to Barclays, Brazil has the highest level of inflation of all emerging markets and prices of virtually everything - including salaries and raw materials - are far from going down.

So with at least a dozen towercos with portfolios ranging between 18,800+ to 50 towers, the industry is likely to have to wait a while before any consolidation takes place.

Do you know how many towercos operate in Colombia? So far, I tracked down ten and I am pretty sure that this number is likely to go up in the near future. With Andean Tower Partners (ATP), part of Ganzi’s Digital Bridge Group, the last entrant in the country, Colombia is getting pretty crowded…

ATP’s CEO, Estrella Zaharia, explained to TowerXchange the drivers behind its entrance in Colombia in an exclusive interview published in the latest issue of the TowerXchange Journal. The delayed spectrum auction which is likely to set new coverage targets to awarded companies, in addition to a staggering growth in data consumption, are creating the perfect storm for towercos to enter the country and work on BTS programmes.

This said, I am firmly convinced that after the initial excitement, we are likely to witness consolidation among towercos and a rationalisation of the Colombian market.

Peru is another common target for towercos with as many as seven companies already active, including new comer ATP. With Peruvian carriers committed to a combined capital outlay in the order of US$3.9bn and a favourable regulatory environment, towercos have good reasons to get excited!

Ecuador and Chile are quieter markets in terms of towerco activity. Ecuador doesn’t necessarily present the right market characteristics for towercos, considering it’s effectively a duopoly between Claro and Movistar. However, ATP has announced its entrance in the country and it will become the second active towerco in addition to SBA Communications. Torres Andinas’ COO Eric Ensor stated with regards to Ecuador that “Claro’s dominant position doesn’t help the towerco model spreading in Ecuador and we are still trying to understand how to position ourselves there. So far, we haven’t been able to answer that question entirely as we aren’t sure about how much business we can get there.”

Chile is a story of its own… The most mature market in the region and host to three healthy carriers - Entel, Claro and Movistar - the country seemed to present the perfect scenario for the adoption of the towerco business model. However, as previously reported by TowerXchange, the Towers Law (N. 20.599) suppressed Chile’s BTS market with its “onerous restrictions on building in saturated or sensitive areas, its somewhat heavy-handed attempt to mandate infrastructure sharing, and its requirements both to invest in camouflage, and at times to compensate local communities.” Once again, newly founded ATP is planning to enter the country in 2016 and we are eager to follow its developments especially since the company plans to focus on developing small cells and DAS across Chilean metropolitan areas.

As the era of Kirchnerismo is over and President Macri takes office and promises to open up to international investors while negotiating the debt crisis with U.S. hedge funds, I cannot help but think Argentina is likely to open up to towercos very soon. And actually, the change is already happening.

In fact, while carriers in Argentina aren’t interested to sell their tower assets at the moment, Torresec has recently secured its first Build-to-Suit contract and is positive that the BTS model is likely to become popular in the country, especially since at least 5,000 new towers are needed to bring 4G coverage up to speed.

In spite of the need to update and modernise its regulatory environment and its ever-uncertain political situation, Juan Cueria, COO of Torresec said that there’s plenty of equity funds interested in doing business in Argentina. In his own words “everybody recognises that this is a sleeping market, ready to awaken.”

With around 16,000 towers and stringent coverage targets for carriers that were recently awarded 4G spectrum (Movistar, Telecom Personal, Claro and Arlink), it comes as no surprise that carriers are welcoming an entrepreneurial towerco such as Torresec, able to provide BTS services. And the BTS model could be the perfect entry ticket for towercos looking at developing new business in this practically virgin market.

The CALA tower industry has had more exciting phases, and is now not only maturing but clearly slowing down from a deal flow point of view. The Brazilian crisis as well as the near-saturation of the Mexican market since the creation of Telesites provide an occasion to look beyond the obvious and find new revenue channels. While the Andean countries are increasingly in the spotlight, I would bet we are likely to see developments in Argentina, especially in light of the new government and its willingness to open up to international trades.