Investment banker André Laloni is now Head of Brazil and Southern Cone Investment Banking for UBS. He has been covering the telecom sector for almost seventeen years and has been a key contributor to shape the tower industry in the country, advising most of the transactions in the sector. In this interview, André shares with TowerXchange his views on Brazil, the likelihood of new markets including Cuba, Argentina and Paraguay opening up and key factors that determine the decision for carriers to sell or carve out their tower portfolios.
TowerXchange: André please tell us about yourself and your experience in the telecom investment arena
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
I have been an investment banker for almost seventeen years, specifically since 2000 when I started working with UBS in New York in their global industrial group. In 2003, I moved back to Brazil where I joined Telecom Italia for a few months to then go back to investment banking with Unibanco, Goldman Sachs, Barclays and then again with UBS, where I now run their investment banking division for Brazil and Southern Cone.
Telecoms is one of the sectors I have always been covering throughout my career. It’s one segment where I have always been involved. I have participated in the majority of the transactions that shaped the tower industry in Brazil, more frequently advising carriers in divestiture processes, negotiating with towercos.
TowerXchange: Why are certain MNOs increasingly inclined to carve out and keep their towers rather than sell and leaseback? What are the relative merits of each model?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
This is a very relevant and hot topic at the moment and I see that most carriers take one direction or the other as a function of three key underlying motives.
Capital needs: if and when a carrier does need financial support as a result of its capex outlook and/or indebtedness, it will compare the cost of a sale and leaseback operation with the cost of other funds available in the market for them. Not every carrier can easily access capital, so the decision behind selling towers will depend on the cost of alternative funding.
Regulatory environment: we’ve seen this happening in Mexico last year, contributing with the creation of Telesites. In this instance, there’s no need for upfront cash hence a spin-off is a good alternative. On the pro side, the carrier will still retain a certain degree of control on its portfolio and there is an upside in terms of value as towercos tend to trade around 15-18x while carriers trade within 5-8x. On the downside though, there’s always the risk of being perceived as not completely independent from the parent carrier company which could hinder the attractiveness of the portfolio to potential tenants. This could result in a lower degree of growth than originally expected.
Unlocking value: as I mentioned, towercos trade at higher multiples than operators so creating a spin-off gives an opportunity to generate considerable value. Whether the spin-off is a result of regulatory demand or elected to create value, the new entity will face the same challenges and will need to prove itself as truly independent and focused on maximising the potential of the tower portfolio.
TowerXchange: Why do you think Telesites made an underwhelming debut on the stock exchange?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
Telesites is a young company and I wouldn’t necessarily call its debut underwhelming. I believe the company has great potential and it’s the beginning of a new story with very strong DNA.
Telesites did have some price drop after its IPO during the first few weeks of operations and I believe it’s now trading at about 10-15% discount to the likes of AMT, CCI and SBA. But again, this is the normal evolution of a young organization.
However, I’d say there are a couple of factors to be taken into consideration with regards to Telesites’ future outlook. First, their forecasted demand from the carriers might not be as high as originally expected.
IFT did estimate that Mexico would need 70,000 sites on top of the existing 25,000 to densify the network and bring it to mature market standards. However, there are various factors that might reduce this forecast. Specifically, according to research analysts, AT&T originally planned to add around 3,000 new sites by 2018 but they’ve now found that the sites acquired from Nextel have greater potential of utilisation than originally thought. So they might actually be up for less co-locations and less new builds than predicted.
Telefónica doesn’t have a great narrative of investments in Mexico and won’t necessarily become a major tenant on Telesites sites. And lastly, the Government is currently working on the 4G shared network and for now, they’ve estimated that 12,000 new sites will be built in Mexico by 2023. If that’s the case, this could further reduce and dampen the demand for Telesites portfolio.
Some of the global investment funds have restrictions to invest in emerging markets and sometimes their investment mandate comprises ETFs, index, overall broad equity-linked instruments instead of a single ticker only. Since Telesites didn’t issue ADRs, some of these funds, former investors of AMX, wouldn’t be allowed to be a shareholder of Telesites. (At the time of the spin-off, América Móvil shareholders received one Telesites share for every twenty América Móvil shares held, consequently AMX investors became also investors of Telesites)
TowerXchange: And with regards to the company itself, do you think it will expand its operation beyond Mexico and into Brazil and other LatAm states?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
Telesites did announce they’d expand into other LatAm countries and they have recently announced new towers to be built in Costa Rica through their build-to-suit contract with Claro Costa Rica.
With regards to Brazil, the situation is a bit different in light of the presence of large and very established independent towercos - American Tower, SBA Communications and Grupo TorreSur - and due to the competitiveness of the local market. That said, there’s definitely room for growth and Telesites could leverage Claro’s portfolio by putting it up for share.
Claro has about 8,000 sites in Brazil which could serve the market and Telesites could definitely look into that. Current market conditions don’t necessarily help the move though.
In Brazil, the number of subscribers per tower is still much higher than in developed markets such as the U.S. - 4,500 vs 1,000 - and the average tenancy ratio is around 1.2/1.3 while it reaches 2.5 in the U.S. so there’s definitely still a lot to be done.
TowerXchange: What is your perception of the status of the Brazilian telecom tower industry in light of the country’s economy? Are towercos progressing towards consolidation?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
Brazil is going through very tough times both economically and politically but I hope that the situation can be defined once and for all and finally improves. The international and local investment community definitely needs more clarity on the direction of the country.
With regards to towercos, high interest rates combined with inflation pressure and difficult access to credit do have a direct impact on the industry, especially on smaller companies that see their margins and ROIC compressed.
In the past M&A activity has been intense in Brazil with Telefónica, Oi and TIM all divesting most of their assets as a solution to fund their capital needs. To date, the only intact portfolio is Claro’s which has no intention to sell so I’d say that on the carrier side, most transactions have already taken place beside some residual assets which could get sold in the future.
On the other hand, we’ve also seen some degree of consolidation happening among towercos with BR Towers being acquired by American Tower and T4U which was recently bought by Phoenix Tower International. So yes, I’d say there is the potential for consolidation among towercos.
However, the mismatch in terms of currency is affecting international players and their capital returns. Investments made in Brazil in U.S. dollars return cash in Reais and the exchange is obviously hurting companies so this is a very delicate financial phase for everyone. In spite of the current situation, I’d still say that Brazil is up for a lot of growth with stronger companies well positioned to ride through these volatile times.
I’d also add that smaller towercos such as family businesses and privately funded entities could do relatively well in spite of the crisis. In fact, they can still generate significant profits for their shareholders no matter how small their portfolio is.
The hard place to be right now is in the middle… I am referring to those towercos purely focused on build-to-suit that haven’t reached enough scale to be relevant targets to larger towercos but whose investors do have certain expectations in terms of growth rates to be achieved exclusively via BTS rather than with acquisitions.
The hard place to be right now is in the middle… I am referring to those towercos purely focused on build-to-suit that haven’t reached enough scale to be relevant targets to larger towercos but whose investors do have certain expectations in terms of growth rates to be achieved exclusively via BTS rather than with acquisitions
These companies hardly have any competitive advantage to win BTS projects over larger, more structured organisations. So I am not sure what kind of multiples they can expect if they were to be acquired today. I think some of these towercos could potentially be acquired but for the value of their portfolios rather than their value as “ongoing businesses” hence taking into consideration their specific know-how. Or they could get sold and become platforms for new entrants but considering there isn’t much else to acquire in Brazil, I am not sure they’d serve as a good entry card to significantly grow a new portfolio.
Who owns Brazil’s 51,929 towers?
TowerXchange: Is Argentina the next big thing for the tower industry? We know of one BTS firm (Torresec) that got into the country in 2015, do you think we are likely to see any other towercos entering Argentina?
André Laloni, Managing Director Head of Brazil and Southern Cone Investment Banking, UBS:
Argentina is definitely an interesting place which is now presenting some positive conditions for towercos and in general, for the investment community.
On the telecom side, the market is quite big, seizable and with lots of competition. Claro, Telefónica and Telecom Argentina all share similar proportions of the market ranging between 30% and 35%, rising and falling year to year. Nextel (Cablevision) is the fourth largest player with over 3% of market.
The country has so far lacked significant investments so there’s lots of room for growth in virtually every industrial segment. To date, Torresec is the only firm operating in Argentina and there isn’t any large towerco yet.
The industry is lacking education… There’s no pattern, no rule, no precedent. Everything has to be created from scratch just like in Brazil eight years ago. I participated in shaping up the industry here in Brazil and I can see the same history repeating in Argentina. There’s an increased appetite for its assets not only in terms of towers but as a potential investment destination across multiple industries since the change in government.
On the financial side, there are extremely high interest rates and lending is very expensive which represent a positive factor for potential M&A as carriers will find it more convenient to sell their towers rather than to source alternative ways of funding their businesses. However, there are crucial issues related to land agreements, leases and permitting as the country lacks any kind of regulation over it.
Everything has to be created from scratch just like in Brazil eight years ago. I participated in shaping up the industry here in Brazil and I can see the same history repeating in Argentina. There’s an increased appetite for its assets not only in terms of towers but as a potential investment destination across multiple industries since the change in government
The other challenging factor is that contracts cannot be indexed with inflation which is really high. In Brazil, MLAs do factor in inflation but the same cannot be done in Argentina for now. As a solution, contracts could potentially be dollarised but, even when contracts are stipulated in U.S. dollars, this has proven really hard to enforce.
So I’d say that there is a legal framework that needs to prove itself but this has to be done during an actual negotiation rather than theoretically. Once the opportunity presents itself, players will look into it and sit down to negotiate terms that are beneficial for the telecom tower industry as a whole.
In terms of timeline, I think that although the industry is showing an interest in Argentina, no one is ready to act just yet. There are some ongoing conversations and we’ll need to wait to see how they go over the next few months.
TowerXchange: The sale and leaseback scenario has been extremely quiet… Where do you foresee the next deals to happen (we are keeping a close eye on the Andean States)?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
There’s the potential for transactions in a number of Andean countries and it all depends on their economic and political stability really… Carriers across all countries need to invest in their networks and the cost of debt is high in most countries beside Chile.
The attractiveness of any local market depends on various factors including the competitive landscape among carriers, prospects for network investments and the cost of lending. As said, where lending is expensive, sale and leaseback is usually a more economically viable option. Legally speaking, having a strong framework for contracts and some degree of protection against inflation do help towercos to invest more comfortably.
I’d say that Peru, Paraguay, Uruguay and Argentina all present interesting conditions but are at very different stages of market development.
TowerXchange: How about Paraguay and Uruguay? Are they likely to experience any towerco activity in the near future? Although out of your geographical coverage, we are looking at Cuba as well, any opinion about that?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
In Paraguay, there are four operators - namely Millicom’s Tigo, Telecom Argentina’s Personal, América Móvil’s Claro and state-owned Copaco, trading as Vox.
Tigo has recently announced its plans to invest as much as US$2.5bn over the next few years and usually once a carrier announces this kind of investment plans, the others follow… The stable economic and political environment of the country definitely helps capital investments and the development of a strong telecom sector so I do foresee some towerco activity there in the future.
In Uruguay, Antel is the state-owned incumbent which does have a monopoly of landline telephony and broadband but it does compete with Movistar and Claro in the mobile market. Thanks to the country’s competitive landscape, Uruguay could also be a target for towercos.
Cuba is a completely different ballgame. With just over 20% mobile penetration rate, the telecom industry is massively behind any other state in Central America. There are some signs of development but the entire legal, political and industrial framework has to be designed from scratch.
Back in February 2015, IDT Telecom and ETECSA closed a deal to provide long distance calls and in September 2015, Verizon won the contract to offer roaming services. So it’s clear that there are quite a few movements and much to be done in the country but the challenges remain when it comes to its legal system, local financing and we all need to see whether contracts stipulated in Cuba can really be enforced before making any move.
TowerXchange: If you were to pick a towerco to invest in and could draw its top four characteristics, what would they be (geo-spread, tower count, management, clients, tenancy ratio, liquidity, debt et cetera)?
André Laloni, Managing Director, Head of Brazil and Southern Cone Investment Banking, UBS:
I would say there are four key components that determine the success of a towerco.
Four must-haves of a tower portfolio
Portfolio: the company’s portfolio needs to have a good size, strategic locations, solid tenancies and infrastructure available for co-location
Client base: a growing, credit-worthy clientele is key to drive the profitability of the portfolio
MLAs: the quality of contracts, their duration, structure and guarantees are absolutely fundamental. An MLA needs to secure cash-flow to the towerco and the same portfolio could give very different returns depending on the structure of the underlying contract
Management: as an overarching element, towercos need to have very strong and competent expertise, especially local one. In fact, although there are common denominators to the industry, the specifics of the business differ region by region and local expertise and management is a very relevant factor.
