The changing shape of the telecom tower industry in Latin America

Since the inception of the independent towerco model in Latin America around the turn of the millennium, operators have adopted different strategies with regards to their passive infrastructure portfolios. Some have sold towers to towercos, some have outsourced build to towercos, some have kept it all in-house. Meanwhile towercos have been able to penetrate certain markets better than others as a result of the level of engagement of the local carriers and the fundamental investibility of telecom real estate in markets such as Mexico, Colombia, Peru and Brazil. In this editorial, TowerXchange offers an analysis of the current status of these markets as well as an outlook for the future based on key findings from the third annual TowerXchange Meetup Americas, held in Boca Raton, 16-17 June 2016.

The third annual TowerXchange Meetup Americas gathered 212 leaders from the CALA tower industry in Boca Raton for two days of knowledge sharing and intensive networking. Endorsed by Diamond Sponsor SBA Communications and Bronze Sponsors Phoenix Tower International and Torrecom, the TowerXchange Meetup Americas has now established itself as the must-attend event for the industry.

Top solutions providers including Acsys, Accruent’s Siterra, Invendis, Ausonia, Ascot and Nexsysone as well as leading law firm Vinson & Elkins also joined the TowerXchange Meetup Americas 2016 as sponsors and contributed to the great success of the third edition of the event.

The audience included over 60 C-level and 90 representatives of regional towercos including American Tower, SBA Communications, Telxius, Mexico Tower Partners, Phoenix Tower International, QMC Telecom, Torrecom, AlfaSite, NMS and Intelli Site Solutions.

Towercos currently own 48% of CALA’s 170,000 towers. The landscape of towercos features three large, listed companies: American Tower, SBA Communications and Telesites; significant scale private players such as Telxius, Grupo TorreSur, Digital Bridge (MTP+ATP) and Phoenix Tower International, supplemented by a fragmented ecosystem of dozens of smaller, independent developers, mostly focused on build to suit, exemplified by Torrecom, Torres Unidas and Brazil Tower Company.

Breakdown of ownership of CALA’s 160,000+ telecom towers, Q2 2016

2011-2013 were characterised by substantial Sale and Leaseback (SLB) activity with Telefónica, Oi and Nextel and others divesting thousand of towers across the region. And even though this phase of SLB has slowed down, the industry is now waiting for the next wave of transactions, which will be mostly focused on consolidation among towercos.

In terms of deal value, the regional industry has so far enjoyed healthy tower cash flow (TCF) multiples ranging between 12x and 17x. But whether towercos can still realise the same returns upon exiting, will depend on a variety of factors including the quality of their assets, their location, tenants and growth potential, the characteristics of the underlying MLAs as well as the presence of a complete set of permits. In a nutshell, valuations will be defined by the degree of compliance with the industry’s best practices.

Generally speaking, the CALA telecom tower industry is being challenged by a variety of internal factors including tough competition, carriers driving prices down for build to suit (BTS) projects and lease rates.

In addition to internal factors, we’ve identified a number of macro issues that are adding pressure to an already challenged industry. The devaluation of many regional currencies is threatening the returns of towercos in countries such as Mexico, Brazil and Colombia and doesn’t favour the repatriation of funds, reducing the appeal of the region to international investors.

This situation could have a positive side-effect, pushing towercos to reinvest revenues in their respective local markets. However to date carriers are being cautious with their capital investments as a result of the same wave of macro-economic uncertainty as well as expectations of costly future spectrum auctions, such as in Colombia. The market is particularly turbulent in Brazil where the political and forex crisis has been exacerbated by the bankruptcy of Oi.

Many stakeholders in CALA towers are now playing a waiting game for what TowerXchange believes will be the next wave of deals and growth. But to achieve that, the industry needs to undergo a rationalisation that could push certain players out of the game and favour those that are sticking with the aforementioned industry’s best practices.

Mexico is host to a wide array of towercos including listed Telesites and American Tower as well as independent developers such as Mexico Tower Partners, Torrecom, NMS and IIMT. There are 20+ towercos currently operating in the country, mostly focused on build to suit (BTS). Many of the newcomers were attracted by the entrance of AT&T and its bold investment plans .

AT&T has set a goal to become the number one operator within the next ten years which would mean surpassing Telefónica and clawing back the dominant market leadership position of América Móvil . To date, AT&T holds 8.1% market share behind Telefónica at 23.2% and América Móvil at a staggering 68%. AT&T aims at covering 75mn people in Mexico by the end of 2016 and as many as 100mn by the end of 2018. To do so, it has announced investments up to US$3bn which have triggered the entrance of several new BTS firms into the country while raising the expectations of those already active in Mexico.

So far, the volume of tower build business in Mexico has been underwhelming, and the tower market is being challenged by the devaluation of the Pesos as well as a declining price of tenancy lease rates. While most Telcel new build is being funnelled through Telesites, which added over 3,000 towers in the last five quarters, the market leading MNO had historically kept most of it’s network rollout in-house, so little has changed. However, local stakeholders are questioning the value of the existing opportunities in the market against the sustainability of this tough battle for prices and business.

In light of AT&T’s repeated bullish announcements, TowerXchange remains optimistic with regards to the future of the Mexican telecom tower market, although much will depend on the criteria that AT&T will use to select its BTS partners.

In the meantime, questions remain with regards to the future of Telefónica in the country and the impact of giant Telesites and its 13,000+ portfolio on the co-location market.

Just like in Mexico, we’ve witnessed several towercos entering Colombia over the past year, but so far the market has failed to deliver the anticipated build opportunities especially since the much awaited 700MHz spectrum auction has been delayed several times and is preventing carriers to make concrete capex deployment plans. While the volume of BTS activities hasn’t met expectations, further threats to independent developers could be posed by Telxius and Telesites if they decide to enter the market. And once again, the market is being further challenged by the downward trend of tenancy rates and by other disruptive practices including a request for towercos to cover 50% of land rent.

Drawing a comparison with Colombia, Peru seems a much healthier market and one where hopefully the recently held 700MHz auction will prompt considerable investments to build capacity and extend coverage. The Peruvian tower market has been growing at a slower pace compared to Colombia (and neighbouring Brazil) and has attracted a lower number of towercos. However, strong firms such as American Tower, Torres Unidas, Torres Andinas, NMS and Innovattel are present in the country. Additionally, Peru is one of the very few CALA markets that has witnessed an increase in tenancy rates over the past couple of years in spite of the currency devaluation. This all contributes to TowerXchange’s evaluation of the local market being quite positive!

With its 55,000 towers, Brazil has always been the crown jewel of the CALA tower industry but is now facing one of its toughest phases ever as a result of the combined forex crisis, political uncertainty, financial market instability as well as the bankruptcy of Oi and the reduced capex of other carriers.

While the Brazilian tower industry is now at a standstill, with very little happening both in terms of SLB (due to scarcity) and BTS (due to reduced spending), TowerXchange believes that there are plenty of opportunities ahead for towercos able to face these tough times and gear up for what’s next.

Brazil needs as many as 100,000 new towers by 2020 to satisfy the need of the forecast 300mn subscribers that will then require coverage. And it’s obvious that this level of growth can only be achieved thanks to the combined - and well coordinated - effort of high quality towercos and creditworthy carriers!

The trend of consolidation among towercos is likely to take root in Brazil where various BTS firms have been created on the premise of a successful acquisition by a larger entity after a five to seven year lifecycle. The slowdown of activities in the telecom industry has possibly delayed exits, but TowerXchange remains convinced that this is on the cards for various local towercos in the medium term.

The crucial question relates to valuation, and to whether buyers are ready to meet the expectations of the sellers. When it comes to valuation, macro factors such as the forex crisis are just part of a more complex model. In fact, as previously mentioned, the key element that will determine the sellability of a towerco is its compliance to the rules of the game. And in a local market currently affected by a slower pace of business, the temptation of coming to terms with lower quality standards or prices will have an impact on the future valuation of a business.

While CALA’s more mature markets face challenging phase, Argentina has been witnessing many positive shifts in just over a year and is now positioned to host the next CALA towers gold rush. With virtually every towerco now looking at the political, industrial and economic changes being implemented by the new Argentinian government, TowerXchange believes it’s only a matter of time before foreign investments and companies start flooding into the country.

BTS firms have an easier entry into the country since the need for coverage and capacity are such that carriers are starting to take advantage of third parties in their network deployment projects. On the other hand, there is still a way to go for any SLB to take place in Argentina, mostly in light of its burdensome tax regime. There is still a variety of limitations such as the absence of indexation which are particularly crucial for listed entities but Argentina presents very interesting opportunities for towercos willing to be first movers.

Conclusions

Since the entrance of independent towercos in the CALA market, almost 30,000 towers have changed hands from carriers to towercos for a combined US$3.5bn. While the excitement of those SLB days is now dying down, the industry needs to gear up for the next phase of consolidation.

As the industry matures, an enhanced level of discipline and business acumen is needed especially since carriers are becoming smarter and more careful in their capex strategy.

TowerXchange remains positive with regards to the region’s growth potential, which couldn’t be fulfilled without the contribution of independent towercos and their investment and know-how. With 4G penetration at 11% in Brazil, 7% in Mexico, 8% in Colombia and just 4% in Peru, capacity remains a crucial issue across the region and tens of thousands of new towers are needed to satisfy data needs. And while we witness these markets maturing, we keep an eye on new frontiers such as Argentina that could open up in the near future.

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The fourth edition of the TowerXchange Meetup Americas is taking place 7-8 June 2017 in Boca Raton, Florida and further information can be found here.

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