Brazil Tower Company keeps building until the market turns around

Despite tough times, Brazil Tower Company (BTC) remains one of the fastest growing independent developers in Brazil. BTC has overcome macro economic challenges, slowing carrier network investment and scarcity of local capital to raise US$40mn to fund continuing growth. Over the next year the company is targeting reaching a scale of 1,000 towers. TowerXchange spoke to CEO Dr Chahram Zolfaghari and Kyle Detwiler of Silver Swan Capital.

TowerXchange: Congratulations on completing Brazil Tower Company’s latest debt raise – what can you tell us about the deal?

Back in May 2016 we closed a US$40m transaction to provide growth capital to Brazil Tower Company (BTC) so that they could continue to construct towers and maintain credibility with MNOs.

TowerXchange: Can you tell us a little bit about the current equity stakeholders in BTC and how this injection alters – if it does – the equity ownership structure?

Through creative structuring, Silver Swan was able to develop a transaction structure which retained our existing shareholder structure with relatively minor changes.  Without going through the numbers, the company remains controlled by 1848 Capital and myself.

TowerXchange: What is the availability of local capital for towercos in Brazil?

Unless you visit Brazil, you won’t be able to appreciate the degree to which the country’s banking and political system is being tested from every angle. Capital markets are much tighter than they have been historically. Whether you’re talking about towers, restaurants or oil companies, capital has become much more expensive.

The situation is very similar to 2008 and 2009 when I first began investing in the country. We can find a number of good companies with constrained balance sheets, especially in a capital-consumptive sector like wireless towers.  But on the plus side, while we expect the cost of capital to remain high, we expect it to subside within a couple of years.

It is very difficult to raise capital in Brazil at the moment, so I have to commend Kyle on his achievement! At least one other well known towerco in Brazil has had major financial difficulties because it hasn’t been able to raise capital. As a consequence, the company had to return search rings and lay off people.

But I think it’s important to put the current situation into context. Before the Olympics happened, critics said that Brazil would never be able to make a success of it. Well, that has proved not to be case. The same is true of the Brazilian tower market. The country has over 200 million people. Those consumers still need cell phones and they are continuing to consume. Brazil certainly hasn’t dropped off the map because of the financial crisis.

It may be the case that people are waiting to see how the market develops. However, I will admit that it is extremely hard to find capital inside Brazil at the moment, so I am very fortunate to have secured Silver Swan’s investment. It was not an easy win!

TowerXchange: How will you spend the capital given the slowdown in build in Brazil? Tell us about BTC’s core organic growth and geographical footprint in Brazil – are you still focused on the North East?

We got some interesting feedback from the third annual TowerXchange Meetup Americas in Florida this year. It was suggested that the Brazilian market was slowing down. In fact, we have the opposite problem – we have such a big pipeline that we needed to raise additional funding.

At present, we have about 750 towers and are aiming to reach the 1,000 tower milestone. Initially, we had to push back on this target because of a lack of funding, but we are now fully funded again and are confident of reaching that milestone within a year.

When we first started operating we focused our attention on the North East of Brazil. If you look at the map on our website, you’ll notice that 80% of our sites are still in the North East, but we no longer have any geographical restrictions. That’s because we are focusing on numbers way in excess of our original targets. We initially started with just 10 sites, then we worked to a goal of 100, then 200 and 500, and now we have gone past the 700 mark.

Of course, carriers in North East Brazil naturally talk to BTC, but we have been accepting search rings anywhere in Brazil for the past year and will continue to do so.

The irony is that when we started no one else was interested in the North East of Brazil, but now everyone is interested in getting a piece of the action. The market has definitely become much more competitive!

TowerXchange: How has BTC managed to ride out the adverse economy in Brazil and the bankruptcy of Oi?

BTC never accepted search rings from Oi – we have no exposure in terms of BTS.

At present, we plan to develop 250 sites over the next 12 months.

In terms of the investment picture in Brazil, carriers have already started cutting back. To put things into perspective, building 250 sites in 12 months is still quite a demanding exercise, but in good years we have built over 400. Contrary to reports you may have read, we never had any designs to target 1,000 sites a year.

By November, when search rings are released for 2017, we anticipate a pipeline in excess of the number I’m talking about. Of course, the pipeline doesn’t necessary translate into the number of sites built, so we expect the pipeline to be in excess of 300 sites by November.

In the US, there is essentially one cell site for every person.  In Brazil, you have 2.5 people for every cell site – this speaks to the significant disconnect in Brazil’s wireless infrastructure. There is still the same number of towercos in Brazil as there are in South Florida; even Brazil’s neighbour Colombia may have more competition for rings than in Brazil.

We believe that the Brazilian tower market has a positive future. One of our role models is Warren Buffet. He famously invested in American Express during the Salad Oil Scandal. Despite the headlines in the newspapers, back in Omaha, Nebraska, Buffet could see that people were still using their American Express cards as normal despite the uproar.

We look at BTC in the same way. People are going to continue to use phones despite the downturn, and carriers are going to continue to build. Just look at Oi. Even though the company has gone bankrupt, people are still running their networks. We have seen this play out in the US before, and believe Oi’s situation underscores the value of mission-critical infrastructure.

I see a golden opportunity for BTC to grow while others are distracted and nervous.

The Oi bankruptcy has presented an opportunity for us. For the past two to three years Oi was essentially bankrupt in all but name. We had to wait and see what was going to happen because we didn’t want to start building for a company that was going to wind up bankrupt. Finally, the situation got clarified. Now we know that if the company is bought we can start working with the new owners. Oi hasn’t invested in its network for many years, so the new owners will have to invest massively to catch up. They’ll have to build new sites or upgrade their technology.

Alternatively, they will have to dismantle Oi and sell it to existing carriers that are interested in absorbing Oi’s assets. If Oi gets dismantled it won’t change the situation for BTC. Other towercos have much more exposure to Oi.

TowerXchange: Have you seen competitive pressure on lease rates in Brazil?

Historically, build to suit (BTS) companies like BTC have had master contracts with set prices that have not been modified, and we have not been asked to modify them.

In Brazil, each of the big groups have set processes for BTS. Each search ring is not individually priced, but the pricing is transparent to regional carriers.

How the BTS model works in countries like Colombia is a mystery to me! All I know is that lots of BTS companies in countries like Colombia are willing to do practically anything to get business. In Colombia, if someone is willing to lower their prices, they will get business.

We have not lowered our prices, nor has anyone asked us to do so. In fact, the number of BTS companies in Brazil is shrinking due to consolidation, so we would be surprised if a new entrant was aggressive on price.

TowerXchange: Has the devaluation of the Brazilian Real increased the cost of Brazilian towers and put pressure on quality?

The price of iron is based on US dollars, so you’d have assumed that the cost to build would have skyrocketed, but in actual fact this hasn’t happened.

While the price of the metallic structure has increased marginally, the price of labour has actually decreased. So in reality, the capital outlay for building a tower has remained essentially unchanged.

TowerXchange: You’ve hinted that BTC might sell some towers later this year – can you tell us anything about that?

We were thinking about selling part of our portfolio, doubling our money and using the profits to build more sites, but now we have managed to reduce that sale to a much smaller number. It’s less of a priority now that we have access to capital, so it’s really a question of timing. Right now, people are trying to sell to get out, so it’s not a good time to sell. It’s better to hold on and mature the portfolio.

We will probably close a small sale later this year, but only because of a contractual commitment.

TowerXchange: What is your vision for the next two years?

Silver Swan would be thrilled if Chahram and his team continue to do what they’ve been doing. We’re patient, long term investors. If Brazil stays the way that it is, we’re prepared to double our investment to support additional growth. However, we’re optimistic about the future – we expect Brazil to calm down over the next three years and for capital to return to the country.

Only two of the three big towercos are in Latin America. Getting to a four digit tower count is the minimum scale for a company like Crown Castle to come down to Brazil. Should that happen, it would be great for the mid-market guys, but Crown would want to come in at a reasonable scale.

Latin America remains one of the easiest places to achieve growth despite the forex volatility, and we expect it to continue to have more growth than the US domestic market.

In short, we’re bullish on Latin American towers over the long term.

There are some big players in Europe who could also be interested in Latin America.

I agree with Kyle; we’ll keep on growing and will develop a portfolio of scale to attract a prospective new entrant into Brazil.

I believe that the market will transform itself into a sellers’ market in a couple of years, so it would be a mistake for us to sell in the meantime. We just want to continue to keep building until the market turns around. When market conditions are favourable we’ll sell, but we’re not in a condition where we have to sell right now. That’s why we’re going to stand our ground, wait for a good offer, or make a move when the market turns.

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With over 19 years of experience in wireless network rollouts and consulting in the telecom industry, Dr. Zolfaghari has a long track record of executive, operational, and business development success. Prior to joining BTC, Dr. Zolfaghari was President for Latin America division of Wireless Facilities (WFI), a provider of turn-key solutions for wireless carriers in the US and Brazil.

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Mr. Detwiler earned his spurs in private equity at KKR and The Blackstone Group – which played an instrumental role in incubating a couple of tower businesses. Mr. Detwiler left Blackstone in 2015 and co-founded Silver Swan Capital, a private equity firm specialising in investing in niche and underfollowed assets. The principals of Silver Swan Capital have invested approximately $750m in telecom firms.

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