During the fourth TowerXchange Meetup Americas, Dagan Kasavana, CEO of Phoenix Tower International (PTI), David Porte, Vice President - International at SBA Communications (SBA) and Diego Mahecha, CFO of Andean Tower Partners (ATP) took centre stage for a panel discussion on the drivers of inorganic growth and the future of acquisitive towercos across CALA.
Jon Atkin, Managing Director at RBC Capital Markets moderated the session and started by asking panelists for an introduction of their respective companies and to discuss where CALA towercos are looking for growth nowadays.
Porte introduced SBA as a “classic tower company that owns, buys and operates towers” and with regards to the growth expectations in CALA he stressed that if growth is defined by new MNO portfolios coming to market in CALA, then we are likely to experience a slow few years ahead. In fact, little is left to acquire in the region with América Móvil not selling its sites and, if anything, transferring assets to Telesites and Telefónica having divested all of its sellable sites and now either transferring the remainder to Telxius or retaining them. Some carriers, such as Entel and to a certain extent Tigo, still own their tower portfolios and could divest them in the future but the majority of large portfolios have all been sold in the past.
Mahecha was next and defined ATP as a “tower-centric, privately owned entity”, backed by various private equity firms and strategic partner Interconexión Eléctrica S.A (ISA), a Colombian high-voltage infrastructure company with over 17,000 assets that ATP can leverage across the Andean region.
Talking about the growth potential in the Andean region, Mahecha noted that Tigo and Avantel have divested their sites in Colombia while Claro and Telefónica have retained them. In Peru, Entel, Claro and Bitel own their tower portfolios while Telefónica took a diversified approach and divested some assets to independent towercos, transferred a portion of its portfolio to Telxius, while also retaining some towers.
Kasavana recalled how PTI’s initial business plan in 2013 was to be a “multinational start-up towerco”. Back in those days PTI’s management felt that the way to compete against larger and established entities like SBA and American Tower would be to have a broad and flexible mandate able to serve carriers across multiple markets.
Since 2013 PTI has proven itself as a strong local partner able to compete with public entities across CALA and has been looking for growth opportunities across various regional markets such as Peru, Colombia, Panama and the Dominican Republic among others, and not shying away from more challenging ones like El Salvador.
How do investors and shareholders measure growth and risks?
Investors in the tower industry are generally well educated about the business model and understand its fundamentals. If returns in terms of cash-flow are key, the value that cash-flow creates is equally if not more important than returns and transactions should be structured to maximise the value of the assets. And this is why towercos need to focus on scaling their portfolios carefully, not building or acquiring overlapping sites and always offering quality products.
Publicly traded companies, whose growth is often predictable and safe, tend to focus on having the highest quality growth AFFO per share. “We are a destination towerco” in Porte’s words, which means that most independent towercos build portfolios with the final aim to sell to one of the larger entities and they can afford to take on risks that listed companies cannot afford to. “They drive out the risk of certain deals and portfolios” Porte added “and eventually we are going to pay a certain amount for a properly de-risked portfolio.”
Risks can also come in the form of joint ventures with carriers. This type of agreement might be not acceptable for listed towercos which need to consolidate results, indeed it should be accepted under strict conditions even by private towercos. In fact, most towercos still prefer to retain full control over their assets and will bend towards a joint venture only if deemed highly strategic. This is particularly true for private towercos looking for an exit, who need to make sure they don’t get stuck in deals that don’t make sense to a buyer.
Private equity investors often focus on Internal Rate of Return (IRR) and Multiple On Invested Capital (MOIC) and typically utilise 5-7 year models to calculate them. Their return thresholds are often quite aggressive and don’t necessarily take into consideration the higher level of risk taken on by towercos in CALA versus in the U.S.
On the risk side, the fluctuation of currency has to be dealt with a great degree of flexibility in determining the timeframe for an exit. In fact, while PE-backed towercos might need to work with a 5-7 year exit horizon, the forex challenges in Brazil, the Andean region and Mexico might compel them to adjust their exit horizons to maximise their chances of satisfactory multiples.
Forex is a crucial matter in an industry that tends to expand beyond national borders and, while the ideal scenario would always be to invest in stable currency or US Dollar markets, towercos are often forced to adopt escalators tied to inflation or other financial solutions to secure stable growth in less predictable markets. And even so, sometimes the value created through lease-up and escalators remains at risk of being wiped out by forex.
Investing in markets that do not trade in US Dollars requires a deep degree of financial acumen but also a fundamental respect of the basic notion that US Dollars will (almost) always be worth more than the local currency. And this is particularly relevant when towercos seek an exit at times of local currency depreciation and have to return capital in US Dollars.
Looking at this dynamic from the perspective of an acquisitive (often listed) towerco, it’s key to remember than listed towercos always have a choice between acquiring third-party assets or buying their own stocks back. And if they opt for acquiring an existing portfolio, the decision will be based on a detailed and disciplined approach to modelling future returns from the deal.
…With all constitutes a gentle reminder to ensure the math is right when making investments in currencies other than US Dollars!
A look at the state of play in various CALA markets
Panellists discussed some of the specific dynamics of CALA markets and noted how the gruelling task of providing coverage to rural Brazil has forced RANsharing to expand more than in other CALA countries. From their side, towercos can refuse to allow carriers to enter RANsharing agreements or can price it in their contracts.
In the United States and Central America, RANsharing hasn’t been much of a trend and these regions are definitely benefitting from healthier lease up activities. And on the other hand, one market where clauses related to RANsharing have been notoriously lax is Colombia.
Panellists noted how before the opening of the Colombian market, the CALA tower industry was fairly disciplined. ‘Destination towercos’ expected smaller towercos to come to market with quality portfolios, not having signed bad MLAs and not having granted huge discounts to their tenants. But something changed when BTS towercos entered Colombia.
Colombian carriers - maybe more aware of the dynamics of the industry following the opening of other markets like Brazil and Mexico - were quite aggressive in pushing some BTS towercos to accept commercial terms that compromised the quality and integrity of their portfolio. The panel mentioned clauses related to RANsharing, lease discounts, transferability as well as the possibility to cancel the contract altogether that put at risk the returns (and exit) of Colombian BTS firms, and which may leave investors looking for a profitable exit disappointed.
RANsharing doesn’t have to be as value-destructive for towercos as many fear, and it is often a necessity in rural areas, so rather than forbid RANsharing, towercos should impose contractual restrictions that limit the impact on their business. Mahecha stressed that negative decisions and bad clauses do have an immediate effect on the value of a tower and that the market is naturally inclined to go through cleansing phases which happened in Brazil too, where several small companies folded due to the uninvestible terms agreed in their MLAs.
The CALA tower market is split between those who understand the model and those who don’t. It’s a simple business but one that requires discipline and the ability to react to market conditions… Simple rules that not every towerco has always followed.
Wearing the CFO hat…
Discussing the cost of capital and the strategies of public and private towercos with regards to funding M&As, Porte noted that SBA doesn’t win deals due to the lower cost of capital but thanks to the diligent evaluation of the expected returns in 5, 10 and 15 years.
In PTI and ATP’s cases, both companies have European holdings which are used to repatriate cash to finance investments in other markets. Kasavana added that PTI often seals related-party loans, a complex financial structure that enables the towerco to move and utilise capital across multiple countries without taking new equity.
Panelists added that the IFRS accounting changes that will come into force in 2019 mean that while now carriers can divest their towers or enter BTS programmes off their balance sheet and absorb it through EBITDA, in the future every tower lease will go on the balance sheet as a liability. A change that is likely to impact how tower deals are structured.
As an example, a European towerco has already switched its model from real estate leases to service contracts which is something the participants in this panel did not advocate, especially since CALA markets protect towercos with solid real estate laws and, in Kasavana’s words “towercos are in the real estate business, not in the service sector.”
But are small cells and DAS services or products?
Questioned regarding the nature of small cells and DAS, Kasavana noted that PTI treats these solutions as real estate products and structures its contracts with carriers incorporating escalators and other clauses similar to a tower lease. According to ATP, as a real estate company, a towerco must react to market conditions and follow the trend of what carriers are demanding. The key is to structure the offering as an extension of the towerco business model.
On the other hand, Porte, who has been involved in the DAS space for several years, pointed out that while a DAS is typically worth less than a tower, it can still be a good investment. The key reason for the difference in multiples is that DAS presents lower barriers to entry while requiring more capital and anyone entering the DAS industry should model their returns accordingly.
Commenting on the growth expectations for the next two to three years, PTI is looking at small cells, IBS and DAS to complement its macro-tower offering while always assessing transactions of scale across CALA.
Having recently raised over US$200mn, ATP is focused on putting that capital to use and scaling up its business via both BTS and M&As across the Andean region. “We’ll be aggressive in a responsible manner” Mahecha stressed.
SBA will keep growing the cash-flow on the towers in its portfolio as well as assessing acquisitions if and when the portfolios for sale meet (or exceed) the expected return threshold. Porte added that “markets work better where there are only rational tower operations. SBA doesn’t mind being second or third as long as its portfolio yields high returns.”
In conclusion, while panelists all noted that the CALA tower industry is facing a delicate phase of adjustments that might push some companies out of the competition, they also remained bullish about their companies’ growth horizons. Much is left to be done in CALA both in terms of consolidation among towercos and carriers’ portfolios that could come to market. What remains to be seen is who will make it through these tough times and TowerXchange once again bets on those diligently following the rules while creatively driving growth.
