AMT, SBA and GTS: CALA tower market still attractive and growing

The opening panel of the fourth TowerXchange Meetup Americas offered a strategic overview of the dynamics of the Central and South American tower market thanks to insights from Olivier Puech, CEO - LatAm at American Tower, Jim Eisenstein, Chairman and CEO of Grupo TorreSur and Kurt Bagwell, President - International at SBA Communications. Here is a summary of findings from the executive panel moderated by TowerXchange’s long standing contributor Enda Hardiman, Managing Partner at Hardiman Telecommunications.

The panel started with an overview of the pros and cons of doing business in the region and noted how CALA’s macroeconomics as well as its general political conditions are often challenging and unpredictable. Towercos need to be aware of the high pressure on carriers which are dealing with ARPUs around US$10, as opposed to the U.S. average of US$45. In spite of these challenges, panelists highlighted how the key drivers for the tower industry to expand into CALA are all present, with mobile and data usage still booming and regional networks overloaded compared to the United States.

There are 20+ countries in CALA and each market is at different stages of network deployment with some moving into 4G spectrum auctions and therefore requiring high capex investments by the carriers, and others adjusting to lower levels of spending following years of network deployment. And while 4G is becoming a reality across the region, there are still markets shifting from 2G to 3G and it will take more time for next generation networks to be deployed as regional carriers aren’t as wealthy as in the U.S.

In spite of the challenges of doing business in CALA, panelists agreed that the region still presents considerable growth opportunities. However, they also commented that discipline is needed when assessing new markets and that the criteria taken into consideration must include stable economics and political environment - which is particularly crucial for listed towercos and other entities that seek to make long term commitments to markets. A healthy level of competition in the telecom market as well as a positive regulatory environment were also mentioned as priorities. And when it comes to the carriers landscape, markets with three players tend to be preferred, but exceptions like Nicaragua, essentially a two-player market, could work too.

Another critical consideration is the potential of the market to deliver scale to towercos. Large entities like American Tower and SBA prefer to enter a new market via an acquisition in order to start with a sizable base. However, SBA’s Bagwell noted that there are always exceptions, for example SBA entered Costa Rica via pure build-to-suit.

CALA is home to 30+ towercos and the assumption has always been that large entities like SBA and American Tower (but also Phoenix Tower International and Digital Bridge’s ATP and MTP) would end up acquiring most of the independent developers and drive consolidation.

Touching upon the topic, panelists agreed that the high quantity of towercos in the region suggest that we could see some M&A in the future. The entry of private equity-backed towercos was made possible in CALA due to its proximity with the United States and the subsequent interest of U.S. capital in this adjacent and yet underserved region. And some LatAm markets more than others - namely Mexico, Colombia and Brazil - were able to attract 10+ towercos due to their size, carriers landscape and growth prospects.

While the immaturity of CALA markets has played a great role in enabling the entrance of several towercos in the region, the real size of each market is likely to define whether they will ultimately host a towerco ‘natural monopoly’ or not. So while Brazil with its size and needs can welcome more than one towercos in the long run, smaller markets might eventually see towercos consolidating and one or two entities taking the lead.

On the other hand, panelists discussed the potential for consolidation among MNOs which could well be on the cards in Brazil, but not before Oi’s bankruptcy is solved. Oi could end up being restructured or sold in its entirety, or broken up into portions, and any of these options could lead to what was defined a virtuous circle thanks to which MNOs enjoy a less competitive environment which enables them to increase their network capex, resulting in more sites being deployed and more capacity for data consumption and, eventually, in more revenue in the hands of carriers.

...And more sites being deployed is just what CALA countries need! In fact, most regional markets need several thousand sites each to achieve optimal levels of coverage. And the number of subscribers per site is expected to come down overtime from 3-4,000+ to 1,500-2,000 but low ARPUs are slowing the process. What might help is the expanding middle class across the region which could enable the change. And some carriers are already serving those pockets of relatively wealthy population by increasing capacity in highly congested areas via short macro-towers, rooftops and other infill solutions.

Cell site densification is made easier in markets with a favourable regulatory environment and panelists noted how certain key CALA markets aren’t there yet in their efforts to define a positive legal, regulatory and permitting regime for the telecom sector. This is the case in Chile for example, whose stringent new build requirements and zoning rules have inhibited the entrance of towercos and slowed build-to-suit plans. Or Colombia, whose 700MHz spectrum auction hasn’t been completed yet after two years of announcements and preparation.

Permitting for new sites is particularly challenging in urban areas. And it’s specifically to serve urban areas that carriers are increasingly demanding new site typologies to towercos. Shorter and lighter structures are being requested in high quantities and towercos need to safeguard their returns while meeting the demand for new solutions such as small cells, short macros and rooftops.

In spite of the changes and innovation in site typology and the challenges of permitting and deploying greenfield sites, organic growth is the number one growth driver in today’s telecom infrastructure industry.

As AMT’s Puech noted, American Tower is present in eight markets with an overall CALA portfolio of over 36,000 sites and is now looking at scaling up in those markets first while keeping an eye on new opportunities for inorganic growth such as the recent acquisition in Paraguay.

Grupo TorreSur’s Eisenstein agreed that organic growth from existing tenants is their main source of revenue growth and the company is now focused on overlays and amendments to its portfolio of 6,500 sites. GTS is also focused on increasing its co-locations and is carefully adding selected new sites via BTS only when there’s a quick opportunity to add a second tenant.

SBA’s Bagwell drew the attention on the importance of working on the ground leases under the towers. In fact, while in the United States the ground lease is sometimes included, it is often a pass-through in CALA. SBA has a dedicated team that works on extending or buying out ground leases at accretive multiples.

After a high level overview of the governing dynamics of the CALA tower industry as a whole, panelists shifted to comment on selected markets including Mexico, Brazil and Central America.

There are high expectations with regards to the impact of the ‘Red Compartida’ 700MHz shared network in terms of co-locations, although there are less indicators of future build-to-suit needs. The government has taken a bold stance by incentivising competition and addressing preponderant players in Mexico via both the opening of the 700MHz spectrum and the entrance of AT&T. As a result Mexico’s tower companies have renewed hopes for improved growth and opportunities.

Improvements in the overall economy as well as in various industrial sectors are more perceived than real. Citizens do feel better about the state of the economy in the country but the tangled political situation isn’t really getting solved. However, Brazil achieved GDP growth for the first quarter since Q1 2015, inflation is coming down and industrial production is going up. These are the early stages of what everyone hopes could be a firm recovery but there are still many uncertainties and high levels of unemployment. From an investment standpoint, FX risk remains high and this is particularly true for private equity investors with US dollar-denominated investments in the country as well as towercos with debt in US dollars. Overall, Brazil is in a better place to do business than a year ago but there’s still a long way to go.

With regards to Oi, it was noted that the Brazilian carrier - now dealing with its 2016 bankruptcy - has been fulfilling its financial obligations towards towercos in a timely manner over the past year. Oi is reportedly investing in co-locations as well as amendments which is definitely good news for towercos active in Brazil! And while the final solution for Oi isn’t clear yet and the whole situation remains complicated, from a towerco standpoint it hasn’t had all the expected negative effects.

According to SBA, Central America as a pack is an exciting place where to do business. The towerco has added over 2,500 sites to its regional portfolio with more than half of it coming from build-to-suit programme. With solid economics, a capable local workforce, US dollar-denominated contracts and consistent growth, Central America has delivered fabulous opportunities over the past few years. And remains a great source of growth for active towercos!

In conclusion, panelists noted that the wireless industry has proven very resilient during challenging times and hasn’t been as affected as other sectors by the global economic slowdown. While key CALA countries such as Mexico, Brazil, Colombia, Peru, Chile and Argentina all progress towards economic recovery, data consumption is expected to keep growing and this can only mean more business opportunities opening up for smart infrastructure companies able to select the right markets and partners, while being disciplined about their models and return.