Every year over a dozen of the leading stakeholders in the Brazilian tower market convene for their annual roundtable debate at the TowerXchange Meetup Americas. This year’s candid diagnosis acknowledged 2015-16 as slow years for growth, inhibited by uncertainty surrounding the bankruptcy of Oi and an irrational BTS market, while revealing continued optimism about the long term prospects of Brazil closing its growing infrastructure gap.
Moderated by Jose Varela, COO of Grupo TorreSur, the Brazil roundtable at the TowerXchange Meetup Americas 2017 facilitated an open discussion between senior representatives of the country’s leading towercos; American Tower, SBA Communications, Phoenix Tower do Brasil, Highline do Brasil and QMC Telecom. Also participating were a number of key suppliers to the country’s towercos, a leading equity analyst, and a couple of major investors seeking an investible platform in the country.
As usual, TowerXchange’s report on the roundtable is subject to the Chatham House rule, hence quotes are not attributed to specific individuals or companies.
Brazilian business climate context
Brazil has been in economic turmoil for the past two to three years, with the country lurching from one political crisis to the next.
“The last three years have been the worst three years for growth since we entered Brazil,” said one of the country’s longest established private towercos. “Yet all the towercos still feel great about the long term growth opportunities in the country.”
The prevailing view among roundtable participants was that 2017 was shaping up to be a better year for growth in the Brazilian tower market than 2016, with 2018 better again.
Bankrupt National carrier Oi remains the source of much uncertainty. The implications of their restructuring will be highly significant to the Brazilian tower industry as Oi is both anchor tenant on over ten thousand towers, and co-tenant on thousands more. However, all roundtable participants reported Oi was maintaining timely lease payments.
With four to five leading carriers in Brazil (depending on whether one includes Nextel), consolidation is inevitable but how that will influence the market remains unclear.
One thing that is certain is the continuing relevance of Brazil’s infrastructure gap.
As well as Grupo TorreSur with 6,500 towers, two U.S. publics have positions of scale in Brazil (American Tower had 18,803 and SBA 7,332 Brazilian towers at the time of writing). Both are building and buying more sites every year, both are leasing up healthily, and they remain committed to the market as, in their opinion, the fundamentally positive drivers outweigh short term instability.
“Demand is coming,” concluded one of the publics. “The scale and population of Brazil will support many years of growth – and upon arrival it is immediately evident that QoS is poor – it is evident that the market is underserved.”
Why towercos maintain a positive long term outlook
“While Brazilian towers may be a good investment over a 20 year horizon, insulated against economic turbulence by escalators, will Brazilian towers be a better or worse place to be within a three year horizon as lease rates continue to come under pressure from reduced carrier margins?” Asked one investor.
“We’ve seen anchor tenancies renewed from 16 years ago, even though they were high at the time,” said one towerco.
“Brazil is no different from any other markets – inflation may have exaggerated our employee, office and other costs, and in our case our lease rates weren’t always as high at the outset,” added another towerco. “But over time these contracts escalate, equipment is added, and the carriers will figure out how to make money from the rising middle class.”
“Towercos have faith that there is deferred network investment which has to come, and the recent slow years mean investment is only falling farther behind,” suggested a third towerco. “If Brazil doesn’t catch up in terms of the mobile network it’s going to suffer competitively.”
“With disposable income being slashed, will carriers have to rethink their cost base?” Challenged the investor.
“The last two years have been disastrous economically, yet we’re still building sites, and carriers will continue to invest,” responded one towerco.
“Ultimately the consolidation of carriers will shape Brazil; the Oi bankruptcy and restructuring. Even Nextel just got investment and may continue to be a factor in the long term,” added another towerco.
“Oi’s balance sheet is unsustainable. Once they get through restructuring, that will trigger reconstruction. Nobody knows what will happen, except that consolidation seems inevitable,” concluded a third towerco.
“And if the Brazilian economy recovers, what kind of upside could we see?” Asked an analyst.
“Brazil remains far behind the U.S. Whether it be in terms of subscribers per tower, coverage or QoS, it will take a long time to close the gap,” responded one towerco. “We see potential growth in co-location, and the coverage of our networks, even if the market consolidates to three strong operators.”
“I could see Brazil’s carriers doing 2-3x the co-location and build to suit (BTS) than they’re doing today for five straight years, and they’d still have plenty to do – but it won’t jump to that level,” added another towerco. “For example, Vivo’s network could use as much as double their current investment level. Subscribers are getting picky about QoS, and churn is a great motivator for network investment! And it’s great when we have someone leading marketing messaging with their network as a differentiator.”
“Is network sharing a possible factor?” Asked the analyst.
“Network sharing not on the horizon in Brazil,” was the definitive response.
Brazil tower count, Q217
Increasing discipline in BTS
Prior to 2015, new site build volumes in Brazil were strong, fuelled in part by a fiercely competitive, at times irrational, BTS market. In the subsequent two years, according to TowerXchange research, just 3,326 new sites were added to the portfolios of Brazilian towercos (Q115-Q117). Excluding the effect of towerco-on-towerco consolidation, we estimate that represents only around 1,000-1,500 new builds per year. According to roundtable participants, 90% of new cell sites in Brazil are being built by towercos, as opposed to by carriers.
At the 2016 Brazil roundtable concern was expressed that several private Brazilian towercos were behaving with poor discipline in terms of leasing pricing, volume discounting, and granting concessions to critical MLA terms. By 2017, after two slow years for BTS volumes, the land-grab that led to unnatural pricing proved unsustainable, leaving some smaller towercos that had deviated farthest from the established towerco ‘playbook’ stuck with portfolios of 50-100 sites of a quality insufficient to attract a buyer.
“The value is in the Tower Cash Flow (TCF) – if your initial spread over ground rent isn’t high enough, there’s not enough TCF, and sellers may not be able to attract an offer sufficient to recoup their initial capital outlay,” said one prospective consolidator.
“Brazil was a hot market for private equity,” added the CXO of another large Brazilian towerco. “There were not enough towers, so investors felt if they just backed a team, they thought they could make a lot of mistakes and still sell at 18x. That hasn’t proved to be the case.”
“Every couple of months I get an email from a new towerco with a handful of sites they’d like to sell,” said another prospective consolidator. “But we see our multiples come down during acquisition processes of most private towercos. When we dig in we see that contracts are terminable, capacity rights or RANsharing have been given away – and as a result, too often the buyer and seller cannot reach terms.”
“Even the small private towercos with decent sites and decent spreads are often struggling to get co-location,” added another prospective buyer.
However, Brazil also remains host to a number of long term, quality oriented private towercos who are more likely to be on a course to achieve a profitable sale. “We used to see 30 bidders for BTS contracts offering anything the carrier wanted, but bidders have become more sophisticated, and are holding firmer on pricing and terms,” said one of the consolidators.
“The Brazilian BTS market became irrational – price and quality was too low. But carriers are now narrowing to increasingly do business with a pool of proven BTS providers,” added another leading Brazilian towerco. “If we don’t like the terms on offer for BTS, we’re under no pressure to take the work. That said, the carriers have so much demand that there are some sites they simply must build even if they can’t get a discounted lease rates, so we’re still doing BTS for three of Brazil’s four big carriers at prices and under contractual terms we can live with.”
“There are a lot of private Brazilian towercos with decent scale, and there will be M&A eventually, but both we and they have the luxury of a long horizon,” added another of the market leaders.
“A lot of value has been lost in Brazilian towers. This is a long term business which requires a long term view and long term investors. Everyone wants to show growth in Brazil but greater discipline must be applied in future,” concluded another of the consolidators.
Ground leases and rooftops
A legacy of the accelerated rollout in Brazil, most ground leases remain a pass-through to the carriers. As the country’s carriers become increasingly aware of the opportunity to lower real estate costs, most of the Brazilian towercos have programmes to buyout ground leases, but the incentive to deploy capital in this manner can be limited in the absence of programmes to share benefits.
The rooftop tower market in Brazil is similarly limited primarily to sites where the towerco has exclusive rights to the rooftop, and can control the site and provide combined pricing with the ground lease.
