A reality check on CALA towers with SBA Communications

SBA Communications has been an acquisitive force in Central and Latin America since 2010 and has sealed several landmark deals with both carriers and towercos. In this interview with TowerXchange, David Porte, Vice President, International within the company, shares with us insights into the recent deals SBA closed with Torres Andinas, Highline do Brasil and others as well as his thoughts on the consolidation trends hitting CALA and on the guiding principles of the tower industry.

TowerXchange: What can you tell us about the acquisitions SBA Communications recently sealed in Central and South America?

Highline do Brasil, Tigo El Salvador and Torres Andinas are the major deals SBA Communications signed over the past few months.

Highline and Torres Andinas are both private deals, in line with our strategy of direct negotiations that ensure the best outcome for both the seller and the buyer. In fact, we’ve been negotiating quite a few private deals to ensure fair returns and conditions for both parties, without the involvement of banks and brokers.

With regards to Highline, we’ve added approximately 900 towers to our Brazilian portfolio as well as a build-to-suit pipeline. In fact, the Highline portfolio included a set of solid build-to-suit contracts with positive terms that were negotiated before a wave of mediocre contracts were signed by numerous towercos across the region.

The acquisition of Torres Andinas’ sites represents a step forward in our footprint across Colombia and Peru. We’ve known the management of the towerco for a few years and we were glad to pick their portfolio up when they were ready to exit the region.

On the other hand, the announced deal with Tigo El Salvador sites did follow a bidding process. We’ve been strong in El Salvador since 2010 and we were glad to seal the deal with very solid T&Cs for both parties.

TowerXchange: Can you give us some details regarding the key differences between private and public deals?

Private deals offer more flexibility to the seller and don’t force parties to stick to a certain timeframe, as it happens when deals are carried out by banks. In fact, in public processes the seller is constrained to a given deadline to sell while in private deals, the sale can be put on hold if needed.

Private deals are beneficial, both for those looking at quick sales as well as for those who don’t want to rush, offering a higher degree of control. The real key is that bid processes involve complex negotiations and often result in suboptimal T&Cs for the seller. Whereas in private negotiations, both parties can sit down and discuss their terms without any pressure to reach a deal.

TowerXchange: What is driving independent towercos to start divesting their portfolios? Is it just a function of their investment lifecycle coming to an end?

I would say that there are three key drivers that are pushing independent developers to divest their portfolios.

On one hand, some of them are indeed getting to the natural end of their investment cycle and looking at exiting, as they originally planned. This has happened in a number of cases such as Torres Unidas, Highline do Brasil and Torres Andinas over the past few months. In some cases the investors had to delay their exits for one or two years later than planned due to slower growth and FX reasons.

A second aspect to keep in mind is that towercos could decide to wait longer to divest their assets but they aren’t going to double the money they’ll make by selling in the first five years. There is a 3 to 5-year sweet spot for growth in the industry and although the seller can hold on to its assets for longer, the growth levels won’t be the same on a percentage basis.

Another factor that is driving exits is that there isn’t much build-to-suit (BTS) activity across CALA anymore. In fact, BTS volume is slowing across the region, especially for companies that are not willing to agree to poor contract terms and conditions. So those who want to play by the books and have already built a good portfolio of sites are ready to exit in order to maximise their returns.

To give you an example, we’ve recently looked at a portfolio for sale during a private process but the MLAs were the worst we’ve ever seen and simply walked away from the deal.

TowerXchange: We’ve been advocating the importance of playing by the books for years now, how come some developers still build towers that acquisitive companies won’t buy?

Some of those entities are backed by investors who aren’t educated enough on the industry principles to understand what is being agreed when signing MLAs and how those terms will lower their chances of making a good exit. While some blame the management teams, the investors need to be educated and engaged. Management incentives need to be aligned with value creation, not simply increasing tower count.

We still have some time to wait before people really learn their lessons and investors wise up. The companies with bad contracts are beginning to mature and investors will need to exit. That’s when they will be disappointed and hopefully the whole investment industry will absorb those lessons. It’s started already where we have seen a few tower portfolios across CALA which quietly went unsold due to bad underlying contracts, low quality towers and lack of permits.

TowerXchange: We’ve talked about it many times but it’s worth stressing it again: what are the key factors that make a portfolio enticing for an acquisitive towerco?

Good MLAs with customers are key; while there are plenty of good rules that towercos should follow during negotiations, such as escalators that keep up with underlying currency inflation and FX, there are a few bad terms that will jeopardise deals.

I am referring to clauses allowing free RANsharing, or the ability to cancel leases without notice. Towercos commit to a US$120K (or more) investment to build a tower for a tenant and shouldn’t grant them the right to notify and leave in 30 days. Contracts have to last until the end of the lease and there is no negotiation around that.

On the other hand, ground lease contracts should always allow sublease as well as cancellation upon notice and shouldn’t include odd escalators.

One might argue that towercos demand terms that are the opposite of what they request to their landlords. But the difference is that towercos commit to a considerable investment upon signing those MLAs while land owners don’t invest anything. And this is a significant element to keep in mind!

Another key element is the underlying paperwork and permits. If a permit is required, towercos should get it, even if it’s after building the tower! In fact, any sort of approval, permit, paperwork will be checked and considered when assessing the value of a portfolio.

Towercos should only build good towers. I am referring to structurally sound towers, able to bear three or more tenants and located in good areas. And this is particularly crucial for those towercos whose investors are pressuring them to cut costs and who might give in and build bad towers as a quick solution.

Lastly, but not least important is the towers shouldn’t be built within the same RF-range of another tower. All of us consolidators price towers off of their growth potential. If you build a site that has no growth potential because it is close to another site, you can’t expect to even recoup your money from that site.

I know that all of the above seems quite straightforward but there are quite a few towers in CALA that no one is going to buy, as a function of those rules having been bypassed.

TowerXchange: If you think about the beginning of SBA’s activities in the CALA region, do you think the overall expectations have been met so far? And what could have gone differently?

Our overall expectations with regards to the region and our growth here have been exceeded. We are quite proud of the job we’ve done and although we haven’t done any splashy deals or entered any frontier markets, we’ve managed to grow in line with our disciplined approach.

If you ask me if things could have gone differently, the answer is sure! But I don’t think we’ve ever made a mistake at the time we’ve decided not to enter a market or not to seal a deal. We might have decided not to buy a portfolio in a given country and then found that that particular market was growing faster than expected or delivering more returns than originally forecast. But we didn’t go ahead in light of the set of information we had at the time and in retrospect we couldn’t guess what the future might hold. I wouldn’t call it luck but there is a certain degree of uncertainty when you make a business decision, especially in new, relatively emerging markets. SBA is disciplined and will remain that way. 

TowerXchange: Do you foresee new private equity-backed towercos entering the market now that some “old ones” are looking at exiting? Are there still gaps in the market?

Since the volume of BTS isn’t likely to grow and there may only be small gaps in the market, there isn’t much room for new entrants to reach scale. So no, I don’t think that many new players will enter CALA.

Torres Andinas and Torres Unidas were originally created because none of the larger towercos were interested in doing business in those particular markets back then. Now they’ve been acquired and their buyers (in this case, SBA Communications and Andean Tower Partners) will take on the responsibility of building sites in those countries. Towercos that are looking for an exit generally leave stronger and more stable tower markets behind.

TowerXchange: With Brazil and Mexico effectively almost “sold out”, acquisitive towercos are eyeing carriers portfolios in less obvious locations such as El Salvador, Paraguay and beyond. Why do these markets make sense for towercos?

If a market allows a towerco to reach scale and get good returns, then it makes sense to enter it. Markets like El Salvador still present good growth patterns and chances for us to put capital to work and we will always seize this type of opportunity across the region.

TowerXchange: Do you foresee Argentinian carriers divesting some assets over the course of the next twelve months?

In reality, the only portfolio that could be put up for sale in Argentina is Telecom Personal’s. In fact, Telefónica is already transferring sites to Telxius and Claro Argentina is likely to stick to the group’s strategy not to sell its towers (and if anything, divesting them to Telesites).

That said, the major hurdle to any divestment is still the tax regime in Argentina. No one can afford to sell or buy towers in the country and take on 30% of the purchase price in taxes on fully depreciated tower assets! While the government is looking at addressing this as well as other crucial issues like the out-of-control municipal inspection fees, towercos cannot reach scale in Argentina by buying BTS firms because none of them have considerable portfolios yet.

TowerXchange: Do you agree that 2018 is shaping up to be a year of consolidation among CALA towercos, and if so, how would you summarise your message to tower owners who are thinking about selling?

I would say that 2018 isn’t going to be bigger than 2017 in terms of deals. Many big players exited the market and there are a few remaining portfolios that could be put up for sale. But questions remain as to whether they are good portfolios!

All I can say to tower owners is that we offer a winning solution for anyone looking at selling, as long as they have good towers. SBA is happy to sit down in private negotiations and partner to achieve desired results for all parties.