During the 5th annual TowerXchange Meetup Americas, top executives from across the region got on stage for an overview of some of the changes and evolutions faced by the CALA tower industry. IFC’s Eric Crabtree moderated the session and was joined on stage by Peter Bendall from Macquarie, Eric Ensor, formerly in charge of Torres Andinas and now President of Quiet Water Associates, ATP Torres Unidas’ Diego Mahecha and David Porte from SBA Communications.
A crucial year of elections across the Americas
Ten countries across the Americas will face or have faced elections in 2018 (see figure one for details). And in most countries those elections will have an impact on broadband policies for the years to come.
Panellists agreed that CALA is and will remain an exciting investment opportunity - with emphasis on Mexico, Brazil and the Andean region - despite the uncertainty caused by the political changes ahead.
With regards to Mexico, due to the very low levels of the Mexican peso, it was noted how any new U.S. investor eyeing opportunities in the country should seize them now.
Another aspect to take into consideration is that in many of the countries facing elections, there are not many centrist candidates that could win the rounds and many countries will find themselves with definitive left or right-wing winners.
One common aspect of most countries facing elections is that broadband and universal access are very much at the forefront of each political campaign, regardless of the country or party.
Broadband as a means to enhance social development is key and the political focus seems to be there, which might hint at possible future favourable regulatory reforms.
The three factors that are encouraging investments in CALA - one panellist noted - are the strong political focus paired with population dynamics (e.g. a growing middle class) as well as the continuing increasing levels of smartphone penetration.
Figure one: 2018, a year of elections across the Americas
Volatility and long-term perspectives
With regards to the volatility across CALA economies, the panel noted how there is a definitive gap between small towercos and larger entities when it comes to their ability to effectively manage forex.
Smaller towercos in fact should pay more attention to currency exposure and ensure they have the right skillset in place when managing it. It will be particularly crucial for these organisations to include forex into their valuation model especially since large buyers do apply a forex depreciation model to their math (which will then influence any portfolio valuation).
That said, the panel agreed that CALA long term investors are generally protected by forex volatility.
Despite the macroeconomic uncertainty, SBA Communications’ Porte talked about the firm’s confidence in the CALA region and its growth potential. In fact, after having scouted opportunities across the world, SBA recognised CALA as the most investible tower market in the world, second only to the United States.
Unlike Africa, CALA presents less of the complexities associated with power, and operators are tough but rational. And in spite of the elections and the insecurity they cause to some markets, the fact that these countries hold democratic elections at all is a positive sign to take into consideration.
The appetite for convergence
When discussing convergence and the appetite of investors to diversify their portfolios to include alternative asset classes such as data centres or fibre, it was highlighted how convergence is a trend that must be born out of demand and that many CALA markets do present the right conditions.
But while equity investors are more open to the idea of investing in converged digital companies (e.g. towercos offering FTTT or edge data centres), debt investors aren’t as easy to convince.
In fact, CALA tower companies are still involved in the process of educating local banks on the fundamentals of the tower business and tower cash flow. But the conversation between the two is still often irrational as local banks pose restrictive clauses to towercos’ financing requests (e.g. trusts to obtain debt financing), which means that banks still don’t grasp the full extent of the towerco business model and the quality of their credit.
One aspect to take into consideration when aggregating different businesses such as towers, fibre and data centres is that towers trade at higher multiples and are valued more than the other two. But the decision to add these industry segments to a tower business isn’t just about multiples, hence some tower companies across CALA are indeed becoming fully integrated digital businesses.
On that note, ATP’s Mahecha noted how the demand is crucial and must be related to rational, sensible business decisions. While laying fibre in Africa for example might not make sense these days, doing so across the Andean region could create considerable opportunities soon. And, in his own words, “the strategic question we need to ask ourselves is how we decide to adjust to the market and its needs.”
The evolution of regulatory frameworks across the region
On the regulatory side, panellists discussed how CALA differs from the U.S. with emphasis on the permitting challenges tower builders face in many countries. Overall, the regulatory environment in CALA has improved over the years with many markets and legal frameworks becoming more predictable and processes being simplified.
Being able to navigate the permitting framework is extremely important and panellists agreed that the trend among towercos is to try and secure all permits and legalise sites that lack them. And many governments are actively trying to improve their frameworks to - among other - enable and ease this process of legalisation.
The challenges posed by certain regulatory environments have a direct impact on the way operators decide to densify their networks. And a market like Chile for example has become a pioneer in alternate site typologies as a result of the difficulties posed by the Antenna Law.
Towercos agreed that they need to come together and create a single strategy and message to approach regulators and push forward their agenda. Advocating consistency in regulatory frameworks across the region is key. Towercos wonder how they can keep pushing for the right changes to take place while also evangelising to regulators (as well as to new towercos) on the importance of understanding and respecting the fundamentals of their business model.
Lastly, an interesting aspect that stands out across CALA is that towercos were hoping to replicate the U.S. history of “being unnoticed” for many years before turning into such substantial and important stakeholders that it becomes impossible to ignore at a regulatory level. But in CALA tower companies have generally attracted the attention of regulators from a much earlier stage than in the U.S.
Who buys CALA towers?
Talking about who buys what in CALA, the pattern so far has been of four entities competing to consolidate selected private tower portfolios, those buyers being American Tower, Digital Bridge, Phoenix Tower International (and its sister company Phoenix Tower do Brasil) and SBA Communications.
But now, some towercos that would historically scale and exit are looking at alternative ways of growing and re-capitalising their businesses. Some of them are considering IPOs which is definitely a long-term possibility but does pose significant challenges when it comes to the intrinsic volatility of emerging markets and the discount that their roots would cause to any valuation, especially if the U.S. is selected as the market where to perform an IPO.
Another possible buyer is represented by other industries’ infrastructure giants such as electricity companies, but previous examples such as the UK acquisition of Crown Castle towers by National Grid ended up with the latter divesting to Arqiva, which hints at the fact that these strategic buyers from other industries struggle to find long term value in retaining towers and “becoming or acting like a towerco.”
So for the time being, the so called “destination tier towercos” such as American Tower and SBA, those who will “never” sell their towers, are still the buyers of choice but they are now followed closely by a different - and relatively new - breed of towercos such as PTI, PTB and Digital Bridge.
Speaking about consolidation, Eric Ensor noted how Torres Andinas entered the market expecting to grow more than it actually did. But the company got to a point where it could sustain its structure without the need to build more (and without the need to accept irrational contractual terms that were common in Colombia just a few months ago).
But while Ensor candidly said that he would have enjoyed remaining in the market for a bit longer, Andinas’ investors decided to get the capital out and the firm sold its portfolio to SBA.
Bullish about CALA
Overall, the panel proved once again that CALA is a good investment and growth vehicle for both entrepreneurial and listed towercos, as well as for independent developers who stick to the rules of the game and seek for an exit at the right time.
While the macroeconomics of some countries, paired with political uncertainty and regulatory challenges, still represent a considerable challenges to growth, towercos recognise the potential for considerable future expansions in both maturing and new markets across the region.
Questions remain with regards to the opportunity for towercos to enter other infrastructure segments such as data centres and fibre. From our side, TowerXchange is keeping a close eye on the development of the model of innovative enterprises across CALA and will keep reporting on what seems to be a new trend that will break the boundaries of the pure towerco business model originally imported from the U.S. into CALA and shift to something different, more fluid and quite exciting.
