How to (successfully) grow in CALA towers

CALA is not an easy region to invest in. Some of its most attractive countries from a scale perspective are often affected by macroeconomic turbulence, political instability or high taxation, making it very challenging for tower companies and investors to find value. But CALA remains without a doubt an interesting and rewarding platform for those able to ride through tough times with discipline and business acumen. In this report, we explore some of the valuable insights from SBA Communication, Grupo TorreSur, Phoenix Tower do Brasil, ATP Torres Unidas’ regional representatives as well as investment experts from Cartesian Capital and the International Finance Corporation. 

At a prestigious panel session at the TowerXchange Meetup Americas 2018, Jim Eisenstein, President of Grupo TorreSur, opened by stressing that operating in emerging markets can be as challenging as it is rewarding. Towercos need to have the means and know-how to deal with the operational, financial and regulatory issues that may arise, but the returns can be highly satisfying. He went on to say that cash flow growth in tough territories can be tremendous, as high as “20% on an organic basis”. And while the day to day can be extremely complicated, Grupo TorreSur has been enjoying strong growth in terms of co-locations, amendment revenue and via the acquisition of ground leases.

Eisenstein is also the Chairman of the Board of African towerco Eaton Towers and thanks to that experience he has knowledge of the tricky reality of running a pan-African operation. In his own words “the energy component of a towerco operation in Africa is a critical issue and we managed to turn it into a profit centre, but we had to learn how to do it.”

When it comes to power, IFC’s Erica Noda added that while in Africa and Asia energy management is a big issue, that is not the case in CALA, where grid availability is good almost everywhere and towercos don’t deal with backup power. 

The absence of considerable power challenges in CALA has lowered the barriers of entry for towercos, which in turn creates a more competitive build-to-suit environment. This is one of the key reasons why the CALA tower industry has been moving towards consolidation at a fast pace (and faster than other regions such as Asia).

PTB’s CEO Mauricio Giusti offered the audience an interesting historical perspective on Brazil. “Between 2010 and 2014, M&A activities were very strong, while the last three and a half years have been very unstable not only for us but in general, for the national economy and politics. At the same time, the potential for BTS and lease-up is still huge and we are experiencing interesting growth in spite of adverse macro conditions.” He added that DAS and fibre are both buzzing in Brazil and small cells are starting to gain interest too. 

When it comes to the need for fibre, “traffic is growing extremely fast. We are seeing 70% growth YoY and radio backhaul is a serious bottleneck for QoS. Sites will need to fiberised soon and this is a clear opportunity for towercos” concluded Giusti.

SBA’s Kurt Bagwell offered an overview of the firm’s latest M&A activities and organic growth. In Brazil, the towerco sealed the acquisition of 900 sites from Highline via a privately negotiated deal. The portfolio consists primarily of new assets with a relatively low tenancy ratio - SBA reckoned it was acquired for a fair price as it still featured all the right components such as good paperwork, engineering features and thorough permitting. In Bagwell’s words, “these are good, young assets that will lease up over time.” 

The Brazilian telecom tower market has been heavily affected by Oi’s bankruptcy, a two-year old saga which is finally seeing the light at the end of the tunnel. While towercos report that Oi maintained payments from day one of the bankruptcy, the process had considerable effect on the stability of the telecom and tower sectors, especially while liquidation was still a threat. On the other hand, by not honouring its bond payments, Oi has been able to invest more with towercos and in the overall quality of its service.

Oi is a testimony of the resilience and value of the tower industry. One of the largest bankruptcy in the history of Brazil left towercos mostly untouched and paid in full. That said, the bankruptcy created a precedent and a possible reform of the law is being discussed.

Talking about the opportunity for towercos to expand into new markets, SBA touched upon its entrance into Ecuador where it’s currently switching into scale mode and plans to have 500 sites by the end of 2019. Among the positive aspects of doing business in the country, the use of U.S. dollars zeroes the forex risk, while the country’s MNOs are also quite active and creating a strong BTS pipeline. Back in 2017, the Government did threaten to regulate pricing for towers, among other initiatives; SBA and other entities pushed back against what would have been a considerable hindrance to their development. SBA noted that “by shaping the new rules in cooperation with the regulator, that came back as a benign issue.”

Shifting to Argentina, Bagwell discussed SBA’s entrance and the continuous changes occurring in the country. The towerco entered the market via the acquisition of 35 sites and then focused on BTS but since then, the economy has relapsed and the impact on currency has been huge. That said, the telecom and infrastructure markets remain heavily underinvested and the opportunities for growth are still there. Due to the unchanged federal taxation regime, Argentina represents predominantly a BTS rather than a sale and leaseback opportunity, which is in turn affected by onerous municipal fees due for each new greenfield site.

Talking about the flexibility needed to adapt to each market, Brian Gröll, who heads the M&A and Strategy for ATP Torres Unidas, added that the towerco is very nimble when it comes to understanding the peculiarity of each country where it operates. So while in Chile operations are mostly focused on expanding the company’s co-locations due to the complex regulatory and permitting environment and the stagnant build-to-suit market, in Peru carriers are now allowed to install sites on public land and without ground rental fees, which makes it very hard for towercos to incentivise co-locations. On the other hand, Colombian carriers are still waiting for the spectrum auction to take place and until then, towercos’ activities are somewhat muted. In spite of the challenges, ATP “remains positive with regards to its operations.”

Beth Michelson, representing Cartesian, recalled that at the beginning of its CALA investment, Cartesian sold 60 towers to SBA as a learning exercise to fully understand what needed to be built in order to achieve good multiples. And Michelson doesn’t think that the rules of the game have considerably changed since, “you’ll still get high multiples if you build the right type of towers.” A principle shared by the rest of the panellists.

The real threat to this simple equation sometimes comes from the carriers themselves who, in an effort to reduce their expenditures, opt to work with less experienced towercos who often agree to non-marketable terms. All resulting in their portfolios being less valuable and oftentimes not sellable at all. 

With regards to the opportunity of single tenant towers, panellists agreed that while they aren’t anyone’s favourite projects, some of them do make sense as they create further opportunities with MNOs while also connecting communities otherwise underserved. On the other hand, disciplined towercos won’t accept projects that cannot be fully permitted which creates problems especially in markets with new, emerging BTS environments such as Ecuador, Argentina or Paraguay, where regulations are still very strict and unfriendly towards towercos.

Michelson discussed the firm’s multi-dimensional approach to investments. “We have lots of experience investing in fibre but it’s not for everyone and not everyone should delve into it. We’ve committed to data centres and fibre before and then sold those assets to KIO Networks which now sold them to American Tower.” Michelson added that “in emerging market fibre is a necessity so now we’ve invested in a fibreco in Brazil and looking at the possible synergies between all the various companies we are involved in.”

With regards to fibre, Gröll added that most of it is currently in the hands of MNOs and was designed and deployed for their services. But now, the goal of filling cities with dense networks represents a great opportunity for towercos as MNOs has reduced investment capabilities. Fibre is scarce to find and designing robust metro networks will pay off in the long run.

TowerXchange has been exploring the dynamics of CALA towers for five years now and while the market is far from straight-forward, it’s a pleasure to see that wise entities and entrepreneurs are still going strong in the region, in spite of its tumultuous macro economic environment. Investors, towercos and MNOs operating in CALA know the rules of the game and should apply them in their day to day operations, as well as when making strategic moves to new countries. Some of the pioneers of the industry are always reminding us of why CALA is still attractive. In fact, in spite of its many challenges and downturns, “you’ll still get high multiples if you build the right type of towers.”