The opening panel of the 6th annual TowerXchange Meetup Americas offered a broad overview of the key dynamics across key CALA markets including snapshots of Brazil, Mexico, Colombia and Argentina as well as considerations on other aspects of the industry such as opportunities in fibre, the path towards 5G and more.
Brazil: recovering, at last?
Grupo TorreSur entered Brazil in 2010, when they acquired 1,000 sites from what is now Telefónica. The towerco then went on to seal five more acquisitions and now owns nearly 6,500 towers across the country. In the words of its Chairman, Jim Eisenstein, “Brazil is finally moving in the right direction, with promising growth ahead and reforms such as pension reform, and PLC79 which could further boost the economy and its recovery.”
The government seems to be taking a pro-business approach and wireless is recognised as a necessity, not a luxury. 4G has been growing 50% YoY but people still need to be able to afford phones and their bills – which was a struggle during the tough recession the country has recently been dealing with.
In terms of MNO spending, TIM and Telefónica are quite active with new network capex being deployed, while Oi is continuing its 4G overlays and is looking more stable since emerging from its bankruptcy. The future is still uncertain as rumours persist about its possible acquisition by a competitor but for now, towercos are quite satisfied with its activities and commitment. On the other hand, Claro has been reducing its network investments following the acquisition of Nextel and its spectrum.
Macro-towers still steal the show in Brazil and across CALA in general. In fact, the panel agreed that while some investments are being made in small cells and DAS, the vast majority of capex is still going into macro-towers.
SBA Communications entered Brazil via acquisitions as well, and then went on to build around 7,000 sites of its own. The listed towerco has been reporting strong growth both via amendment revenue as well as new builds and co-location.
The Brazilian MNO scenario is comparable to the U.S. one, with four operators with fluctuating capability to invest in their networks. The fundamental difference with the U.S. is that the demand for data far exceeds what MNOs can offer in Brazil. But MNOs can’t offer it because it exceeds what people can actually pay for. Across Latin America and the rest of the developing world, wireless grows apace with each country’s economic health.
American Tower is present across eight CALA markets with over 40,000 sites, of which 19,000 are in Brazil. The company is quite bullish about the developments happening in Brazil and 2019 is proving a stronger year than 2018. In fact, last year AMT built 45 Brazilian sites, but it has already completed over 100 in 2019.
The ratio of users per tower in Brazil is still 80% higher than in the U.S. so the pathway towards becoming a truly mature market is still quite long.
Phoenix Tower International owns and operates over 6,000 sites across CALA and its sister company Phoenix Tower do Brasil (PTB) over 2,000 in Brazil. The company has recently celebrated the fifth anniversary of Blackstone’s initial investment and since its creation, has maintained an impressive growth rate. In Brazil alone, PTB has built over 400 towers per year and complemented its organic growth with the acquisition of T4U and its 500 sites, mostly located around São Paulo. Lately, PTB has acquired K2, a Brazilian small cell firm with 300 installations across the country, and the towerco has been building DAS as well.
While Brazil is now presenting stronger and steady growth opportunities, the challenges represented by forex and its turbulent economy are real and this is the main reason why PTI and PTB were conceived as two separate businesses. That said, “PTB’s growth, lease up and yields have been fantastic” in the words of PTI’s CEO Dagan Kasavana.
Meet the panellists
Moderated by Jonathan Atkin, MD, RBC Capital Markets, the session welcomed five experts from some of CALA top towercos.
- Jim Eisenstein, Chairman and CEO, Grupo TorreSur
- Dagan Kasavana, CEO, Phoenix Tower International
- Katherine Motlagh, CFO EMEA and LatAm, American Tower
- David Porte, SVP International, Strategy and Business Development, SBA Communications
- Maria Scotti, CEO, Torrecom
Mexico back in the game
Torrecom built its footprint mainly via organic growth, in fact 875 of its nearly 1,000 towers have been built rather than acquired. With a portfolio across Mexico, Nicaragua, Guatemala and Panama, the towerco is now active in the Andean region too.
The towerco did their first sale and leaseback with Telefónica back in 2012 and – commenting on the quality of sites across CALA – Maria Scotti noted that those towers weren’t very good. To date, carriers are more demanding, they know what they want and recognise a healthy, robust structure. And good towers cost more.
In the words of Scotti, “Torrecom is fastidious about how towers are built and how they look” and this is a reason why the towerco has been cooperating with ALTÁN Redes, the Mexican wholesale network, for its buildouts. “ALTÁN is quite demanding as well,” added Scotti.
In Mexico, Telcel and ALTÁN are the main operators keeping towercos busy, both being active co-locators and the latter also requiring BTS to meet its aggressive rollout plans. In fact, while AT&T remains quiet with regards to new builds and is instead increasingly involved in small cells, Telefónica hasn’t been very active for a few years now, even more so with a possible sale of its local operations closer than ever.
Phoenix Tower International is the latest new entrant in Mexico, having acquired 350 towers as well as 1,000km of fibre. Since its entrance, the towerco has been leasing up its fibre while also seeking BTS opportunities and assessing the potential of DAS across the country.
Katherine Motlagh noted that Mexico is American Tower’s strongest growth market at the moment, with plenty of demand coming from ALTÁN. In her words, “American Tower and ALTÁN are a good match in terms of co-location requirements as well as business profiles with both companies being publicly listed and FCPA compliant.”
Panellists agreed that both Mexico and Brazil are on a positive growth curve, with the former stronger in the short term but Brazil playing catch up, especially in light of its dire need for more macro-towers.
Towercos still keen on Argentina but…
Argentina is a market with huge potential, possibly the greatest across the entire region, with three strong MNOs and plenty of demand for data and coverage. That said, the market still presents unresolved issues and uncertainty on political, economic and legal fronts which make it complicated for towercos to invest freely.
Some of the issues mentioned by the panellists include the requirement for towercos invest in US dollars and get returns in Argentinian Pesos – a condition which towercos have been fighting back since their entrance in the country. Another limitation to the towerco industry is the municipal taxes charged as “inspection fees” for each new build, which can be extremely high and can be amended at any time by each municipality – and results in many unpermitted towers still going up across Argentina.
The key to succeeding in Argentina might be to keep building a few permitted sites per year while strongly lobbying with municipalities and other officials for the right conditions to be implemented. So far, Argentina has welcomed quite a few regional towercos but ostensibly they’ve only been able to build a few dozen towers each. And questions remain about the country’s capability to solve its many issues and bottlenecks.
A new golden age for Colombia, maybe?
After a couple of very complicated years, Colombia might be finally emerging as a fast-growing tower market. In two years, PTI has grown to nearly 1,000 sites and, if the much awaited 700MHz spectrum auction takes place this year as announced, it is likely to catalyse further growth and boost carriers’ investments.
Colombia has been the playing field of a few somewhat undisciplined towercos in the past few years, who have contributed to compromising the state of the market by accepting very uneconomical terms, such as giving away RANsharing for free, and building without permits in spite of Colombia’s relatively organised permitting process. As a result, Colombian municipalities are increasingly prone to take down towers built without permits.
Permits and playing by the rules still key
One of the beauties of a heterogeneous towerco landscape is that some towercos will be more inclined to move first and de-risk certain countries, products and concepts while others will be happy to be fast followers, once that particular aspect of the business is proven. This is the case with certain markets (such as Bolivia or Nicaragua), products (such as fibre or DAS), and services (such as energy management).
But the consensus was that towercos who are open to a more entrepreneurial approach to the business add value, while developers who take ill-considered risks and compromise the principles of the towerco business model (sound contracts, high quality structures, compliance with permitting rules) can be value destructive.
Building with permits and all the regulatory approvals is not just “ideal” but should be the norm – and panellists stressed the importance of playing an advocacy role in the countries where they operate, to educate communities as well as authorities of the benefits of sharing infrastructure with the final goal to ease permitting processes and overall new build procedures. In the words of David Porte “if as an industry we simply started following the laws, things would go better.”
Valuation
Tower Cash Flow (TCF) multiples across CALA are still low compared to U.S. equivalents, in spite of the large majority of returns from tower portfolios in the region being in US Dollars. That said, buyers are still cautious with regards to multiples and take extra care in analysing the quality of the underlying paperwork and steelwork. In fact, “most growth is coming from existing inventory and their transfer to towercos” in the words of Maria Scotti, hinting at the need for robust due diligence to assess what it is for sale. That said, Dagan Kasavana noted how sometimes it is necessary to “clean up sites as we go and apply best practices we’ve learned and inherited from doing business in the U.S.”
Early buyers might have had a competitive advantage when it came to the quality of the sites for sale. Not only because the inventory of available sites was wider but also because of the swap clauses which allowed them to run a post-sale due diligence and swap any unsatisfactory site for legal, technical or regulatory reasons. Jim Eisenstein noted how Grupo TorreSur “was able to swap a significant proportion [of sites…] and buy when MNOs were eager to sell.”
In those early days, swaps allowed towercos to dramatically enhance the value of their portfolio. Towercos were also able to pass the risk of unpermitted sites back to the carriers. In fact, if a site acquired by a towerco was taken down because of a lack of complete permits, the towerco would get another site from the seller in return.
Is 5G going to be a game changer in CALA?
In two words: not yet. In fact, in the short term, panellists agreed that 5G won’t have a considerable impact across CALA. We are likely to see more small cell deployments in the future as well as fibre rollouts but some of the key markets in the region, such as Brazil, are still six to eight years behind the U.S.
As noted by Katherine Motlagh, “5G is driven by a demand for latency and capacity” which in CALA is not yet as stringent as it is in the U.S., but it will eventually come. Questions remain as to whether 5G will drive ARPUs and subscriptions up, which would in return speed up the rollout process. Panellists agreed that macro-towers will remain a key component of 5G networks’ architecture, which is obviously great news for towercos.
Fibre and DAS appealing but not for everyone
Fibre is a critical component of communications infrastructure for both 4G and 5G, and towercos are starting to covet opportunities to own fibre, deploy it and lease it up. American Tower is involved in fibre in various markets including Brazil, Mexico, Argentina and Colombia. PTI now owns fibre in 17 cities across Mexico and is leasing it “like a horizontal tower” while it is also deploying DAS, as is PTB in Brazil. Around 25% of LatAm towers are fiberised and that number should rise to 70-80% in the medium term, so MNOs are pushing towercos to get involved in fibre but the required initial investment is high and the technical characteristics of fibre deployment are quite complex.
Fibre is not for everyone but those who get involved need to be ready to take some risks. Dagan Kasavana noted how PTI underwrites fibre and DAS without necessarily assuming lease-ups. But so far, lease-ups have been positive and, in some cases, “yielding better returns than macro-towers.”
Conclusions
Panellists during the opening session of the latest TowerXchange Meetup Americas shared a predominantly positive outlook with regards to the prospects for the tower industry across CALA. The perception is that while the region is still far from mature in terms of overall towerco penetration, network rollout and stability of the market as a whole, key macro dynamics are definitely improving and shifting in the right direction.
Brazil and Mexico – after years of instability and uncertainty – are presenting towercos with new growth opportunities both in terms of new build, overlays and co-locations. Colombia seems to finally be getting its act together after a few years of irrationality, but the 700MHz spectrum auction will be crucial for the market to finally pick up and get MNOs’ investments going. On the other hand, Argentina is still far from offering the ideal scenario towercos are hoping for, with a mix of macro and industry-related challenges that are still hindering the ability of towercos and investors to rollout sites and deploy capital into the country.
While the region is still not ready to leap into the 5G future, market leaders are well aware of the opportunities that lay ahead, especially when it comes to fibre. That said, the business leaders on stage agreed CALA is still ripe with opportunities for the traditional towerco business model and macro-towers deployment.
