Ganzi on Mexico: a “poster child for data adaptation”

Marc Ganzi has been operating towercos in Mexico for over two decades, initially through DB Capital Partners, which owned a small towerco there, and latterly through Mexico Tower Partners, which was formed late last year as the spin out from Global Tower Partners’ Mexico operations.  Today Mexico Tower Partners owns, operates and markets over 600 sites in Mexico. Fresh from closing the transaction which saw Ganzi sell his GTP towers business in the US for US$4.8bn to American Tower, TowerXchange caught up with Marc for some rapid fire Q&A on what is next for the wireless infrastructure entrepreneur and the Mexican tower market.

TowerXchange: What attracted you to invest in Latin America, particularly the Mexican market?

I have always liked the dynamics of the Latin American tower market; it really is a “poster child” for wireline replacement, as well as explosive wireless internet and data consumption. I’m particularly keen on the Mexican market, and feel we can grow our business there significantly. It can take investors quite a long time to get comfortable with the operational norms, currency, political and sovereign risks inherent in Mexico, but I’ve been there for over 15 years, which gives our investors comfort in backing us, and means we’re given the autonomy to run the business as we see fit.

There’s a lot of demand for new sites in Mexico, with significant capital being deployed by Telcel and Telefónica in their desire to cover the entire population - it’s a big country with lots of rural communities and an extremely fast growing middle class. The need for coverage and capacity sites make Mexico an ideal tower market, as it clearly will need future new builds and collocation.

TowerXchange: What is the current state of the tower industry in Mexico in terms of transfer of assets from operator-captive to independent towercos?

We are really in the middle stages of this transfer of assets now.  Movistar (Telefónica), Unefon, Nextel and Iusacell have all sold their towers, only Telcel (América Móvil) still have their tower assets.  The key distinction here is carriers have sold towers and that is one of the critical path items we need to see for a tower market to evolve and ultimately mature.

TowerXchange: Do you think América Móvil will ever sell their towers, or do they see their network as a strategic asset?

Well we never say never in the tower business, but I think it would be very challenging today.  Telcel has a significant coverage superiority over their peers and they have plenty of capital.  This is very akin to Verizon in the United States.  Personally I don’t see the value in carriers retaining towers, but in this instance Telcel has a very strategic asset in their existing towers.

TowerXchange: With American Tower (which had 6,824 Mexican towers in Q3 2013), Mexico Tower Partners’ 600 sites and IIMT’s 250 towers, is there a healthy competition between towercos in Mexico?

The reality is that pricing is brutally competitive in Mexico for co-locations and BTS sites. When one provider controls a significant portion of market, you have to be able to provide value, rapid turnaround on new leases and give your carrier partners speed to market.  We have to try harder and be more nimble to compete effectively. Despite that market dynamic, we are growing the portfolio through core lease-up, BTS and M&A.

TowerXchange: Tell us about the structure of your business in Mexico - is it a “steel and grass” model with power passed through to the tenant?

We’re in the business of managing the steel and the capacity therein. Yes, we also maintain the sites and keep them tiddy, but that is where our obligations end. We don’t maintain generators, that only happens in Africa (and limited parts of the United States) and our carrier partners pay their own electrcity. In Latin America towercos maintain the site, the road and the physical structure - the rest is up to the carrier.

TowerXchange: Do you outsource construction, O&M or keep it in-house?

We outsource site maintenance in some regions, in others we do project management of new construction in-house. It’s a question of economics - if a supplier is cheaper and more efficient in a certain part of the country, we’ll use them. If we can deliver the service with our own staff more effectively, then we will handle the work directly. Our model is all about efficiency and giving our customers the best possible site leasing and new build experience.

TowerXchange: What is the current progress of LTE deployment in Mexico?

To use an American baseball analogy, if we’re in the fifth or sixth inning of LTE rollout in the US, then we’re in first or second inning of LTE rollout in Mexico, with vendor selection, spectrum clearing and trials still happening. This is what makes us most excited about Mexico - that the best lease-up and new build opportunities are yet to be realized and we feel we are best positioned to realize them.

TowerXchange: Are in-building solutions and small cells part of towerco business plans in Latin America?

Towercos haven’t focused on deployment of small cell solutions in Latin America like they have in the United States. A significant deployment remains far off for Mexico. Carriers are not proactively chasing DAS around some of the dense urban bottlenecks like here in the United States - they are currently focused on limited DAS systems like subway stations, airports and futball stadiums. These are congestion areas for 3G networks; which when moved to 4G this will be a far larger issue for the carriers.

We are starting to see some smaller sites that are only 40-50’ above ground level being built in Mexico City, Monterrey, Guadalajara, and a few smaller cites, or every 400-500 yards along highways to meet specific coverage objectives.

TowerXchange: How do you see the investibility of the Mexican market, for example in terms of the value of assets in multiples of Tower Cash Flow (TCF)?

I don’t think of the market in these terms - transaction comps is the language used by bankers.  I have always focused first and foremost on the assets themselves and the key attributes and metrics of those assets.

For me, the attractiveness of a tower market on a macro basis is defined by data growth, the regulatory regime, and whether the independent tower model already exists; if carriers are willing to co-locate and if there is an efficient market for colocation. I’m less motivated by the size of the multiple; I won’t buy into a market unless I know I have customers who are willing to collocate with us. The thing we like about Mexico is that we have six substantial and willing tenants in Mexico. This is the key, to have healthy carriers willing to do business with you.

The next matter is whether there is a good regulatory regime resident, this being an organized governing body that stands behind zoning requirements. In Mexico, COFETEL and the Ministry do a good job governing spectrum and competition. Privity around towers is really important and to have local and national governments willing to close the zoning door behind you. In Mexico we have some of this in place and it gets better each day, with local municipalities and states willing to stand behind their building permit approvals and processes.

Lastly it is important that we have a growing number of consumers willing to buy smartphones and tablets. We need wireless data usage and smartphone penetration (currently around 18% in Mexcio) to grow fast at the same time. Mexico has both of these metrics growing quite fast at the same time which is the tailwind we used in the United States the last 4 years to grow our business.

TowerXchange: Based on those criteria, how do opportunities in Latin America compare to Africa?

Africa is an interesting market with many similar attributes of Latin America, that being said there are nuances here.

Carriers’ adaptation to colocation hasn’t been as strong in Africa as in other parts of the world, but that takes time. The lack of collocation really stems from a lack of transparency in obtaining new building permits and zoning restrictions in rural Africa. This allows carriers and towerco’s to build on top of each other.

In addition, there is a high reliance on fuel delivery to the site and this is not resident at all in Latin America. This is somewhat problematic as you then move from being in the real estate business to the fuel distribution business in Africa and that is not our core business.

Wireless data consumption has yet to take off in Africa, like it has in Latin America.  We need African consumers to buy more smart phones, tablets and air cards which translates into higher wireless adoption (aka: wireline replacement). This has not happened in Africa as fast as Latin America, but that’s going to change fast.

That being said, on the plus side of slower data network build outs, there is a need for cell site densification in modern parts of Africa, particularly in countries where governments are making spectrum available for LTE.  This is increasing the need for cell splitting and more capacity sites, which will be a boom for tower companies over the next few years.

Lastly, on sovereign risk, this is far less pronounced in Africa than people might think. In countries that have investment grade tenants, businesses with modest leverage, decent organic growth and equity IRRs in the mid-twenties, this attracts real institutional and  private equity sponsors for private towercos. In this respect, Africa and Latin America are at parity for a private capital out-flow perspective.

Marc Ganzi will be speaking at the TowerXchange Meetup Americas, taking place of May 20-22 in Orlando, co-located with the PCIA Wireless Infrastructure Show.