A tough year for the Mexican tower industry

In just over a year, Mexico has witnessed some crucial changes that have completely reshaped its telecom tower industry. From the creation of Telesites and its debut on the Mexican stock exchange to AT&T’s acquisition of Nextel, Iusacell and Unefon, expectations for an exciting year were flying high in 2015, but trading conditions over the past twelve months have been more challenging than many forecasted. At the third annual TowerXchange Meetup Americas, several Mexican stakeholders took centre stage and openly shared their side of the story.

Moderated by Marco Cordoni, Senior Partner within Analysys Mason, the Mexico panel featured Maria Scotti, CEO of Torrecom; Felipe de Antuñano, Co-CEO within Intelli Site Solutions; Mariano Gomez, Vice President at NMS; José Sola, CEO of Mexico Tower Partners and Alex Wright, MD within analyst firm Nau Securities.

The panel initially addressed the current state of the market by drawing a comparing with twelve months ago, which revealed how the number of towercos active in Mexico doubled had in a relatively short period of time. The inflow of build to suit firms in the country was mainly driven by the entrance of AT&T into Mexico and its forecast US$3bn financial commitment to extend its network and coverage (to which it then added considerable further investment to integrate 6,000km of fibre network).

However, AT&T didn’t immediately assign search rings and started revising its compliance system as well as its validation and approval standards. AT&T’s approach has contributed to yet another very slow year for the Mexican tower industry.

In fact, while 2015 has been an “on-hold” year due to the creation of Telesites and Nextel’s bankruptcy filing, the market hoped 2016 to be a year of network investments in Mexico but as of June, the volume of new business has been disappointing with AT&T not jumping on new projects but taking a slower route.

AT&T’s approach was seen by the panel as the obvious path of a world class carrier entering a new market - considerate, attentive and cautious. In fact, while América Móvil has never been a large BTS client for any Mexican towerco, and Telesites’ BTS leftovers continue to represent a bonus for other towercos, the extinct Nextel and Iusacell had always worked with third-party towercos on their deployment needs.

Additionally, American Tower is a long-term AT&T partner when it comes to BTS in the United States and the continuity of that partnership South of the border seems quite obvious and is likely to further reduce the ability of other towercos to capture considerable business from AT&T in the near future.

In the meantime, we must remember that Telefónica’s investment history in Mexico has always been far from great and the panel defined their “lack of network attention” as “almost frightening” and stressed that its “churn is becoming dramatic” as other companies build around them.

So the market is now filled with long standing and new BTS firms expecting to serve one customer - AT&T - which is still assessing its needs and redrawing its standards, “giving towercos less certainty as to what they can expect from their clients.”

While América Móvil’s Telcel is still by far the leader in terms of market share at 68%, AT&T did manage to launch its first 4G LTE service back in October 2015 and is already serving one third of the entire Mexican population, showing that in spite of a slow approach to establishing partnerships with towercos, AT&T is committed to investing in Mexico. And this might lead to plenty of opportunities for BTS towercos in the mid-term.

The Mexican Secretariat of Communications and Transport (SCT) recently announced that more than US$6.5bn were invested in the country over the past three years. However, these investments haven’t necessarily translated in improved QoS across the country.

Additionally, MVNOs are starting to look at Mexico and will add pressure on the existing network which is already inadequate. In fact, the panel agreed that with approximately 4,000 subscribers per site and a slow pace of investments, the level of coverage in Mexico is “worse than Haiti.”

In order to invest in new technology and network deployment, operators need to earn money. And while ARPU (US$7.45) is higher in Mexico than in many other CALA markets, it has suffered a decline (-8.8%) over the past year as a result of the devaluation of the Mexican Pesos and a downward price trend. The decline is also partially due to operators adding new subscribers (especially Telcel and AT&T) with aggressive packages, therefore diluting their average ARPU.

While Mexican operators engage in a tariff war, rumours suggest that Telefónica might be sounding out the possibility of an IPO and the panel was in agreement that the Spanish operator should either commit to higher investments or sellout its Mexican operations.

The panel went on to consider the impact of Telesites on the independent developers and Mexican BTS market. While there remain doubts with regards to the intention of Telesites to aggressively market its portfolio of assets and even the suitability of those assets to being shared (for their strength, height and response time), the carve out towerco has now claimed a good proportion of Telcel’s new builds. This leaves only crumbs to other towercos.

The towerco industry beyond Mexico will be marked by a “before Telesites and Telxius” and “after”, since these carve outs have the potential to dramatically disrupt the shape of the traditional towerco model. However, the creation of Telesites also brought some positive changes in Mexico. In fact, while historically Telcel didn’t mind building its own sites next to existing sites owned by other operators, Telesites is now refraining from building parallel infrastructure.

On the other hand though, Telesites is a different breed of player. Created by the masterminds behind giant América Móvil and able to seriously threaten BTS firms and their co-location potential by leveraging its 12,000+ portfolio of assets.

In terms of targets, Telesites aims to reach around 18,000 sites and a tenancy ratio of 1.6x by 2020. And while its current pace in terms of new builds might allow the company to reach a total tower count close to target, the tenancy ratio seems quite bold and, as noted by Nau Securities, 1.4x seems a more realistic goal. Telesites is also targeting co-locations and has signed lease agreements on ~250 sites, mainly with AT&T.

Nau Securities’ Wright commented on the company’s share price and noted that its listing was quite peculiar since in most new listings you’d have around three years of operations and financials to base a price analysis on.

In Telesites’ case, the company had just come into existence thus investors questioned its ability and intention to operate as an independent towerco. Since its listing, Telesites’s share price has been quite volatile (MXN11.11 as of today, 11 July) but its current share price seems to be based on the future anticipation of 1.6x rather than on the company’s current state of play.

Back in 2014, the Mexican government announced a project to enhance the level of competition in the telecom industry by creating a 700MHz nationwide shared broadband network, whose spectrum has been auctioned back in January 2016 (winners are expected to be announced in September).

The project should help small mobile network operators to enter the Mexican market by using the State-owned network rather than building their own and the shared network should cover 98% of the Mexican population by 2018 thanks to an investment now estimated around US$7.5bn.

Some panellists commented that while last year the project seemed completely unfeasible, some consultations over strategy have been conducted over the past twelve months and although very complex, the project is supposedly going to happen. However, other members of the panel noted how the project has been delayed several times and questioned its capability to attract customers, especially in light of declining ARPUs and some underlying issues such as what existing infrastructure is expected to be utilised for it. Skeptical parties concluded that operators are very likely to rollout their own LTE network and no one is currently cancelling their existing plans.

The panel took this occasion to highlight that while permits for the shared network have always been available, the private sector doesn’t enjoy such an easy framework when it comes to permitting and dealing with the regulatory environment. And the hope is that some considerable improvements will be made in the near future.

Mexico is now undergoing an extremely delicate phase of radical changes and adjustments and TowerXchange believes that the market will take a further 18-24 months to stabilise. Upon reaching a certain balance, the Mexican telecom market will offer new opportunities to towercos but what is left to be seen is who will be around when the pace of BTS finally picks up.

In the meantime, the migration from 3G to 4G LTE will require operators to enhance the level of technology on existing sites and the tower industry is likely to get involved in more amendments than new builds in the near future.

While the upcoming months might not be the most exciting for the Mexican tower market, TowerXchange believes that once AT&T gets up to speed with regards to its internal procedures and future plans, there will be considerable BTS opportunities in Mexico. And our hope is that BTS projects will be assigned in consideration of the quality and credibility of partners so to favour the growth of the market and continuity of trustworthy BTS firms.