A decade ago, CALA was a virgin market in terms of towerco penetration and building and owning towers across the region definitely didn’t suit the fainthearted. But not long after the creation of a successful towerco industry across the United States, some bold investors and developers seized a similar opportunity in Central and Latin America, introducing a profitable vertical real estate business in markets like Brazil and Mexico. Ten years later, the regional industry has matured considerably, but still offers healthy levels of organic growth and big potential for M&A activity. Last July, the 6th TowerXchange Meetup Americas gathered several financial experts on stage to discuss where growth will come from and how the evolution of the towerco business model is impacting the investors’ appetite.
The session moderator, SBA Communications’ President – International, Kurt Bagwell broke the ice with the million-dollar question: where will growth come from? The industry is now experiencing acceptable levels of build-to-suit activity in countries like Brazil and Mexico and both investors and advisors have been very active, working on recent and upcoming transactions in the Caribbean, Peru, Chile and Argentina. In addition, more and more operators are realising the benefits of working with towercos and companies like Telecom Argentina, Entel and Telefónica are relying more and more on their infrastructure partners. Efficiency, a top priority in an increasingly competitive and constrained scenario for MNOs, will also drive collaboration and create opportunities for innovative investors and developers.
Representatives of the Inter-American Development Bank (IADB), the International Finance Corporation (IFC) and the Overseas Private Investment Corporation (OPIC) highlighted coverage in remote and rural areas as a key industry challenge and one of their main business priorities. The industry will benefit from their skilled support and local knowledge while investors, MNOs and developers can form prolific partnerships with the likes of OPIC, IFC and IADB, who will facilitate capital for challenging and yet transformational initiatives. In fact, the collaboration between IADB, Telefónica, CAF and Facebook on the Internet Para Todos project set a very positive precedent for future synergies between private investors and multilaterals to develop and drive telecom infrastructure sharing to secure coverage in remote locations.
How does CALA compare to the U.S?
For years, we heard that the Latin American telecom industry was ten years behind the United States, but how accurate is that statement? As a comparison, Crown Castle was mentioned as the new towerco paradigm, where convergence between towers, fibre and data centres increases the business complexity and potentially reduces the appetite from traditional private equity and short-term lenders.
Investors are still cautious about this approach as it is way more complicated than the traditional steel and grass model. However, Crown Castle is showing superior levels of growth thanks to this diversification and that is a very meaningful signal of what could soon become a reality for CALA players who have – although timidly – already started to integrate new technologies and business streams into their portfolios.
“There is an opportunity in the growing complexity of the towercos business model in CALA that investors need to understand; otherwise they won’t be able to serve that market,” stated IADB’s Gonzalo Arauz. Although nobody has gone as far as Crown Castle in the region, some innovative developers are already acquiring and developing their own fibre portfolios in order to provide a wider and tailored service to their MNO clients. While fibre brings to the table its own operational and financial challenges, it can also provide a competitive advantage and a new revenue stream.
From both a technology and coverage perspective, CALA is indeed behind the United States, but ten years is an overstatement. Although financial constraints and fierce market competition are slowing down capital expenditures from the operators, the investment community confirmed its appetite to continue developing new technologies in the region. Further, institutions with a mission like the ones mentioned above are helping to develop projects that have a more speculative commercial viability.
Meet the panellists
Moderated by Kurt Bagwell, President - International, SBA Communications, the session welcomed multilaterals, bankers and private equity investors
- Gonzalo Arauz, Lead Investment Officer, IDB Invest, Inter-American Development Bank (IADB)
- Eric Crabtree, Chief Investment Officer, International Finance Corporation (IFC)
- Alexander Hadden, Director, Structured Finance, Overseas Private Investment Corporation (OPIC)
- Scott McBride, Vice President, Digital Bridge
- Beth Michelson, Senior Managing Director, Cartesian Capital Group
- Alex Ramirez, Managing Director, Global TMT Group, Citi
Who is bringing money to CALA?
As activity slows down in Europe and the United States after a few years of countless transactions, global investors and banks have switched their focus to Latin America, which has pushed valuations up. However, along with rewards come much greater risks.
Panellists highlighted an increased presence of institutional investors in emerging markets, who are using designated vehicles such as limited partners and local private equity funds to invest. “We haven’t seen big institutional players investing directly in telecom infrastructure, at least not on the towercos side,” Alex Hadden from OPIC added. Institutions like OPIC, who are not on the M&A or refinancing game, are driving and supporting the rollout of new infrastructure and bringing capital from wealthy families and new private equity funds that were not among the sector’s usual suspects.
The business model is evolving and consequently the investor profile is changing too. A decade ago, many private equity players came to CALA expecting “private equity type of returns”—which basically means getting back a lot money in a relatively short period of time. Now, expectations have been modified. The model is tried and tested and long-term investors have started to feel very comfortable with a less ambitious but safer scenario.
Based on a basic investment profile principle, traditional private equity players need to get out in a short period, but in this industry, their deadline sometimes comes before they’ve been able to build the business. “Towers are becoming more of a traditional infrastructure type of investment that is not necessarily going to generate typical PE returns. And that is why we are seeing an increasing presence of high networks and pension funds that have lower expectations in a safer investment scenario.”
Currencies, volatility and other risks
Beth Michelson, who has been involved in many tower transactions in the region at Cartesian Group, assumes that investing in CALA will always have its particular risks and in her own words, you just have to deal with it. “If you are a Brazilian investor putting money in the country, you are fine. If your investment is dollar-denominated and you are investing in Latin America, you need to have that appetite for the currency exposure,” she stated. Her advice: build in dollar-nominated markets such as Ecuador and Paraguay; they present their own challenges, but you mitigate the currency exposure. Ironically enough, CALA has a history of clever enterprises that developed very good tower portfolios but weren’t able to get the expected returns due the currency volatility. And that has had a greater impact on PE players as they have less flexibility when it comes to their exit expectations.
On the other hand, other industry leaders have a long-term vision. “At SBA, we have a long-term approach. After any acquisition, we try to do as much build-to-suit as we can, so we reinvest that local cashflow back into those markets,” Bagwell added.
In conclusion, you can’t predict currency valuations and only longer-term investors can mitigate that exposure. “It’s hard to time the FX right; nobody can really get what is going to happen with FX. In 2012, we made an investment in the UK in one of the most secure global currencies. Then, BREXIT happened,” Michelson added.
Geographical diversification is another way to reduce exposure in CALA. And finally, you need to find the right partners and management team: “If you are investing in emerging markets, you have to have the appetite, establish a very good strategy and back the right management.”
Going beyond steel and grass: is it worth it?
Scott McBride voiced Digital Bridge, one of the biggest investors in telecom infrastructure in the Americas and beyond: “We have been focused on the different elements of telecom infrastructure as a fund, which gives us a unique position. We believe there is a lot of value in delivering a whole offer to our clients. U.S. cities are going on that direction and we see a lack of fibre and connectivity in CALA.” McBride who have helped the company to develop and invest in many towercos, data centres and fibre projects across both North and Latin America, also highlighted a change on their clients’ requests and claimed that MNOs are pushing infrastructure players to go beyond steel and grass.
Eric Crabtree, IFC’s Chief Investment Officer, challenged the towercos in the audience: “do you need fibre to preserve your market position?” In the U.S., AT&T and Verizon are doing their own fibre rollouts, but Eric questioned whether MNOs in CALA will have enough capital to deploy their own fibre. With the increasing competition and the well-known financial constraints, towercos can find an edge while attracting intrepid investors. “In the U.S., towercos will need to play a role on this rollout or they won’t see growth.” In CALA, towercos will eventually face the same challenge. However, fibre is a completely different beast. “Returns are good in terms of lease ratio vs capex cost, but fibre has its own operational complexities,” Crabtree added. The multiples are at least 40% less than towers’, and towercos will have to also determine how far do they want to go after analysing how MNOs are behaving in each market.
Indeed, data centres and especially fibre require much complex business and skillsets. Convergence is happening, driven by the increasing demand for data and Latin America doesn’t have enough backhaul capacity so fibre and data centres are a real priority. However, investors need to be aware of the crucial differences in business models and returns when they decide to bet on convergence.
How do you know what you are getting?
Standards can sometimes be a subjective matter. When Cartesian was involved in a tower sale to SBA and Uniti, they learned the quality that buyers were expecting: “After that transaction, we decided to build our future towers as we were in sales mode. We looked back at the specific data that SBA required and decided that none of the towers will enter the database without their permits. We started to monitor every aspect and that strategy allowed us to be ready and maximise any potential sale at any given moment, always following the highest standards,” Michelson commented.
Alex Ramirez, Citi’s MD for TMT, also highlighted the fact that any potential buyer will carefully evaluate the quality of the assets so highest standards are indeed a critical factor when attracting new investors and buyers. The potential for new leases on the assets was also discussed as a key element, but most of the participants agree on how difficult it is to predict future tenancies.
What are the most investible markets?
Brazil remains one of investors’ favourites, as local financing sources have experience, capital and a very good understanding of the tower business. Investors have also succeeded in Mexico and the Andean region, where local banks have provided the required debt and desired conditions, although sometimes capital restrictions have presented some limitations.
Although pretty much all the financial experts on stage wouldn’t mind travelling to the Caribbean to close a deal, most of the speakers showed reluctance. Scale, growth, the lack of a solid legal framework and the logistics complications were among the main barriers highlighted by bankers and PE investors. Entering through a portfolio acquisition could work, but BTS is very challenging as you are dealing with so many different small countries with their own regulations, institutions and economical regimes. However, development banks have a more optimistic view and are actively exploring opportunities in the Caribbean as part of their mission to reach remote areas.
Finally, Argentina is one of the most underserved markets. The industry requires a lot of investments by both MNOs and towercos, but currency volatility, regulatory barriers, political risk and the lack of local capital are still slowing down deployments and the overall development of the local market.
Wrapping up
Over the last decade, CALA has been proven as a very investible tower market and many local and international developers have successfully built profitable portfolios. The establishment of the business model is now changing the investors’ profile towards longer-term lenders and developers, although some specific markets are still attracting private equity capital, while new funds and wealthy families are shifting their focus to Latin America as activity slows down in the European and North American tower sectors.
Money is indeed required in untapped markets such as Argentina and more mature regions like Mexico, Brazil and Chile will need capital and financial expertise to support new deployments, required innovations and upcoming M&A transactions that will come from both the MNO and towero sides.
As discussed, Latin and Central America is a little behind the United States in terms of coverage and technological innovation, but multilaterals’ investment will drive the industry forward and create plenty of synergies and opportunities in remote and rural locations that are not as attractive for commercially-focused investors and lenders.
Investors will inevitably continue facing geopolitical and economical risks hence dollar-indexed markets will be their best choice, while more adventurous enterprises can find bigger paybacks on more speculative contexts. The investment community must understand a yet slow evolution of the business model where new elements such as fibre, energy or data centers have started to add complexity while also bringing growth and new opportunities.
In any case, CALA requires the right partnerships, skilled management and high quality assets to guarantee good valuations and secure the expected returns. And indeed, you should have an appetite for some extra risks.
