Brazilian tower industry is facing its toughest year yet

Why organic and inorganic growth has slowed, and what it means for investors in Brazilian towers

Read this article to learn:

  • The slowdown of the Brazilian tower industry in context
  • 2011-2016: what changed in the Brazilian industry and why
  • Is it possible to find an exit strategy during the crisis?
  • What are BTS firms doing when there are no towers to build?

Back in 2013, TowerXchange estimated that independent towercos owned around 32% of the 140,000 towers in CALA. By 2014, those figures rose to 41% of 148,000 towers. Although estimated, these figures showed an impressive growth both in terms of towerco penetration and portfolio growth across the region. In 2015, the percentage went up just 1% to 44% (over 156,000 total sites) and to date, almost at the end of Q1 2016, we think that towercos own approximately 45% of CALA’s 165,000 sites. In 2013-14, inorganic growth of the tower industry in CALA was driven by Brazil. In 2015, organic growth in CALA was driven by Brazil. Both have slowed. Why?

Brazil was crowned queen of the CALA tower market thanks to its balanced carrier market, high site densification and rollout requirements, and sheer size. Towercos rushed to start operating in the country, invested in local teams and know-how in spite of Brazil’s tough tax regime and uncertain political situation. Investors bet high on its potential returns and everyone enjoyed a few years of tremendous successes.

However Brazil is currently facing the deepest recession since the 1930s and its effects are spreading across all industries including the tower sector.

Did Brazilian towercos underestimate the risks?

2011-2013 were phenomenal years for the CALA tower industry, especially thanks to Telefónica, Oi and Nextel which all divested several thousands towers in Brazil, Colombia, Mexico and Chile. We all knew that at one point the pace of sales and leaseback (SLB) transactions would slow down as the inventory of acquirable portfolios was reduced. But that didn’t stop – and if anything it helped promote – the proliferation of towercos especially thanks to the potential of the Build-to-Suit (BTS) market in the region.

This trend contributed to the creation of a new layer of middle market towercos, with less acquisitional buying power but specific know-how, regional connections and capabilities which made them the perfect partner for carriers with aggressive densification plans and reduced budget.

To date, there are at least a dozen BTS-focused towercos in Brazil, as many as twenty in Mexico alone, around ten in Peru, and a mid-teen count in Colombia.

Most of these towercos are private-equity backed and built on the assumption that after a few years of BTS activity, they’d scale their business enough to flip to one of the larger towercos – most likely American Tower or SBA Communications. And not only they’d be acquired but they’d be able to sell for multiples in the twenties.

The first glimpse of consolidation among towercos happened back in 2014, when American Tower bought BR Towers and its 4,630 sites across Brazil for US$978mn. A transaction many saw as the first of many, but which to date has few sequels.

The trend of towercos entering the region, reaching a certain scale and succeeding at their exit strategy with high multiples seemed achievable until not long ago. Amidst this rush to scale, a growing swell of complaints could be heard that a complete set of paper and structural quality wasn’t always a priority in Brazil, with projects being awarded to the cheapest bidder regardless of the overall engineering standards.

The evolution of the CALA telecom tower industry 2013-2016

CALA-evolution

Is 2016 going to be the quietest year ever?

Until 2013, Brazil made the headlines as one of the poster children of economic growth and industrialisation – the BRICS – but its GDP was already in decline. But 2015, with its -3.5% in GDP’s growth was the year when finally the word crisis started to creep into the news.

There’s no need to revisit the recent story of troubled Brazil, whose economic stagnation, recession, inflation and political corruption allegations have all been widely discussed in recent news. However, 2015 was still a relatively good year for the Brazilian tower industry with an estimated 2,000 new sites being built in the country, the majority by the BTS-centric middle market towercos.

However, 2016 has started under a cloudier sky and is likely to become the toughest year to date for the local telecom and tower industry. There are very few BTS projects being developed in Brazil and most of those that remain are just backlogs from 2015. And although scenarios can vary depending on the towercos and their position in the market, not many can enjoy American Tower’s predictions of 11% organic growth in 2016.

If it’s true that towercos can invest some of their “free time” in cleansing their paperwork, reviewing underlying contracts, amending their revenues and marketing their towers to new tenants, this proposition isn’t as valid for towercos with relatively small portfolios hence unable to leverage their scale. And I’d doubt that their investors would be satisfied with a quiet year of paperwork.

On the other hand, whereas middle market towercos could still long for a high valued exit in the future, it’s unlikely that their potential buyers will want to cultivate a narrative to their investors of expansion and acquisition in Brazil under the current circumstances. The combination of the Brazilian foreign exchange crisis, its internal political and economic situation alongside the less than rosy outlook of the U.S. – and international – stock exchange don’t really call for bullish investments in Brazil or elsewhere.

The recent nomination of Mr da Silva, former President, as Chief of Staff to current President Ms Rousseff to protect him from the investigation related to the Petrobras’ scandal has just contributed to throwing the country into a black hole. Not even the upcoming Olympics are looking good with tickets on sale for as low as US$18 and commentators noticing how the sales campaign is falling considerably behind.

Under these conditions, I doubt anyone feels bold enough to buy in Brazil, but even if… Who would commit to a multiple higher than the multiple at which their own stock currently trades?

Although I am no expert in finance, I am left wondering whether the cheeky plan – which many seem to have adopted – of building towers in Brazil at whatever price, under whatever conditions to one day flip at high multiples is now shaking under the reality of these less than prosperous times.

Today’s conditions don’t help any towerco to function, whether they’ve been diligently following market rules or cutting some corners and working below market prices. But whereas some towercos can afford to keep their Brazilian capital in the country, reinvest it or simply wait for better days to come, private-equity backed towercos – no matter how high quality their work is – are often under the pressure of a stringent investment lifecycle which rarely exceeds eight-nine years.

whereas some towercos can afford to keep their Brazilian capital in the country, reinvest it or simply wait for better days to come, private-equity backed towercos – no matter how high quality their work is – are often under the pressure of a stringent investment lifecycle which rarely exceeds eight-nine years

Long are gone the times when a tower with one tenant was already worth a premium! 

I think everyone still interested in doing long term business in the country is likely to welcome this tough but much needed wave of rationalisation. And I do hope we’ll see more towercos diligently following the rules, compiling a complete set of permitting paperwork, working at market rates and spending time leasing up their towers.

If some towercos are just taking the foot off the gas and waiting for better times to come while focusing their attention on their existing portfolios, some others really don’t have this luxury and weren’t created on the premise that the local industry would at any point get to such a deadlock.

The only option is to wait and see, if investors can be persuaded to have patience. For better times, more favourable conditions and an upswing able to instil a sense of confidence firstly into carriers. In fact, only a renewed wave of investments from the mobile network operators could revamp the BTS market in the country.

Will there be rationalisation and consolidation in the Brazilian tower industry? Probably not at the prices many investors had hoped for. There is a wildcard in the pack: could Phoenix Tower International rollup to scale whilst American Tower and SBA Communications are reluctant to re-invest in Brazil?

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