In spite of Brazil’s weak macroeconomic environment, the Brazilian tower market remains resilient. However, further investments in both build-to-suit (BTS) projects and sale-and-leasebacks could be hampered by future consolidation among wireless…
In spite of Brazil’s weak macroeconomic environment, the Brazilian tower market remains resilient. However, further investments in both build-to-suit (BTS) projects and sale-and-leasebacks could be hampered by future consolidation among wireless carriers, infrastructure sharing and a grim economic outlook.
Brazil is home to more than one third of mobile users across Latin America and the Caribbean. According to BuddeComm’s data, mobile penetration is approaching 140% and still growing steadily.
The four major wireless carriers – Vivo, Claro, TIM Brasil, and Oi – have secured spectrum in the 2.5GHz band for LTE services, and are deploying networks in an effort to grow subscribers in a highly competitive market.
The 2016 Olympic Games, due to be held in Rio de Janeiro, are also expected to drive LTE expansion.
However, a sluggish economy, coupled with a government tainted by corruption scandals, threatens to plunge the country into recession.
According to data from Banco Central do Brasil, the country ended 2014 with a primary budget deficit of R$32.536bn, corresponding to 0.63% of its gross domestic product.
In May, it posted a primary budget deficit of R$6.9bn (US$2.23bn), the widest since the beginning of the year, and well behind its 2015 fiscal target.
Economists believe that reducing the deficit and saving more is fundamental to avoid a credit rating cut.
Earlier this year, Dilma Rousseff’s government, announced it would reduce the telecoms ministry’s annual budget by 25%, from US$440m to US$337m, as part of a cost-saving strategy aimed at addressing the political and economic crisis.
Tower market continues to draw investors
Nevertheless, dealmakers are still committed to the local telecoms tower market, which, compared to other segments, is seen as a more profitable and secure investment due to the long-term nature of lease agreements.
One of them is SBA Communications, which last year acquired 1, 641 mobile towers from Brazilian telco Oi for R$1.172bn (US$457m) through its local unit SBA Torres. Oi had previously sold another 4,100 sites to the tower operator in two separate transactions.
SBA, advised on the deal by Citigroup, currently owns 7,000 local towers.
“While the near-term economic picture in Brazil is challenging, demographic trends, smartphone sales, network needs, new spectrum and the competitive carrier dynamic all lead us to continue to believe that Brazil will be a growth market for network investment for many years to come,” SBA president and CEO Jeffrey Stoops.
“Our investment focus for Brazil for the remainder of the year will likely focus on new builds and smaller acquisitions and we would like to reinvest all the Brazilian reais we are generating back into the business,” he added.
Last month, Blackstone subsidiary Phoenix Tower International acquired Sao Paulo-based T4U for an undisclosed sum, while in early July regional operator Algar Telecom agreed to a ten-year sale and leaseback of 125 towers to Highline do Brasil Infraestrutura de Telecomunicacoes for R$64m (US$20.5m).
American Tower has also further expanded, agreeing to buy two tower portfolios from Telecom Italia-owned TIM Brasil for R$3bn (US$1.2bn) in November 2014. It acquired the first tranche, consisting of 4,176 towers, in late April for R$1.9bn (US$631m), but has yet to complete the acquisition of the remaining 2,305 towers.
Oi, long rumoured to be in merger talks with TIM, is also reviewing the possible sale of up to 1,000 towers, along with other non-core assets, its CFO Flavio Guimaraes told TelecomFinance.
“We are discussing possible structures with the agency [regulator Anatel] that would enable us to monetise the properties,” he said.
“There has been a lot of hype about the Brazilian tower market, but not all hype is justified. Whilst there are substantial 4G, and to a lesser extent 3G, roll-outs taking place, much of this is collocated on top of existing infrastructure” Brian Burns, Principal at TMT consultancy Analysys Mason said.
He conceded that all the main players have committed resources to 3G/4G network deployment, with Telefonica-owned Vivo leading the way followed by America Movil’s Claro, Oi and Tim Brasil, but nationwide 4G roll-out “is still a long way to go”.
He believes there are still revenue opportunities, particularly in densely populated areas, but they are not as big as reported by the media.
The antenna law
A new bill aimed at reducing the duplication of mobile network antennas in urban areas, the so-called antenna law, was finally approved in April.
Under the new bill, which unifies the rules for wireless antenna installation across the country, mobile operators must share infrastructure and will be awarded licences for a minimum 10-year period.
As part of the regulation, each municipality will have 60 days to review licence applications for wireless equipment deployment.
According to telecoms minister Ricardo Berzoini, the new law will contribute to improving availability and quality of mobile and broadband services.
Both operators and analysts welcomed the bill as a positive step for the industry and end-users, pointing out that the introduction of a 60-day deadline will make the application process faster and more efficient.
“It’s a positive development for the market, it will help streamline the infrastructure roll-out process across the country” Burns said.
However, he remains cautious on its broader impact on foreign investments. “It’s a market enabler, but not a transformational law”, he added.
Future prospects
Rumoured deals, along with further active infrastructure sharing, might create uncertainty for investors, because towercos in other markets have lost between 20 to 35% of their tenancies following consolidation, Burns said.
However, in the long term, M&A could foster competition.
In-market tower consolidation is also a very likely scenario, according to Burns.
The likes of American Tower, BR Towers, Grupo TorreSur and SBA tend to focus on sale-and-leaseback transactions, while smaller players such as Brazil Tower Company, CellSite Solutions, Highline do Brasil and QMC Telecom are more attracted by build-to-suit opportunities, which are usually more price competitive.
Smaller towercos could either merge among themselves, be acquired by larger counterparts, or serve as a springboard for financial investors keen to enter the Brazilian market.
“It’s a sector that will continue to grow, but growth is unlikely to be as fast as what we’ve seen in previous years,” Burns concluded.
The main challenge is to find the right asset at the right price.
