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12:00 AM (GMT ­03:00) – Nov 20 2014 towers' market grows as industry shifts

By Ivone Santana | São Paulo

The evolution of the business has dramatically changed the profile of the entire market. With increased competition, companies’ revenues have been affected and the race for market concentration that began in Europe in the 2000s has gained new force worldwide. In this context, strong or vulnerable companies, but with the common goal of reducing costs, have decided to forgo something they fiercely advocated a decade ago: ownership of cell phone towers. Companies are also treating such equipment as important assets that can provide liquidity at crucial moments, such as acquisitions.

A mapping of the main transactions carried out by consultancy Value Partners and commissioned by Valor shows that companies sold 18,983 towers in Brazil from 2012 to the second quarter of 2014. The deals involved towers of , Vivo, CTBC (owned by Minas Gerais­based group ), GVT, Nextel and television network Bandeirantes. Sales totaled $3.46 billion. The value of each tower, which ranged from $119,000 to $223,000, is now between $136,000 and $234,000.

Since carriers depend on towers for the communication of their networks, when selling them they negotiate to lease them with the buyer – usually companies that only work with the management of towers. It’s a way of getting financing without resorting to banks or the market, and with a lower cost than that of the capital.

Tower companies pay for the asset and can do more business in a way that carriers cannot, says Francesco Pellegrino, partner of Value Partners. Sharing towers has never been something easy among competitors. In many cases, sharing the same equipment is synonymous with distrust and uneasy neighborhood.

The regulation of the telecommunications industry requires companies to share infrastructure. The rule took years to be adjusted, and agreements are not easy. Discussions are lengthy and pricing often requires arbitration from the National Telecommunications Agency (Anatel).

Jealousy in relation to the assignment of space in the towers was born with the industry’s privatization. At the time, there was a rush of telcos. Those who built their network more quickly attracted consumers first. In that scenario, the more the rival took time to build and start to operate its towers, the better. But after all companies built their networks, there was no reason to stop sharing. Instead, companies began to see the sale­and­rental model as a way to generate cash flow and reduce costs. Still, depending on the carrier and region, the resistance to sharing continues. In general, telcos tend to keep the ownership of strategic towers – in places where there is no competing equipment, or negotiation is difficult for new towers.

It’s common to see concentration of towers of different carriers in the same place. In Uberlândia, Minas Gerais, for example, the same block hosts Algar, Vivo and TIM towers, says the CEO of Algar, Divino Sebastião de Souza. One tower could be enough to host the antennas of the three companies. On the other hand, on Avenue Engenheiro Luiz Carlos Berrini, region in São Paulo with high concentration of office buildings, it’s possible to see antennas of all carriers at the top of a building. In this case, the building replaces the need for construction of tower and solves the problem of lack of sites for new equipment in urban areas.

Although they are valuable and subject to lengthy discussions, towers are basically made of cement and steel, on which the carriers’ base stations are mounted. If on one hand they may seem rustic for their strategic importance, on the other, it is worth mentioning that the price of each tower consists of several variables.

First, it’s necessary to negotiate with property owners the sites where the towers will be built. Second, there is no national regulation for the license, which forces companies to negotiate with each municipality and deal with over 200 different rules. A single legislation has been under review in Brasília for years, still with no conclusion.

In addition, other factors make up the cost: the location of the tower; the carrier’s average revenue per user; the revenue volume that is already on the network; if it needs reinforcements in infrastructure; if the lease to be signed by the carrier that is selling the tower is short or long term (the shorter the term, the higher the rental price); and how much the telco will pay for the management of towers. If the tower is in a place where it is difficult to obtain a license and where there’s no competitor, its price is higher and the operator is less interested in selling it.

Telcos’ change in strategy has fostered, in recent years, the growth of companies that manage towers. Some funds have decided to invest in the business, followed by a concentration move.

In Brazil, American Tower has become the leader after buying BR Towers. About a dozen companies operate in the domestic market, according to Teleco, which provides statistics on the telecommunications industry. The largest are American Tower, SBA and TorreSur, controlled by American fund Providence. The others are very small and are searching for growth, potentially becoming a takeover target.

Aiming to raise capital for expansion, T4U Holding Brasil, unit of T4U, an Israeli company of antenna lease, filed with the Securities and Exchange Commission of Brazil (CVM) for the registration of public company. But with the elections the process was left aside. Now there are signs it may be resumed. The company rents telecommunication towers to the largest carriers in Brazil, including Oi, Vivo, TIM and Nextel. Estimates of an industry executive who asked not to be named indicate that there are six midsize tower­management companies in the country, which own 100 to 200 towers. About 20 other small companies, with regional operations, have 10 to 20 towers.

With the purchase of BR Tower for roughly $978 million, American Tower will see its number of owned and managed antennas increase to 16,000 from 11,700.

American Tower seems to have insatiable appetite. Last year, it acquired MIP Tower Holding, parent company of Global Tower Partners, which had 7,100 towers in the country. In the last two years, American Tower, BR Towers, SBA, GTS TorreSur and Highline concentrated the bulk of acquisitions, according to the Value Partners survey.

Since carriers have sold most of its towers, there are few big deals left on the table. The only one being negotiated at the moment involves about 7,000 assets of TIM Brasil, the local unit of Telecom Italia. Industry sources estimate the price at €900 million to €1.2 billion. TIM Brasil is completing the process of selling these assets, said CEO Rodrigo Abreu, during a conference call on the company’s third­ quarter earnings.

Another attractive set of towers is the one owned by América Móvil, the Mexican conglomerate that owns , and Embratel in Brazil. Altogether, it owns about 11,000 towers and shares or leases 3,000. But the group of Mexican billionaire is maintaining its position of not selling such assets. On the contrary, it’s beginning new constructions in rural zones in the North region, in Bahia and São Paulo, where it needs to expand Claro’s network but there are no towers available to lease. Claro CEO Carlos Zenteno says the goal is to meet requirements related to the 4G auction of last year, for the 2,600MHz spectrum.

Mr. Zenteno doesn’t provide details on the project, but Value Partners estimates the monthly operating cost of towers at $1,000 to $2,000. The cost of constructing and renting depends on the potential of the equipment and the agreement between infrastructure owner and carrier.

On another front, Tom Bartlett, American Tower deputy chief executive and CFO, said in a conference call with analysts on October 30 that he expected to complete a deal with NII Holdings, which owns Nextel, involving the sale of 900 towers to BR Towers. The transaction still depends on regulatory approval, American Tower said.

Mr. Bartlett said American Tower expects to invest about $3 billion this year. Of this total, $1.5 billion will be used to complete the acquisition in Brazil; $1 billion for investments and $500 million to pay dividends.

Oi sold assets that generated R$5.3 billion in cash, creating a non­recurring deduction of R$3 billion in the third quarter. The deal included two lots of fixed towers in April and June, a batch of wireless towers in July 2013 and GlobeNet, a submarine cable company, in December last year. The sale of the second batch of towers announced last June is still pending and is expected to be completed by December, said Bayard Gontijo, acting Oi CEO, during the third­quarter results release. The transaction will generate cash flow of R$1.2 billion and non­recurring capital gain of R$1 billion. Mr. Gontijo said there’s another batch of about 1,000 towers to be sold in 2015. "With the assets we have, we are able to participate in the consolidation without accessing the capital markets," he said.

The next major move in the industry is likely to focus on the construction of towers, as the total number in the country is still considered insufficient to ensure quality mobile service. Even when they sell their assets, telcos negotiate with new owners the conditions for building new towers.

With the growth potential of 3G and 4G networks in Brazil, the tower infrastructure can grow as well as the number of carriers’ radio base stations, installed in such structure.

Currently each radio base station in Brazil is used by an average of 4,500 users, compared to 1,500 in the US. For the Brazilian consumer to get the same level of quality offered in the US, the Brazilian base must grow up to 142% to a total of 125,000 to 170,000 radio base stations, Mr. Pellegrino, with Value Partners, estimates. And that's where Anatel’s pressure comes in order to force operators to improve service quality.

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