A telling tale of Mexican telecoms

Favourable demographics and a growing middle class will continue to be strong drivers behind the development of Mexico’s tower market, says the head of Macquarie’s Mexico fund.

In an interview with Infrastructure Investor, Jonathan Walbridge, chief executive of the Macquarie Mexico Infrastructure Fund (MMIF), shares his views on the state of the global telecoms market – and explains why the sector remains a good call for infrastructure investors.

II: Let's start with the basics; can you tell me how invested in telecoms MMIF is at this point as far as value and quantity assets under management are concerned?

JW: We have essentially 25 percent of the fund's commitment invested in telecoms, so roughly $100 million. I can give you the exact number of towers under management: it is 1,200 towers as of April 2015. Mexico Tower Partners (MTP) is the third-largest independent towers operator in Mexico after Telesites and American Tower.

II: And looking forward, what level of growth do you see MMIF aiming for in telecoms?

JW: In Mexico there's a favourable demographic trend with a growing population – and more importantly, a growing middle class with an increasing GDP per capita. In the last 15 years, the country has grown at about 22 percent per annum in terms of towers, which is just a function of increasing data usage by subscribers.

But we see significant growth in Mexico. The market is currently at about 4,000 users per cell site; as you look at more developed markets, the US is at about 1,000 users per cell site, while Korea and Japan are at around 600 users per cell site. So we've a long way to go in terms of data penetration, and as a result – it's just the laws of physics – there is a need to build towers.

II: Where are MTP's towers under management located across Mexico?

MTP’s towers are located in the 31 states of Mexico. But it's really very concentrated around where the population is based – the major city centers such as Guadalajara, Mexico City and Monterrey.

II: What is MTP's current average tenancy per tower, and do you see that changing in the near or long term? Also, what do you see as the ideal tenancy rate for a Mexican tower?

JW: The 4,000 users per cell site is a general market average. In terms of co-locations, the market is still in a relatively early stage in its evolution. And at this time in the market there is a move towards the more independent tower companies, which is a strong driver of co-locations.

While the Mexican towers market is still in its infancy, over the next 10 or so years we could see the co-location ratio going upwards to 2 tenants per tower. Obviously the number of tenants is a function of the number of wireless carriers in the market. Generally speaking, MTP is working towards trying to get up to 3 tenants on a tower. The US is at about 2.5 tenants per tower; Mexico is currently at around 1.2 tenants per tower, so it's very early days in terms of that.

II: What is the length of your typical lease arrangement and what is the average cost per tower over the lifetime of these investments?

JW: Our tenant leases are relatively long-term contracts. With regards to the ground leases, we're trying to match that long-term tenure of the tenant leases. As compared to what we're seeing in other markets, in Mexico, ground lease rent is passed through and paid by the wireless carrier to the landlord. In terms of both the tenant lease and the ground lease, it's usually a fixed-price inflation-linked contract. The wireless operators are responsible for the installation of wireless equipment on the towers.

So the ‘towerco’ is really supplying the land where ‘telcos’ will locate their equipment and then the tower itself on which the transponder or transceiver equipment is located.

II: How competitive is the Mexican telecom space and do you see competition levels increasing in the near term? If there is a shift here, how will it affect bottom lines?

JW: It is a competitive environment, and there are some quality tower operators here. There is American Tower, which is very large and has some very established relationships. Telesites (recent towers spin-off from American Movil) clearly has a very strong tenant relationship with Telcel. There are also a number of smaller tower operators. The market counts more than 100 million cellphone users; it's a large one and it's growing quickly.

As a result of the existing and new cellphone users, we see a relatively high level of competition between carriers. Therefore, in order to differentiate yourself, carriers must have a wide wireless network in terms of geographic coverage, provide excellent service to their customers, and continuously plan for the expansion of their network.

II: How is the policy/regulatory environment surrounding Mexican telecoms? Are there any particular zoning issues to be aware of either now or on the horizon?

JW: As we’ve seen, the current Mexican administration is clearly keen to play a more active role in the market and promote the telecommunications sector within Mexico. Like all other participants we are looking at that and other changes of regulation. It's a very good environment.

II: What is the current state of networks in Mexico with regards to 2G, 3G and 4G deployment, and what is the nature of your forecast picture?

JW: We expect it to move relatively quickly. Mexico’s wireless market has changed rapidly over the last six months: the consolidation of Nextel and Iusacell under the AT&T umbrella, which is clearly a very large and well-funded telecoms provider, is going to be a huge step forward. It will also provide a credible competitor to Telcel and Telefonica.

Similarly to what we've seen in other jurisdictions, we expect some very healthy competition among those three carriers. All of them are highly credible and well-funded, and as a result we fully expect to see deployment to these markets of 4G, 5G and beyond.