With initial rates of return (IRRs) across geographies averaging in the mid- to high-teens, and with growth in demand expected to continue even in locales where unfavourable regulatory shifts are chilling markets, telecoms infrastructure on the whole has entered a towering new phase.
In developed and highly-saturated geographies such as Europe and the US, demand is driving colocations that equate to significant growth opportunities for independent tower companies (towercos). In emerging markets, growth is fast-paced, and in short order investors believe colocations will be a global theme.
And while some markets, such as China, are to all intents closed to outside investment, many others are relatively investor-friendly given the positive economic impact of mobile broadband growth – consulting firm Brattle Group recently tagged $2.32 in economic benefit for every dollar spent on licensed wireless services in the US in 2013.
Below are the themes that are dominating the telecoms infrastructure conversation in 2015:
THE SPECTRUM CRUNCH AND NET NEUTRALITY
In 2010, regulators warned of an impending “spectrum crunch”, and according to remarks delivered by former Federal Communications Commission (FCC) chief Meredith Attwell Baker last month, the crunch is on. She noted huge revenues drawn in the AWS-3 spectrum auction this past January, a clear signal of the “pent-up demand of providers eager for the ability to meet the ever-escalating demands of mobile broadband traffic”.
A former advisor to the FCC told Infrastructure Investor that, along with this spectrum crunch, the elephant in the US telecom room is the recent shift in net neutrality rules via the FCC's Open Internet Order, noting that AT&T and Verizon have already announced plans to scale back investment in response.
“If they're pulling back on their investment, that means less siting and less facilities,” the advisor said. “I would imagine that uncertainty is going to have a domino effect on many different related sectors.”
Still, the advisor was optimistic about growth opportunities in the US, noting that most financial analyst reports at this time are “very bullish on the facilities and tower market despite these issues”.
Whether in emerging or developed markets, despite regulatory shifts and other risks associated with the infrastructure space, new opportunities continue to arise.
As evidence one can look to Chile, where Law 20.599 was enacted in June 2012 establishing regulations for the installation of antennas and transmission stations that caused a cooling effect. Despite this shift, Business Monitor International (BMI) analysts reported in April 2014 that strong fundamentals in the region, backed by a favourable business environment, have led them to hold an “outlook for the towers market [that] is more positive over the long term, as growth in 3G/4G services increases along with consumer spending power”.
To the south, with a total landmass larger than that of the US, Brazil has nearly as many mobile connections – 275 million compared with 345 million – but far fewer towers than the 100,000 or so across the US (roughly 60,000 in 2012), according to BMI. To support market growth, the Brazilian Agency of Telecommunications (Anatel) is pushing for mobile operators to pick up the pace on 4G deployment and colocations somewhat forcefully.
Further north, the head of the Macquarie Mexico Infrastructure Fund, Jonathan Walbridge, notes that similar growth trends are creating a favourable investment environment in Mexico, with MMIF, the third-largest independent towerco in the country with an inventory of 1,180 towers, poised for expansion to accommodate a growing population, and more importantly a growing middle class.
Noting the recent acquisition of Nextel Mexico by AT&T early last month for almost $1.9 billion and concurrent plans to create an interconnected North American Mobile Service area that will include Mexico and the US, serving 400 million customers, Walbridge says the merger could signal a “huge forward step for those markets” and provide a credible competitor to TelCel and Telefonica.
“Similar to what we've seen in other jurisdictions, I think we expect some very healthy competition amongst those three carriers,” Walbridge said. “All of them are highly-credible, well-funded, and as a result we fully expect to see provision to these markets of 4G, 5G and beyond.”
Another market ripe for growth is the African space, according to IHS Group founding partner and executive committee member Mohamad Darwish. IHS has been active in the African infrastructure space since 2001, and in telecoms since 2009.
The company inventory now includes over 22,000 towers across five countries, raising more than $2.5 billion in 2014 to support expansion plans in Nigeria, Côte d'Ivoire, Cameroon, Rwanda and Zambia.
Darwish says that while strong fundamentals and an eye toward decreasing costs and dependency of their assets through development of renewable power systems are key focus points, the company's reputation is its strongest asset.
“One of the key factors that made IHS a success story is the perception our clients have of us as a neutral tower operator which is there to serve their needs and provide them with the highest quality service,” Darwish says.
OBJECTIVES ARE CONVERGING
Even in Europe, where just a handful of years ago there were limited growth opportunities, mobile data demand is opening new income streams and renewed interest in the space, according to Phil Marshall of Tolaga Research.
“Several years ago […] service providers were looking at selling towers, but it didn't make sense back then. Now it does. Mobile broadband is creating quite a significant growth trajectory in demand for the tower space,” he says, adding that specific growth areas include towers for major service providers, for small-cell companies, and for large venues including airports and stadiums.
AMP Capital's listed infrastructure investment team also holds this conviction, estimating that the number of mobile devices is set to reach 10 billion by 2018, and after growing 81 percent in 2013, that global mobile data traffic is set to see an 11-fold increase by 2018.
As a result, it believes mobile tower operators, which play a key role in wireless networks, will be one of the primary beneficiaries of the upgrade cycle, according to a source close to the firm who noted that the AMP team sees these factors, along with a recent wave of consolidation in Europe's telecoms industry, as factors that will likely lead to boosted lease revenues across the industry.
Colocations are the talk of the town, even in early-stage markets such as Mexico, where tenancy per tower is currently at about 1.2:1, and investors expect colocations to become increasingly popular, eventually looking to match other market leaders with TPT ratios of 2.5:1 and higher, such as the US.
The bottom line is, despite contemporary uncertainties and fluctuations, investors active in the space are seeing significant returns – whether through direct investments such as those of MMIF and IHS, or through listed investments such as those managed by AMP – and everyone with whom we spoke said they expect continuing growth to drive those returns for the foreseeable future.
While new investors need to be acutely aware of the specific risks and features of each individual market, strong fundamentals and good relationships with local players are key drivers of success.