Telecom infrastructure sales and spin-offs in the Latin American industry, involving transactions with towers or sites, datacenters and fiber networks, tend to occur more often and are more attractive in markets with multiple telcos, rather than in those with two players ruling the segment.
“Companies [telcos] maintaining network ownership have a distinct advantage in markets where there are only two large competitors, such as in Paraguay (‘BB+’/Stable) or Guatemala (‘BB-‘/Positive). This is due to the barriers to entry these assets create. In fragmented markets, such as Chile (‘A-‘/Stable) and Peru (‘BBB’/Stable), this advantage disappeared, which increased the attractiveness of these sales,” Fitch wrote in a recent analysis.
Such a dynamic is more or less in line with the behavior and performance of operators in these different markets when it comes to the retail business.
According to Fitch, more competitive markets generally translate into lower profit margins than those in well-balanced duopolies, as churn rates tend to be higher in the former and therefore take some percentage points from telcos’ margins.
“At the same time, mobile service quality, in terms of coverage and capacity, along with broadband speed and reliability, tend to be superior in competitive markets than in duopolies, as companies invest more to differentiate themselves to attract and retain customers.”
In the last five years, the Latin American telecoms segment has seen a sizeable number of transactions in which telecom operators offload and outsource the ownership and management of part of their infrastructure to focus on their core business of providing voice, data and, increasingly, content and services to end-users.
Telefónica, Entel, WOM, Axtel, Digicel and Oi are some of the telcos that have sold part or all of their towers, datacenters or fiber networks in the recent years. Most of the deals involve the disposal of towers, in a model known as lease-back.
On the side of buyers, or infracos, US groups American Tower, KKR and Equinix have been some of the most active in increasing participation in infrastructure businesses in Latin America.
Challenges
Betting on the capex-for-opex approach, however, is not a panacea for telcos. Not all models work the same way and depending on contract terms with infrastructure companies, carriers could face pressure on their expenses.
Fitch wrote, “monetizing transactions results in reduced network ownership with a need to establish long-term contracts with infrastructure providers, increasing dependence on the provider and adding operational costs. We monitor the structure of leasing agreements, which take the form of sale and lease-back agreements, with cash proceeds from high valuations upfront, offset by elevated lease payments down the road.”
Intense competition, large capex needs, focusing on core business, generating funds to reward shareholders and increasing liquidity are some of the chief factors that have been driving Latin American telcos to offload and monetize infrastructure.
Yet, because issuers monetizing assets are now more dependent on traditional liquidity sources and because there are increasingly fewer assets available, Fitch expects tower monetization transactions in Latin America to cool off in coming years.
The region already has one of the lowest tower possession rate by telcos. Fitch estimates tower ownership by operators declined to around 25 per cent in 2021, from around 50 per cent in 2016, following the recent wave of divestments.
This compares with about 30 per cent in North America, 37 per cent in Europe and 47 per cent in Asia-Pacific, according to the agency’s estimates.
Telcos are looking for different formats of monetization of towers aside from sales.
Among the latest such transactions, Telefónica announced its board approved up to 700 rooftop towers to be leased to the installation of antennas by third party operators in Colombia. Telefónica expects to reinvest the proceeds into the development of its network and services
In another recent deal, Phoenix Tower International’s Chilean subsidiary agreed to acquire up to 3,800 telecommunications sites from WOM for US$930mn.
After accounting for this transaction, whose initial closing is expected for this quarter, PTI said it will become the largest communications tower owner in Chile, expanding its global presence to over 22,000 towers in 19 countries.
Also in Chile, the country’s state-controlled telco Entel announced it is looking for buyers for its fiber network, after selling its datacenters in Chile and Peru to US group Equinix.
Other major deals were the fiber JVs announced in 2021 by Telefónica, TIM and Oi in Brazil and by Telefónica in Chile and Colombia.
In general, returns form these deals tend to be higher in markets with stronger operating environments and less competition among carriers, while the valuation of infracos tends to vary based on geography and type of asset.
“Assets with faster growing demand, such as datacenters, and relatively less competition or with longer-term inflation-adjusted contracts, tend to trade at higher multiples than assets with more competition, slower growth, and shorter-term contracts such as subsea and long-haul fiber,” said the report.
In fiber, network sharing will likely grow where networks are already established, and it is difficult and more expensive to deploy, such as in large urban centers.
“However, given broadband internet is a growing, high-margin business and fiber networks will be a vital component of data transmission and a fundamental element of 5G, we do not expect massive monetization of these assets in the near term,” Fitch said.
Telecom Competition
Looking at the broader telecom market, the ratings agency said it expects competition for subscribers to remain intense in Colombia, as incumbent mobile operators employ promotional pricing strategies to thwart newcomer WOM Colombia from gaining market share.
Likewise, the Chilean mobile market, controlled by four players, is expected to remain challenging, “while the fixed broadband market is experiencing intense promotional activity leading to severe ARPU weakness.”
In Peru, the Telefónica-Américal Móvil duopoly is now broken down into a more competitive environment.
“The Peruvian mobile market transformed in the last several years from being a largely two-competitor market dominated by Telefónica del Perú (TdP; ‘BB+’/Negative) and América Móvil’s (‘A-‘/Positive) Claro to an almost evenly split four-operator market. TdP lost market share as Empresa Nacional de Telecomunicaciones (Entel; ‘BBB’/Stable) and Bitel (Viettel Group) attracted customers.”
Conversely, Brazil has three consolidated competitors from four after the sale of Oi’s mobile business to its three rivals.
This, according to Fitch, should lead to fewer customer-acquisition promotions and longer customer lifecycles with higher profitability.
As for the 5G effect, the start of the new technology tends to maintain telcos’ capex under pressure as in addition to 5G they also have to keep up with investments in existing, and growing, technologies.
“The beginning of a new generation of mobile technology, such as 5G, is marked by acquisition of spectrum, rollout of the network, and increased subsidies of more expensive handsets. Usually this occurs while carriers still need to invest in previous technologies, such as 4G and 4.5G, while switching off legacy generations, such as 2G and 3G. In this phase, telcos usually consume cash and leverage balance sheets. The same applies to ongoing deployment of fiber-optic networks.”
Fitch said it expects limited pressure on carriers’ capital structures in countries prioritizing coverage, as capex for 5G will accelerate while 4G investments phase out. In locations maximizing fiscal revenue, carriers may slowdown network rollouts to offset higher debt burden.
