Goldman Sachs (GS) Group Inc. and Patria Investimentos SA are poised to benefit from a telecommunications building boom in Brazil as mobile-phone providers need companies to construct towers costing $320 million to $820 million.
Goldman, Patria and at least six other private-equity firms are backing five local tower builders as phone operators from Tim Participacoes SA (TIMP3) to Telefonica Brasil SA (VIVT4) shift from constructing their own towers to contracting the work out. Operators will seek bids to build about 3,900 towers, more than half the 6,680 new towers needed in 2014 to improve networks, according to forecasts from one of the builders, who asked not to be identified because the estimates aren’t public.
Brazil is trying to boost services and reduce dropped calls as surging demand for high-speed Internet strains the current network. The country has about 61,000 towers installed today -- slightly more than in the U.K., which is 1/20th the size and has a third of the population, said Chahram Zolfaghari, chief executive officer of builder Brazil Tower Co., the builder that’s backed by investment firm 1848 Capital Partners LLC.
“We’re not talking about 10 percent or 20 percent growth - - it’s like 100 percent,” Zolfaghari said in an interview at Bloomberg’s Sao Paulo office about the number of towers needed in Brazil. “They need to be doubled to properly attend to current needs.”
Goldman Sachs and Gavea Investimentos Ltda., the Brazilian hedge-fund firm founded by former central bank president Arminio Fraga, last year unveiled tower-investment fund Cell Site Solutions, while Patria Investimentos SA, a firm that includes Blackstone Group LP (BX) among its investors, has allocated 300 million reais ($123 million) of capital to its Highline do Brasil.
Other companies planning to build towers in Brazil are T4U Tower Management, which is backed by Israel’s Fishman Group; QMC Telecom International Holdings, whose investors include Peterson Partners LP and Housatonic Partners; and Brazil Tower.
An outside spokeswoman for Goldman declined to comment on behalf of the company, as did an outside spokesman for Patria. Representatives from Peterson, Fishman and QMC didn’t respond to requests for comment.
More Brazilians are buying smartphones, while providers like Telefonica’s Vivo brand and America Movil SAB (AMX)’s Claro unit are pushing data services to boost revenue, according to the companies’ financial reports.
Tim was among the companies forced by regulatory agency Anatel to stop selling new lines for about 10 days in 2012 to address complaints about dropped calls. The crackdown, along with millions of reais in fines in the past several years, is putting pressure on companies to improve customer satisfaction.
Vivo needs 10,000 new towers in the next two years to meet traffic growth and government quality mandates, Chief Executive Officer Antonio Carlos Valente said in an interview.
“We are starting to feel difficulties in the availability of steel and labor,” Valente said about challenges in building new towers.
Anatel doesn’t regulate the tower market and sees demand increasing significantly in coming years.
“This is a good business for tower builders,” said Anatel Superintendent Carlos Baigorri. “Third-party tower builders will allow operators to focus on their core business.”
Of the 6,680 new sites needed in Brazil, about 2,780 will be towers built by the operators themselves or shared towers in which companies install equipment alongside competitors.
Brazil Tower builds towers for 200,000 reais to 500,000 reais apiece, its CEO says. That values the 3,900 to be built by third parties at 780 million to 2 billion reais, according to data compiled by Bloomberg. Brazil Tower then expects to sell the sites in bulk for as much as $300,000 each, he said.
Tower operating companies including SBA Communications Corp. (SBAC) and American Tower Corp. (AMT) have been expanding in the past two years as wireless providers prefer to lease towers rather than maintain them internally to preserve cash and limit investments. SBA agreed last month to pay 1.53 billion reais for 2,007 Oi towers, or about 760,000 reais per tower -- more than twice the rate it paid for a previous acquisition of other Oi towers, according to Wells Fargo & Co.
“We have a long-term view of the market,” Kurt Bagwell, SBA’s international president, said in a phone interview. “We basically try to predict the growth of the revenue of these sites over time and we feel that the price we paid for these works for our business, no problem.”
SBA rose 1.9 percent to $92.29 at the close in New York, while American Tower rose 2 percent to $81.18.
Cell Site, Brazil Tower, Highline do Brasil, T4U and QMC -- the five largest builders in Brazil -- have the capacity to construct only as many as 1,600 towers a year, opening the door for other companies to step in to help build towers, according to the investor analysis obtained by Bloomberg.
“Everybody wants to do business in Brazil -- the problem is that to do business in Brazil is so difficult,” Brazil Tower’s Zolfaghari said. “Just in the state of Florida, you have 60 companies like us. Why do you think I’m in Brazil? Over there I would be one guy among hundreds.”