Brazil Phone Towers Spur Race for Returns Topping 80%

The race to snap up phone towers being sold by companies from Oi SA to Telefonica Brasil SA is driving up prices, prompting some investors to hold off on signing new agreements.

Lured by gross profit margins of more than 80 percent to operate the towers, buyers have pushed prices up as much as 60 percent in the past year, to about $200,000 apiece, Wells Fargo & Co. analyst Jennifer Fritzsche said. With thousands of towers up for grabs, foreign and Brazilian private investors are going up against U.S. public companies such as American Tower Corp. and SBA Communications Corp.

Goldman Sachs & Co. and Gavea Investimentos Ltda. this year created tower-investment fund Cell Site Solutions, while Patria Investimentos SA, a firm that includes Blackstone Group LP among its investors, has allocated 300 million reais ($130 million) of capital to its Highline do Brasil. Highline and Cell Site Solutions have yet to sign any deals amid concern current returns may not be worth the level of risk involved, said a person with knowledge of the matter who asked not to be identified because the information is private.

“The size of these tower portfolios is luring private equity funds and U.S. companies looking for large deals as they can put a lot of money to work at one time,” said short-seller Carson Block, founder of Muddy Waters LLC in Isleton, California, which was critical of American Tower in a report last month. “The problem is that some of these players -- AMT among them -- are pushing valuations up to the absurd levels we see today,” he said in an e-mail.

No Deals

Highline estimates that the 60,000 cell sites in Brazil will have to double or triple to keep up with rising demand for Internet access over mobile devices, the company wrote in a statement at the time of its creation in December. While countries such as Japan and the U.S. have sites for every 400 to 1,200 people, Brazil only has one for every 4,500 users, Highline said.

Representatives of Highline, Goldman, Gavea and Cell Site Solutions declined to comment.

A plan by NII Holdings Corp. to sell towers will fetch prices of as much as $200,000 apiece, according to estimates from Fritzsche. Last month Oi, the most indebted Brazilian operator, sold the right to operate towers to Boca Raton, Florida-based SBA Communications for $143,000 each, a lower price than others have fetched because of their technical characteristics.

‘Tremendous’ Returns

Tower-lease returns are “tremendous,” and the Brazilian market offers significant growth opportunities, Fritzsche said. Owners can rent space on each tower to various phone companies, maximizing profits.

“With two tenants, it’s like an 85 percent margin,” Fritzsche said in a phone interview from Chicago. “It’s very easy as you lease up. The first is break-even, and the rest is gravy.”

Matthew Peterson, an American Tower spokesman in the U.S., and the company’s Brazilian press office didn’t respond to several phone and e-mail messages. The Boston-based company said in a regulatory filing that a report last month by Muddy Waters claiming the firm overstated the value of acquisitions “included inaccurate statements.” Muddy Waters stood by its statements in a new report published yesterday.

American Tower fell 0.4 percent to $71.01 at 2:13 p.m. in New York.

Tough Comparisons

While prices between $125,000 and $200,000 are “cheap,” direct comparisons with rates in different countries are difficult, James Moorman, an S&P Capital IQ analyst, said by telephone from New York. Companies “will be cautious if they do start to see prices go up too much.”

The value depends upon the “revenue opportunity, how many tenants you can put on a tower,” he said. “It depends on the rent increase you can put in. There are a lot of complexities involved.”

Brazil’s communications ministry has long been vying for the industry to share towers, Paulo Bernardo, communications minister, said in an interview in Brasilia on July 25.

“The reality is that our operators fight a lot about the question of infrastructure,” he said.

Brazil’s government is mandating investments surrounding the 2014 World Cup and 2016 Olympic Games and is providing tax incentives for development.

“There are a lot of incentives and there’s just a lot of potential growth and a pretty big market,” said Moorman of S&P.

Phone companies also have incentives to sell to raise cash for investments the government is demanding. Oi, the nation’s largest landline phone company, is selling assets to pay for 6 billion reais in infrastructure investments and reduce its 27.5 billion-real debt, according to company filings.

Oi’s Sales

Rio de Janeiro-based Oi has sold more than 6,000 towers for 1.8 billion reais and has an estimated 5,000 additional wireless towers it could offer, Marcela Nagib and Jacob Steinfeld, analysts at JPMorgan, wrote in a report on July 15.

Oi’s press office declined to comment, as did Telefonica Brasil’s and SBA’s.

The next deal to watch is with Reston, Virginia-based NII, which sells mobile-phone service under the Nextel brand. It is close to a deal to sell 4,500 towers in Brazil and Mexico, Chief Executive Officer Steve Shindler said yesterday on a conference call. Claudia Restrepo, a company spokeswoman, said NII had no further comment.

“There are certainly interested buyers for these towers,” said Fritzsche of Wells Fargo.

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