TIM SA, a wireless carrier in Brazil owned by Telecom Italia, detailed its value creation initiatives, including the decommissioning of 4.4k tower sites in Brazil, following the closing of its R$7.0bn ($1.4bn USD) share of the acquisition of Oi SA’s mobile assets, formerly Brazil’s fourth largest wireless carrier.
As Brazil’s wireless carriers have now consolidated from 4 to 3, tower decommissioning is beginning to commence, driven by wireless carriers seeking to extract merger-related synergies. Specifically, wireless carriers like TIM SA are dismantling and moving their active infrastructure to towers with non-overlapping coverage.
TIM SA’s Site Deactivation Plan – Current
As part of TIM SA’s acquisition of Oi SA’s mobile assets, the company received 7.2k tower sites in Brazil and assumed R$4.1bn ($0.8bn USD) in IFRS 16 debt related to tower lease contracts. Of the total tower sites received, TIM SA states that only ~40% are in new locations – thus worth retaining. However, the remaining ~60% of acquired sites are surplus to TIM’s requirements because they are either:
- Overlapping sites with TIM’s current footprint; and/or
- Not required in order to provide the same level of service to TIM’s customers, given the 49 MHz of incremental spectrum depth that TIM gained through the Oi acquisition
To this end, by 2030, TIM SA plans to rationalize the acquired Oi SA portfolio down to ~2.8k sites, through a site deactivation plan. As such, TIM intends to shrink this tower portfolio by 4.4k sites, equivalent to a ~60% reduction.
Site Deactivation Plan – Current – # of Sites
By pursuing these site optimization opportunities, TIM SA will accrue future operating expense savings / leasing reductions. At the same time, TIM will reduce its R$4.1bn ($0.8bn USD) tower leasing obligations and related IFRS 16 financial debt by ~60%.
TIM SA’s Site Deactivation Plan – Accelerated
While TIM SA’s current site deactivation plan contemplates a timeline of ~8 years, the company has also developed an accelerated site deactivation plan which reduces the program’s length to only ~2 years. Specifically, TIM’s strategy to accelerate its site optimization plan would start in Q3 2022 and result in bringing the Oi SA portfolio down to ~2.8k sites by the end of 2024.
Site Deactivation Plan – Accelerated – # of Sites
TIM SA views the execution of its accelerated site deactivation plan as accretive to net present value (NPV) by ~R$300m ($60m USD). However, this plan would generate higher short-term cash-out payments, by TIM to tower companies, due to early termination penalties of tower contracts.
Potential Tower Sales – Following Oi Transaction
As a condition for approving the sale of a portion of Oi SA’s mobile assets to TIM SA, CADE, Brazil’s antitrust regulator, stipulated that certain acquired tower sites must be marketed for sale. Nevertheless, Alberto Griselli, CEO of TIM SA, notes that the company’s site deactivation plans are not dependent on any successful outcome in this mandatory sale process. Particularly, Griselli states:
“Our plan does not depend on selling portion of this sites portfolio as determined in the antitrust approval process. The success in the mandatory sale process would represent an additional upside for us.”
Tower Company Exposure to TIM and Oi
Tower companies face impacts from TIM SA’s plans to decommission tower sites in Brazil, in instances where TIM does not own the underlying infrastructure. Thus, on a portion of the 4.4k tower sites which fall under TIM SA’s site deactivation plan, TIM is a tenant of tower companies, which are the lessors.
Although TIM is decommissioning overlapping tower sites related to the acquisition of Oi SA, the company could choose to deactivate either a site it owned pre-transaction or an acquired site, in order to eliminate an overlap. Therefore, in the context of TIM’s decommissioning, it is relevant to analyze a tower company’s exposure to both TIM SA and Oi SA as tenants.
In Brazil, the three largest independent tower companies, pro forma for pending acquisitions, are American Tower, SBA Communications, and IHS Holding – which all have exposure to TIM SA and/or Oi SA.
American Tower
As of Q4 2021, American Tower operates 22.9k sites in Brazil and has exposure to both TIM SA and Oi SA as tenants:
- TIM: 1.4% of American Tower’s total property revenue, equivalent to ~$132m in full-year 2021
- Oi: 1.0% of American Tower’s total property revenue, equivalent to ~$95m in full-year 2021. Presently, Oi has ~7 years of remaining contract term with American Tower
SBA Communications
As of Q1 2022, SBA Communications operates 10.2k sites in Brazil and has exposure to Oi SA, which is the company’s single largest International tenant. Specifically, Oi SA comprises 25.6% of SBA’s International site leasing revenue, equivalent to ~$32.4m or ~5.8% of SBA’s total site leasing revenue.
Notably, as shown below, Oi SA’s site leasing revenue share for SBA Communications has already been in decline for the past two years, with a significant downturn of 2.6% in Q1 2022 alone:
Oi SA as % of SBA’s International Site Leasing Revenue
SBA’s Broader Exposure to Oi SA
As of December 31, 2021, SBA Communications disclosed that 1,568 (21%) of its 7,525 tower leases with Oi SA overlap with leases from Brazil’s other wireless carriers, namely Vivo (Telefônica Brasil), Claro (América Móvil), and TIM SA (Telecom Italia). Therefore, SBA indicates that these leases may be subject to non-renewal upon their expiration. To this end, as of December 31, 2021, SBA’s leases with Oi have an average remaining current term of ~12.4 years.
Finally, SBA Communications estimates that its aggregate exposure from overlapping sites, over the life of Oi’s contract, is in the range of $20m to $30m of revenue.
IHS Holding
Pro forma for IHS Holding’s acquisition of the SP5 tower portfolio from Grupo TorreSur, IHS operates 6.7k towers in Brazil. Through the acquisition of the SP5 tower portfolio, IHS gained exposure to Oi SA as a tenant:
SP5 Tower Portfolio
Oi SA entered into a 20-year operating lease agreement with Grupo TorreSur’s SP5, in April 2013, to use space and install equipment on the company’s fixed-line communication towers. Presently, this operating lease would have an initial remaining term of ~11 years. Additionally, the contract is renewable for another 20 years.
IHS Holding notes that Oi Fixed is a key customer of Grupo TorreSur’s SP5 towers, while the portfolio has de minimis exposure to Oi Mobile. Overall, this tower portfolio has contracted future revenue of R$7.9bn ($1.6bn USD), which includes the non-cancellable second lease term from Oi SA.
