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Who is Digital Colony, the US$30bi group who wants Oi and much more

Who is Digital Colony, the US$30bi group who wants Oi and much more

Digital Colony closes this month the fundraising of the second investment fund for its mega plan to be one of the largest digital infrastructure companies in the world. The American investment group does not comment on the values, but the expectation in the market is that the volume raised will exceed the 6 billion dollars originally intended. This is the second capture of the house. The first, which ended last year, totaled $ 4.1 billion.

Brazil has a prominent place in the company’s plans, which will establish a local base here in early 2021, from where it will manage the entire region of Latin America, one of the priorities for the allocation of resources.

Marcos Peigo, a Brazilian executive with more than 20 years of experience in the telecommunications sector, became a partner of the American group in March. After two years dedicated to the cloud computing market at IBM, he joined Digital Colony in the purchase of UOL Diveo’s data center assets, right at the beginning of the pandemic and from that base they started Scala – an investment of the order of $ 400 million at the start.

Few, in the general public, know Digital Colony and its projects for the country. Although President Marc Ganzi has already made investments in Brazil in the past, the holding company only ‘checked in’ here in late 2019, when it bought Highline, a cellular infrastructure company founded by private equity manager Pátria Investimentos about eight years ago.

In the acquisitions of Highline and the formation of Scala, Digital Colony invested close to US $ 500 million and the volume is expected to double soon, with the next steps for these operations to be announced soon. But this is only the beginning.

“There is no way to ignore a market the size of Brazil, with 200 million people. It is one of the five largest consumer markets for social media and one of the largest mobile internet users in the world. Our clients know the importance of Brazil and so do we” says Marc Ganzi, global president of the asset manager in an exclusive interview with EXAME IN.

“My challenge is to continue investing in infrastructure to make the economy continue to develop. But we are not just investors, we are operators ”, he says. It is the first time that Ganzi and Peigo talk about the deal with the Brazilian press. The main message is to make clear the strategic vision and the long-term commitment, although the executives are firm in not detailing the value of the new fund, nor the next acquisition movements. But there is no doubt that they will come.

The public only discovered the Highline when the company started fighting over Oi’s assets. But it stopped there. It is still far from having any idea who its new owner, Digital Colony. Executives want to make it clear which long-term project they have for the industry.

Ganzi believes that the future of the sector is the complete separation between network companies and service providers. This division process has already started outside Brazil and should accelerate in the coming years, with advances also in the sector’s regulatory debate. Here, Oi will be the first to adopt this structure for its entire area of ​​operation, but TIM and Telefônica Vivo have also adhered to this strategy to leverage investments, albeit on a smaller scale. In the Spanish group, for example, it will only be for operations outside its concession area, the state of São Paulo.

“Digital infrastructure is the new real estate”, says Marcos Peigo, the Brazilian partner and president of Scala. The statement sums up more than a strategic vision of return: it fits perfectly into what is happening in the sector and in Colony Capital itself, which became the exclusive owner of Digital Colony last year. This holding company was a partnership between Digital Bridge, a manager founded in 2013 by Ganzi, already focused on digital assets, and Colony Capital, a traditional investor in the global real estate market.

US$ 30 billion by 2021

After a strong campaign of investors dissatisfied with the results and eager for change, Thomas Barrack, the head of Colony Capital until then, decided to buy Digital Bridge and put Ganzi as president of the business. The mission? Convert almost the entire real estate portfolio to digital infrastructure. Barrack became chairman of the combined company.

When they merged in July 2019, Colony Capital and Digital Bridge had about $ 58 billion under management – $ 40 billion under Barrack and $ 20 billion under Ganzi.

Since taking up the position, the executive has been promoting changes at high speed. Colony Capital’s total portfolio ended September at $ 46 billion. Several assets were divested, debts were paid, and resources were reallocated according to the new project.

In the balance of the third quarter, a great achievement: the digital infrastructure businesses now represent more than half of the entire portfolio, compared to 13.5% in December. This is US $ 25.4 billion invested in networks, data centers and towers. The goal publicly assumed by Ganzi is that this percentage will reach 90% by the end of 2021. In practice, Digital Colony will swallow Colony Capital.

Adding the conversion of the portfolio that still lacks the total of the new fund, Ganzi has capital of no less than 30 billion dollars to invest in networks and data centers until the end of next year. As the manager usually acts in an associated way, it means aiming at no less than about 50 billion dollars in business – something around 270 billion reais.

Message to anyone who was startled or surprised by Highline’s proposal for Oi’s cell phone operation: this total is almost 20 times Oi Mobile.

In September, Digital Colony provided financial support for the subsidiary DataBank to acquire zColo, a $ 1.4 billion movement. But probably the most well-known and daring recent step was the acquisition of fiber company Zayo, in partnership with EQT Partners, for $ 8.2 billion last year – announced just before the combination with Colony Capital.

Although Brazil will be the basis for the Latin America project, where the fund already owns Mexico Tower Partners (MTP) and Andean Tower Partners (ATP), among others, there is no previous definition of contours, that is, how much should be in one location or another. What Digital Colony has clear is the choice for the region and its vision of the sector’s future. The rest is flexible and will be shaped according to customer opportunities and demand. Some countries in Asia are also in the crosshairs.

Networks – From ugly duckling to Cinderella

To understand the size of Digital Colony’s appetite, it is necessary to understand its business vision for the future of the telecommunications sector. When explaining why digital infrastructure is for today’s market what real estate assets were in the past, Peigo illustrates it this way: “Telecommunications networks are the great avenues where digital life happens.”

Even those who had never stopped to think about it understood this in practice during the pandemic, which locked half the planet in their homes for months, as a strategy to contain the new coronavirus. The networks carry everything in contemporary life and this role only tends to increase.

“Ask yourself: what has changed in your life in the past ten months? Everything has changed. The way you communicate, how you shop, how you work from home, how you consume. People’s lives did not just collapse [in the pandemic] because there is digital and connectivity”, says Ganzi, enthusiastic about this revolution.

The entrepreneur and manager has long seen the opportunities of this business. Digital infrastructure and Polo, the sport, are among his greatest passions. Ganzi made his fortune by creating, in 2003, Global Tower Partners, acquired by American Tower Corportation a decade later. “Every day, engineering challenges us and we always need to reinvent ourselves”, he comments, about the beauties of this sector.

Telecommunications infrastructure networks, which were once the ugly duckling of telecom businesses due to the need for investment, are suddenly becoming an attractive asset for many investors. Funds dedicated to these opportunities keep popping up here and there. Behind this is the concept of neutral network, which allows the separation between the ownership of the network and the ownership of the service provision business, the part that sells and serves the consumer.

As a result, telcos that previously were the sole owners of the networks will only be able to concentrate on the service and will rent the capacity of companies dedicated only to infrastructure. “Whoever is not doing it now to preserve the market, will do it in the future”, points out Peigo, regarding the operators.

The similarity between the network and real estate businesses, explains the Brazilian executive, is in the model of long-term contracts, with low-risk clients, such as banks, insurance companies, telcos, and an activity that requires less use of labor, differently direct service to consumers. Evaluated from this perspective, the shift announced by Colony Capital is almost an update to modern times, but with the difference that now more than investors want the role of operators in the sector.

In the view of the Brazilian executive, only the neutral network model can solve the problem of the country’s telecommunications infrastructure deficit, which still has 40 million homes without access to the Internet. “It is impossible for telcos to profit from these investments alone.”

Ganzi and Peigo share the same view. When asked if the extent and disability of Brazil is not a problem, the American executive does not think twice. “Brazil’s challenges are opportunities for us. Although there are still bureaucratic obstacles, there is no way to cross the chasms of the country without digital infrastructure”, he says.

Streets, avenues and buildings

But Digital Colony’s operator vision goes beyond big avenues, that is, fiber networks. The concept of infrastructure for the digital age has fiber, of course, but also cell towers, small cells for mobile transmission and even data centers. The company already controls a total of 350,000 tower sites worldwide (not all of which are active), 220,000 kilometers of fiber, 125 data centers and 40,000 small mobile cells. “These three dimensions of assets together are the foundation, the foundation of the digital economy. Everything will be built on mobility; hyper-scale data centers and fiber transport networks” says the Brazilian executive.

“When you think about joining digital fiber and data center, you are building houses, buildings, avenues and the transportation network. I transport, receive, and store data. But a connectionless data center is useless. Delivery to the customer is really good when it has fiber and capacity at the ends, which values ​​tower assets. The pandemic made this need for decentralization very clear”, details Peigo.

Just to gain scale in data centers, 3 billion dollars are expected for the region in three years – the equivalent of almost 120 million reais a week. But, besides that, what really dictates the budget, according to Peigo, are the opportunities.

Scala has plans to grow and consolidate this market quickly. At the moment, on the executive’s radar, there are 17 deals between land purchases in Latin America, greenfield investments and possible acquisitions – including two very relevant assets in the sector. “One of our assets drives and leverages the other,” he says, explaining that the budget that is consumed with the data center does not occupy space for movements in networks and towers.

For example, in Digital Colony’s view, below each cell tower, whenever it makes sense, it is possible to build small data centers, which connect to the exchanges, but distribute capacity and coverage. “The applications of the technology will be rebuilt and necessarily data centers with heavy processing capacity will be necessary, but they will need to use the tips to be faster for services that will increasingly work with hyperlocation and hyperpersonalization”, explains Peigo.

And Oi in all this?

Digital Colony’s name scratched the news after Highline made headlines for almost gaining a leading position in the auction of Oi’s mobile assets, whose minimum price was then 15 billion reais. A totally unexpected move, when looking only at the Brazilian company. There was a certain disagreement in the air.

Not by size, but by strategy, Highline formally withdrew from this dispute. The preference of the operation is with the consortium formed by the trio TIM, Claro and Vivo, which committed to a total of 17 billion reais for the acquisition. Even so, industry sources point out that the American group can get part of the infrastructure it intended, as it has already started conversations with the trio behind the scenes to take what the telcos will inevitably put on sale next.

Despite leaving the competition for Oi Móvel, she is very interested in Oi’s fiber network and also in the purchase of towers, whose auction is scheduled for the 26th and for which she has already won the preemptive right with a minimum price of 1, 07 billion reais.

Binding proposals for Oi’s fiber network, the most competitive asset being triggered, should be made by the 16th of this month. In the previous phase, more than a dozen offers reached the tele. Now, stakeholders are coming together and forming blocks – including the Highline itself. The minimum entry ticket for 51% of the business is 6.5 billion reais. But whoever takes it still needs to honor a debt of 2.5 billion reais and commit to a capital contribution. The investment plan established by tele for its network is no less than 20 billion reais in five years.

In this fight, Highline will find strong competitors, ranging from renowned names in the sector to international energy companies, which operate in Brazil and operate in telecommunications transport, and have plans to leverage the use of its infrastructure.

Ganzi’s challenge is not to make the same mistakes as Barrack, that is, to make investments that end up not offering the expected return, either due to quality or excessive leverage. The concern comes from the expected speed for investments. On the purely financial side, what Digital Colony wants to demonstrate is that it pays a multiple of the order of 20 times Ebitda for the assets – which may even seem salty -, but it manages to impose with its experience in the sector a rate of capacity increase such that quickly reduces the multiple of input. Just the time to say whether the bets will be settled or not. “We are a patient capital”, emphasizes Peigo and recalls that the cycles of this sector are long. For this reason, he explains, investments in the region include an ESG platform – which deals with environmental, social and governance factors – at the start. Scala, which started with 26 employees and already has 118, aims to be carbon neutral and use only renewable and certified energy. In addition, it has already started partnerships for vocational education programs and engineering scholarships to train manpower. In the boom that Digital Colony bets, more people will be missing than money.

Source: Exame