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In the race to lay broadband fibre lines underneath streets across the UK, the focus is turning to customer take-up and industry consolidation as investors hope to recoup billions of pounds invested in the infrastructure transformation.
Dozens of alternative network providers — or “altnets” — raised private financing to compete with BT’s Openreach, incentivising the incumbent telecoms group to commit to £15bn in investment for its networking division.
But some of these smaller debt-laden companies are now being squeezed by rising interest rates and disappointing uptake, resulting in slowdowns of their rollouts and more than 1,250 job cuts across the industry in 2023, according to data compiled by Enders Analysis.
James Barford, head of telecoms at the research firm, estimated total capital expenditure by altnets of between £8bn to £9bn so far.
But many altnets are now “struggling due to tougher financial conditions” and deployments have been paused as “investors demand better performance on existing footprints”, Barford said.
He added consolidation was “sorely needed” but that negotiations will be challenging because some altnets will not be worth the amount invested in them. Potential acquirers will also be debating whether it is more cost effective to build or buy areas that do not overlap with their own full-fibre footprints.
Greg Mesch, chief executive of CityFibre, the largest altnet in terms of the premises its fibre passes — at 3.5mn, with a target to reach 8mn — said the company aims to make as many as five acquisitions over the next 24 months. He said CityFibre was in exclusive talks with two other altnets, developing offers for three others and under non-disclosure agreements with six more.
“Investment is drying up but I think that’s creating the opportunity to consolidate the network,” Mesch said.
The wholesaler has around 345,000 connected premises but it is yet to break even and made around 300 redundancies last year. It is aiming to balance its books in the first half of 2024.
Mesch added he had been “openly inviting BT” to use its network.
Virgin Media O2, which is jointly owned by Liberty Global and Telefónica, is also looking to challenge Openreach. In 2022, it secured £4.5bn for a fibre-building joint venture with InfraVia Capital Partners called nexfibre, which is initially aiming to reach 5mn homes by 2026.
Virgin Media O2 also acquired UK broadband provider Upp in September, after the oligarch-backed investment company LetterOne was forced to sell it on national security grounds.
Mike Fries, chief executive of Liberty Global, told Morgan Stanley’s European TMT conference in November that the company was looking at “another six or seven” altnets in the M&A market.
Openreach in December passed 12.5mn homes and is halfway to its target of 25mn by the end of 2026. It plans to reach up to 30mn premises by the end of 2030.
However, its networking division in November warned it could lose more than 400,000 broadband customers this financial year. Its outgoing chief executive Philip Jansen said it had lost customers to competitors who had built full fibre to homes first in rural areas.
But some altnets have struggled to get customers on board.
Their average take-up rates, which Barford estimates to be between 10 and 15 per cent, are “disappointing”. Altnets have found it difficult to “overcome the drawbacks of [being] an unknown brand in a very competitive market” while most consumers find currently available speeds enough for their needs, he said.
According to a May 2023 report, by the Independent Networks Cooperative Association and Point Topic, an analyst firm, altnets had reached 8.2mn premises passed and 1.5mn connections at the end of 2022. In an update, Point Topic estimated this would increase to about 10.7mn in combined footprint and 2.3mn customer connections by the end of 2023.
The industry is expecting widespread consolidation but this has not taken place yet.
Rajiv Datta, chief executive of nexfibre, which has passed 500,000 premises so far and expects to reach 1mn in the first half of 2024, said it is a “natural home” for a subset of the altnets that are having difficulties with the change in the financial markets. He does not expect a flurry of deal activity within the next six months due to many providers trying to conserve cash and slow down their build to sustain themselves while investors also assess their options.
“There is a spectrum. There’s some that might have to find solutions sooner. There are others that are fairly well capitalised but have a fundamental business plan problem given the situation,” Datta added.
Both Mesch and Datta expect all or the vast majority of altnets will be acquired rather than collapse.
Inka Klinger, head of project finance at Hamburg Commercial Bank, which finances digital infrastructure across Europe, including UK altnets, said it was “quite challenging” for investors to get a return on investment in the current environment and that consolidation was needed for growth.
Klinger also warned of the “huge overbuild” risk and said altnets have to reduce their processing times to activate premises to generate cash.
For Olaf Swantee, chair of London altnet Community Fibre, which passed 1.3mn properties and connected 225,000 customers by the end of 2023, there are now “clearly winners and losers” in the market.
Swantee said Community Fibre has paused its build to focus on monetising its network. He added it would be profitable by April this year.
The former EE chief executive predicted there is going to be a “shake-out” between the diverging types of altnets. Ultimately, Swantee said, competition is needed for “the last big transformation of the digital infrastructure in the country”.
