Infrastructure Fund Set to Buy UK Rural Fibre ISP Gigaclear for £270m

The M&G Investment Management fund has offered to buy ultrafast fibre optic (FTTP) rural broadband ISP Gigaclear for £270 million (all cash), which is backed by the UK operator’s largest shareholder Infracapital (43.2% holding). The offer is due to be discussed next week.

As an ISP Gigaclear is one of the very few commercial broadband providers that has managed to make a seemingly workable model out of deploying expensive 1Gbps capable Fibre-to-the-Premises (FTTP/H) networks into challenging rural communities across England. At present their network covers 60,000 homes and businesses (c.25% take-up) across 20 UK counties and they aim to reach 150,000 premises by the end of 2020 (here).

The provider has also won numerous state aid supported contracts (e.g. Devon and Somerset), most of which can be found covering counties in the South West, Midlands and South East of England. Broadly speaking they’re currently spending significantly more money than they make back in profit as part of a long term investment strategy to grow rural fibre coverage (i.e. the rural equivalent of what Cityfibre are doing in urban areas).

In the past we’ve speculated that this approach might eventually result in Gigaclear being scooped-up by another operator, which has recently become much more likely now that a growing number of alternative network (AltNet) ISPs seem to be deploying FTTH/P “full fibre” broadband technology. The scope for future consolidation is suddenly much stronger than it was two years ago.

Under the proposed deal Gigaclear Shareholders will be offered 400 pence in cash for each Share they hold, valuing the current issued share capital of Gigaclear at approximately £270 million.

Infracapital Statement on Gigaclear Offer

The Offer:

– Represents:

* a 23% premium to the most recent fund raise in 2017, at 325p per share; and

* a 545% premium (a multiple of over six times) to the early subscription by seed and EIS investors at a price of 62p per share paid by the majority of the non-institutional shareholders.

– Is an opportunity for those shareholders wishing to realise substantial gains, particularly where the applicable three year holding period for EIS purposes has expired.

– Provides a liquidity opportunity for shareholders:

* Gigaclear’s shares are not listed and there is no recognised market for its shares;

* the Company plans to raise substantial further capital to finance its medium term business plan and it is not obvious when another material liquidity event may occur in the short to medium term for existing shareholders.

– Enables individual shareholders to sell shares in a more tax efficient manner (especially those who expect their shares to qualify for EIS treatment) than the share buyback suggested in the Company’s circular to shareholders dated 30 November 2017.

– Ensures that the cash proceeds from the Company’s proposed 2018 fund raise can be invested fully in the expansion of the business and its rollout plans (rather than the proposed share buyback).

Infracapital is committed to the Company and intends to continue to support the Company, through the exercise of its pre-emption rights and participation in future fund raises, as it has done since its initial investment in Gigaclear in 2015. Access to such capital has been a key ingredient in the Company’s ability to grow at such a fast rate historically.

Infracapital, which also invests in UK ISP TalkTalk (they’re a huge part of the operator’s recent 3 million FTTH/P premises rollout plan – here) and WightFibre (Isle of Wight), said it was making the offer to ensure that all the future fund raising capital is available to support Gigaclear’s future growth plans (rather than to buy back shares). The deal will also provide liquidity to those shareholders who are “looking to realise their investment and who may not wish to provide further investment capital“.

It’s known that Gigaclear had been seeking more financial support in order to help fuel its growing network build and to potentially secure a number of new state aid supported rollout contracts. In a brief email Gigaclear’s CEO, Matthew Hare, said: “Our business plan and focus for the future remains: to bring ultrafast full fibre broadband to rural Britain.”

The deal itself is conditional upon receiving approval from more than 50% of the shareholders, which looks fairly easy since Infracapital hold 43% and the other big shareholder, Woodford Investment Management, has also signalled their intent to accept the offer. Meanwhile the Railway Pension Trustee Co, which is a 15.9% shareholder, rejected the offer.

Infracapital added that it does not intend to seek to terminate the continued employment (or make any material change in the terms of employment or in the balance of the skills and functions) of the employees and management of Gigaclear or its subsidiaries.