Credit Suisse Warning – UK Full Fibre Investors See Growing Challenges

A recent report from banking giant Credit Suisse has warned that the availability of “cheap financing” for UK broadband infrastructure, which is helping to deploy a new generation of gigabit-capable Fibre-to-the-Premises (FTTP) networks, might be facing a growing squeeze that could impact future builds.

For some time now we’ve been highlighting the growing expectation of consolidation in the alternative network (AltNet) space, which is being driven by a number of factors. Firstly, there’s the rising level of overbuild between networks, which forces operators to build faster and cut prices in order to drive take-up – this in turn means it will take longer for investors to see payback (payback periods for FTTP can run up to 10-15 years).

On top of that, some AltNets are overbuilding in less competitive areas, where the local market may struggle to sustain more than one or two operators in the first place (e.g. sparse suburbs, smaller towns and sometimes rural villages), which tends to stretch the economic rational outside its comfort zone. Greater use of existing cable ducts and poles (PIA) does reduce the risk, but not completely.

Lest we also forget that Openreach is placing further pressure on their smaller rivals by both speeding up their own deployments and continuing to reduce the price of their FTTP products for ISP (here), which is now the subject of a competition complaint by Cityfibre (here). Virgin Media (VMO2) are also expected to ramp up and expand their fibre build in the near future too, which is another challenge.

Finally, there’s the issue of rising inflationary pressure and interest rates, which Credit Suisse’s latest report predicts is “likely to worsen in 2023” (e.g. the impact of this is typically felt in rising energy costs, rising wage costs and other lease cost increases). “This should be partly offset by price increases and headcount reductions. But the net effect is likely to be negative,” said the report.

A Credit Suisse spokesperson told ISPreview.co.uk:

“Higher interest rates is in our view likely to lead to consolidation in the altnet space in the UK over time. Some – but by no means all – fibre challengers have financing that is exposed to higher rates. And there’s been a shift in investor focus from fibre buildout to penetration of networks deployed, and many of the altnets still have very low penetration rates.

However, how that consolidation plays out is less clear cut. Some altnets have owners with low returns thresholds or are well insulated from rising rates, so can hold out for a while. And more expensive financing for build also means more expensive financing for acquisitions. Plus some networks might be incompatible.”

The reference to some altnets having “very low penetration rates” above is key because operators need to show a respectable growth in take-up by consumers and businesses in order to satisfy their investors. Providers that fail to achieve this will face pressure from their investors, which tends to manifest as a tightening of the purse strings. In response, operators may slow their rollout in order to focus on building take-up.

However, if the necessary take-up fails to materialise, then an operator’s backers may turn to the option of consolidation, yet even this has its limits. At present the level of overbuild between networks is still fairly low and so the asset value of fibre in the ground remains high, which is good for those seeking consolidation (i.e. investors still stand a good chance of getting a return).

On the flip side, trying to sell a network that is already being heavily overbuilt by several rivals will be more of a challenge (diminished value), and then there’s the issue of compatibility. Not all FTTP builds adopt the same hardware, software and approach, which can throw up obstacles to consolidation (i.e. the buyer has to factor in extra costs due to the need to upgrade/adapt the network).

In short, the availability of cheap financing for fibre optic deployments is likely winding down in the UK, which occurs at around the same time as investors will be starting to seek results from the many fibre deployments they’re already backing. One way or another, there will be some fallout to this, hence why we expect to see more consolidation. The latest opinion from Credit Suisse only reinforces this expectation.