CityFibre Target Five UK AltNet Acquisitions Over Next 2 Years
Network operator CityFibre, which is rolling out a 10Gbps capable Fibre-to-the-Premises (FTTP) broadband ISP network across the United Kingdom, has provided an update on their ambitions to boost their full fibre coverage by acquiring some of the other operators in the alternative network space.
Last week saw the company reveal that their FTTP network had grown to cover 3.5 million premises (3.2m as Ready for Service by supporting ISPs), which is up by around 90,000 premises in the last month (here). But this is not fast enough to reach their ambition of covering up to 8 million premises (funded by c.£2.4bn in equity and c.£4.9bn debt) – across over 285 cities, towns and villages (c.30% of the UK) – by the end of 2025 (here).
The difficulties have been further underlined by last year’s spate of build suspensions and related job losses (here, here and here), which were understood to have been fuelled by issues like rising build costs (inflation, leases, suppliers etc.) and the difficulty of raising fresh investment in the current climate. Similar challenges have also been hitting many other alternative networks involved in UK fibre build.
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On the other hand, CityFibre has made no secret of their desire to boost network coverage through consolidation (example). Back in July 2023 the operator signalled to ISPreview that they had developed an interest in up to 20 potential altnets (here), but a new article in the FT (paywall) confirms that they’re aiming to make around 5 acquisitions over the next 24 months, although more may follow..
According to the operator’s CEO, Greg Mesch, CityFibre is currently in “exclusive talks” with two other altnets, developing offers for three others and are 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 article doesn’t name any potential targets, but in order to achieve the sort of scale they need the operator will most likely be looking toward larger AltNets, at least initially, and probably targetting those that are already feeling the strain. As well as those that have little to no overlap with their own network.
In our view, that means some of the potential targets could be CommunityFibre (large presence in London, where CityFibre is largely absent) and Hyperoptic (strong focus on MDUs, where CityFibre are playing catch-up). Netomnia, Gigaclear, Trooli, Fibrus, toob and others may also be potential early targets, although Gigaclear might have their own acquisitions in mind, toob already has a network partnership with CityFibre and Netomnia seem to be in a stronger position than many AltNets.
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However, history does show that negotiating a viable deal for such things can be difficult, particularly if the sellers have an inflated view of their network’s true value (i.e. sometimes it’s better to wait for a business to get into trouble before stepping in with an offer). Not to mention the complex and costly challenge of integrating so many different networks, not all of which will be following the same approach. At the same time, nexfibre (Virgin Media O2) are also pondering further merger and acquisition (M&A) activity in the UK (they gobbled Upp last year), which could create some added competition for CityFibre’s bids.
Quite how all of this pans out will be interesting to see, but CityFibre have already committed to add another 1 million premises to their network coverage during 2024, although this could be achieved from both a mix of their own build activity or M&A. In theory, they could add between 1.5 to 3 million extra premises via M&A alone by the end of 2025.
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and Linkedin.
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Wessex internet, toob and trooli are probably on their radar! As all three would be area consolidation
Great news, stop blowing money on pointless overbuilds and start consolidating to make a major competitive player to Openreach & nexfibre.
Either that or become ntl mk2 and wallow in burdensome debt obligations for a few decades, take your pick.
Most altnets are already wallowing in a deep bath of debt – for example Community Fibre had £318m of debt at the end of 2022, Hyperoptic had £620m. Although that’s small compared to CityFibre’s £2.7bn of debt.
The unfeasible economics of many altnets have long been a conversation around here, and the problem is that the economies of scale from merging are pretty small. Which means as a straight merger or acquisition any new company is a combination of two over-indebted companies to make one even more over-indebted company, and the various options are limited:
1) It achieves near miraculous growth (importantly, at profitable rates!) to cover its costs. In a competitive market with many large Openreach ISPs, Virgin Media, and possibly a bit of altnet overbuild, how likely is that huge profitable growth?
2) Lenders agree to huge debt write offs in order to allow MergeCo to be viable (and to do this, they’d usually ask for either most of the equity in MergeCo, or that the remaining debt is as convertible bonds or the like, meaning that they eventually can take a major equity stake.
3) Absent 1 or 2, then MergeCo runs out of cash unless equity or debt holders keep bankrolling the operating losses. If they do call a halt, what then happens is the equity gets rubbed out, and the lenders become the controlling interest. Most are big banks, insurers, or lending syndicates, and can either choose to hold and run MergeCo until conditions are better for a trade sale, or they can wash their hands and let the administrators conduct a fire sale, in which case an opportunist buyer picks up the assets on the cheap.
> the economies of scale from merging are pretty small
Disagree — most altnets don’t have enough scale for their wholesale to be feasible. Consolidation will improve this situation.
I don’t doubt there’s economies of scale but relative to the altnet’s capital costs they remain small – certainly nowhere near enough to move the needle on profitability. My background is strategy and corporate planning, I can read these companies accounts, I know what’s economically viable, and I understand how physical infrastructure businesses work.
Last reported year, if Community Fibre had got its wholesale (and all other costs-of-sale) FOR FREE and their entire business admin costs were halved, they’d still have made a loss of £42m. And CityFibre lost £219m in the same period. This won’t be turned round by tweaking sales performance and netting a few economies of scale as they simply aren’t going to make the big difference that’s need to make altnets financially sustainable. I’m also well aware that take up is slow and progressive, so customer numbers should be continuing to rise, but even so I can’t see those numbers hitting a level where the altnets make a credible return on the capital they employ.
Surprised that Fern isn’t on the list, especially with their “internal” consolidation.
The big problem is most of the alt nets are small and there will be a lot of overbuild
Probably better to let them go under and just buy up the customer base
Depends whether they have a lot of mutual overbuild although I’m guessing not that much. It would be fascinating to see a publicly available map of all the altnet builds in the UK and get a general picture.
@Big Dave there’s one on Think Broadband
@Ben
Thanks for that. From the maps it’s looks like Fern and CF have very little overbuild so may be a good target.
Acquisitions will only be attractive to Cityfibre if either:
1. The assets are obtained more cheaply than they could build from scratch (allowing for costs of merging dissimilar networks, migrating customers and staff, etc); or
2. Cityfibre need to ramp up the properties passed figures more quickly than they’re able to build themselves.
Case (1) means that investors are prepared to sell at below their initial investment, which implies the network is distressed.
Case (2) suggests that there are large wholesale customers who are saying to Cityfibre “it’s not worth us connecting to your network unless you can give us a bigger footprint”. Or strategically, Cityfibre see a risk of becoming irrelevant in the face of near-universal FTTP coverage from Openreach in the next few years.
Or 3. the other altnet has a sizeable amount of connected paying customers. They would also add value to the cost of acquisition.
Yes, but can you point to any altnet in that fortunate situation?
Also, Cityfibre doesn’t deal with retail customers, so it would have to sell them on to some ISP partner.
Remember if you take a company over you also take on all the debt. Offices and staff and any contracts that are in place. Many may be unattractive due to the debt
How’s the job search going, DF? All good now or still looking?
A key consideration will be which operators have built their networks with an eye to future integration. Some will have done this, others will not, which may significantly reduce the value of the latter group to potential buyers.
They said over 3 years ago they would “cover every part of Bolton” with their brilliantly fast fibre broadband.
I live a few minutes outside the town centre and it’s nowhere to be seen!!
https://www.theboltonnews.co.uk/news/19735844.company-bringing-brilliantly-fast-full-fibre-broadband-every-corner-bolton/
Same in Plymouth with no updates
I guess they are all mouth and no action.
Hi Gareth,
In fairness to CF it was Make Happen Groups departure that signalled the end of the build in Bolton.
Granted they haven’t onboarded another Tier 1 partner as yet to complete the build so maybe MHG’s decision to pull out has indirectly saved them putting it on stop.
@DF Give it a rest!
Thought you’d got a new job? Shouldn’t you be concentrating on that?
Since you’re a big fan of UAE, have you thought about getting a job in Dubai or Abu Dhabi?
Why does the 3.5m number keep getting used?
If 300k of those lines aren’t ready for service, they’re irrelevant!
Clearly CityFibre are unable to persuade their backers that keeping on digging is a good use of their money. Will be interesting to see if they can persuade their backers that buying up other distressed operators is a better use of their money.
Can’t see Hyperoptic being a suitable target due to their Cat5e technology that means anything above 2.5gbps is not viable and is totally different from the PON technology CityFibre use. That makes integrating into their network unlikely with ongoing higher costs due to the increased complexity
They stopped using CAT5 ages ago and have been building with GPON for some time
Most of the Alt Nets are small and not in a healthy financial position. In most cases the only real asset of any interest is the customer base. You dont really need the network and staff and offices and certainly not the debt