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Analyst Warns Mergers Between Smaller UK Broadband Altnets are Not Enough

Wednesday, Jan 29th, 2025 (12:01 am) - Score 4,200
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A new research note from analyst firm Enders Analysis has warned that mergers between smaller alternative gigabit broadband networks, such as the one that occurred on Monday between FullFibre Limited and Zzoomm (here), will not be enough for the sector to become “sustainable” and “further financial distress may be required” for some realism over valuations.

ISPreview has often had to report on the challenges being experienced by altnet operators over the past couple of years. This has been driven by rising build costs, strong competition from rivals (i.e. overbuild and the challenges of growing take-up in that environment) and high interest rates (i.e. surging debt repayments and making it harder to securing fresh investment).

NOTE: Check out our regularly updated ‘Summary of Full Fibre Build Progress‘ for context. Some of the market’s largest altnets today include: CityFibre (c.4 million premises passed), Netomnia (c.2m), nexfibre (c.2m), Hyperoptic (c.1.73m), CommunityFibre (c.1.3m), Gigaclear (580,000), Fibrus (400,000) and Trooli (370,000) etc.

In response, many altnets have moved to protect themselves by switching their focus from rapid network expansion to strong commercialisation of what they’ve already built (i.e. growing take-up), which is a sensible approach. But consolidation has long been seen as one of the ways for the market to move through the current challenges, although this hasn’t been happening as quickly as expected.

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For example, over a year has now passed since CityFibre’s CMO, Dan Ramsay, rather boldly predicted that the c.100 alternative broadband networks in the UK market at that time would eventually become one single operator (here). CityFibre had also presented itself as an operator that would be leading the consolidation charge, yet since then they’ve only managed to acquire Lit Fibre (here). But 2025 may yet be different (such deals often take a long.. time to reach agreement).

Instead, Enders Analysis correctly notes that many of the mergers we’ve seen, thus far, have actually been the more predictable agreements, such as between operators with a shared investor in common (e.g. the merger between Netomnia and Brsk (Advencap) or the consolidation of Jurassic Fibre, Swish Fibre and Giganet into All Points Fibre by Fern Trading). But a lot of these have also occurred between smaller to mid-tier scale operators.

The latest deal between FullFibre Limited and Zzoomm looks set to create a much larger altnet (i.e. 600,000 premises passed RFS and 65,000+ customers), which would make them the 5th largest altnet overall, just ahead of Gigaclear. But Enders Analysis warns that even this still leaves such operators “vulnerably low scale with further consolidation necessary” and that warning goes for some of the bigger altnets too.

James Barford, Enders Analysis, said:

“While consolidation has been widely expected in the altnet sector, the general assumption has been (by ourselves and others) that the consolidator candidates are the larger players that have been pitching themselves as consolidators and have already made acquisitions, i.e. CityFibre (c.4 million homes passed), Netomnia (c.2 million) and nexfibre (c.2 million). These companies would have almost certainly been willing to make offers for mid-sized altnet targets such as Zzoomm and FullFibre, so this does beg the question as to why they did not succeed.

The most likely answer in our view is that the valuation was key. nexfibre tends to offer cash, but has been quite vocal about valuation expectations needing to be realistic, i.e. is unlikely to offer a high price, albeit the price is paid in a robust currency. CityFibre and Netomnia tend to offer shares, so here the relative valuation is key (between CityFibre/Netomnia and the target), and the larger acquiring companies would likely want a premium for their own value given that they already have considerable scale. Hence the appeal of a merger of equals—no hit has to be taken to their perceived (and likely unrealistic) value.”

Enders notes that such mid-tier mergers will deliver some synergies (e.g. cutting cost overlaps and marketing/customer acquisition best practice), but they’ll also be hit by the slow and costly process of network integration. The resulting company may also “still be too low scale to achieve sustainable profitability in our view” (e.g. altnets several times the size of Monday’s merger parties remain below or barely at EBITDA breakeven). In short, the analyst states that these sorts of mergers risk not being able to “solve the core (linked) problems of lack of scale and lack of financing“.

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The analyst reasonably concludes that “much more consolidation is required for the sector to be sustainable in our view“, but unless the issue of “unrealistic” valuations is solved through another means, then “further financial distress may be required for realistic valuations to emerge“. However, it is worth stressing that there are still niche cases, where flexibility does exist for success to be found by doing things differently – even at the smaller scale.

Enders concludes by urging many smaller and mid-tier altnets not to get too comfortable with drip feed financing to fund day-to-day operating losses and mounting interest costs. “We would urge them to act faster [on consolidation] to maximise the chance of decent long-term returns, even if this means a paper loss in the interim,” concluded the analyst. Waiting too long may risk inviting the debt holders to take control, further eroding the chances of a positive equity return.

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Mark-Jackson
By Mark Jackson
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, BlueSky, Threads.net and .
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16 Responses

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  1. Avatar photo bob says:

    Most Alt nets are far to small to survive long term. They need millions of customers but most are lucking if they have 100,000

    1. Avatar photo Disco dave says:

      Hi Bob, can you provide further context to your comment of “millions of customers to survive”?

      It’s quite clear to see that some altnets are plodding along perfectly well in what is a crowded market.

      Larger Altnets
      Gigaclear – not in distress, seems to be surviving. Still building physical networks and had a solid customer take up.

      Smaller Altnets
      Lightspeed – (was in distress), but now seems to be surviving. Still building physical networks.

      F&W (Hey broadband) – not in distress, seems to be surviving.

      Connect Fibre – not in distress, seems to be surviving. Still building physical networks.

      Whilst I agree that AltNet’s need customers to generate revenue and eventually become self sufficient, I think it’s bold to suggest they need “millions” of customers to survive. A solid bench mark is 10/20% of the AltNet footprint, with minimum churn, and this benchmark has been validated recently through posts from other larger AltNets such as Netomnia (YouFibre & BrSK) who have publicly spoken about their customer base being close to 20% of their estate.

      Anyway, whilst we’re all entitled to opinions on the matter, it’s important we fact check figures, as it can create a false narrative on the market.

      Checking out, keep dancing.

      Disco Dave

    2. Avatar photo James says:

      @bob

      It depends on the business model but for sure most of them can survive with 100,000 customers or less if they have built a good quality network logically.

    3. Avatar photo carlconradw says:

      Sorry Disco Dave, but the truth is that owing to Openreach’s intention to build to 30 million premises by 2030, the surviving altnets will either fold or be forced into cost-cutting to compete. The latter will make them uninvestqble. The cost of replacing their ageing assets means that altnets won’t be able to raise the finance and Pepnreach, with a host of well-known providers, will always have a marketing advantage. My background is in private equity which is the very industry that has supported the altnets expansion so far. I warned my peers years ago that they were risking their investments for what would be a very uncertain return. Private equity is built on risk, but this risk is too great to warrant the investment,ent save for the very largest altnets. Smaller ones won’t have assets worth fighting.

    4. Avatar photo lee says:

      The Netomnia CEO Jeremy Cherlot specifically said that an Operator can service there debt in a sustainable way once they hit around 15% of HP, as long as they aren’t building. Thats a general guideline for right now, so doesn’t apply to certain areas of build or if anything changes, rates, competition etc.

      My guess is that the answer is probably somewhere between 100k and a million hp ironically.

    5. Avatar photo Andrew G says:

      @ Disco dave

      Check out if ANY altnet is earning a credible return on capital employed. I can’t find a single one that’s within a country mile of that, nor stand any reasonable prospect of doing so. Put simply, if a company isn’t beating its cost of capital then it’s losing money for somebody. Take CityFibre, they’re biggish, been around a while, know what they’re doing. Capital employed for full year 2023 was about £3.9bn. Average cost of capital for a medium-large business is 8%, although it should be notably higher for riskier businesses such as those not making a profit and facing intense competition. I’ll run with the 8%, that means to wash its face CityFibre needs to have earnings before interest and tax (EBIT) of £312m a year. In 2023 its total sales were only around £100m, and its EBIT was a £213m loss. In rough terms as I haven’t bothered to work it through in any detail, that indicates that CityFibre need almost ten times as many customers as they currently have, with little additional investment. Yes, they are growing, but how realistic is 10x as many customers, and how long will that take?

    6. Avatar photo Big Dave says:

      @Andrew G

      If my understanding is correct CityFibre currently have debts around the £5bn mark. If you divide that across the 4 million premises passed that equals to about £1250 per premises, if you take your 8% interest figure as correct then they would need to make £100 from every premises passed just to service the interest on that debt.

    7. Avatar photo Ed says:

      I honestly would not be surprised to discover that a few investors in Altnets were only in it for the government cash and fully intended to sell up before reality caught up with them.

  2. Avatar photo Joe Who says:

    I am highly interested in current and future mergers, particularly in how companies navigate the challenges posed by overbuild in certain areas.

    For example, CityFibre is likely seeking to acquire a strong alternative network that is not directly within its footprint but is close enough to leverage its existing infrastructure and logistics for support.

    An in-depth analysis of overbuild within altnet areas would be fascinating to see.

    1. Avatar photo John Francis Nolan says:

      It looks like the analyst community has finally caught up with my thinking see – recall that I have been looking at this since 2003.

      https://shorturl.at/syLKo

    2. Avatar photo Big Dave says:

      As far as I’m aware CityFibre are still seeking fresh funding themselves although they seem pretty confident of getting it.

  3. Avatar photo The Provisioner says:

    This article is explaining that those investing in AltNets can expect to take a bath on their investments.

    As the old adage goes something is only worth what someone else is willing to pay for it and there is no longer anyone in the industry who is willing to purchase any of the smaller AltNets’ networks for a price that will deliver a profit to the investors.

    And that is before anyone has done an audit on the actual networks that are for sale. Because I can guarantee that all of the AltNets will have built down to a price. I would expect that an audit by a prospective suitor would quickly find that many of the materials, passives, cabinets, active kit etc. used by these AltNets (as well as using CGNAT and limited peering / core or aggregation network capacity etc.) will produce a network that is simply not of a similar quality as those provided by Openreach, Virginmedia (nexfibre) etc.

    Add in a lack of customer take up and ARPC and you can see why, as an investor, it appears important to get you money out of this industry and to reinvest in something that provides a higher potential return with a lower risk profile asap.

    I expect that the investors who have analysed the risk within the telecoms industry, and other industries they could potentially invest in, and have gotten out of telecoms industry early will be the ones that lose the least.

    The investors who stay in would seem to be the biggest potential losers in the long run.

  4. Avatar photo V says:

    It isn’t rocket science. The end game is a ‘Telewest’ and ‘NTL’ > ‘NTL:Telewest > Virgin Media merger scenario.

    It’s the only viable way to do it.

  5. Avatar photo Big Dave says:

    Can Nexfibre really be classed as an altnet? I suspect the only real reason it was set up as an separate entity to VMO2 was to avoid Ofcom treating it in the same way that Ofcom treats Openreach as an “operator of significant market power” as the combined current build plans cover nearly 75% of the country.

  6. Avatar photo DF says:

    Cityfibre says this…
    Cityfibre says that…
    Dan Ramsay CMO of Cityfibre predicted…

    Actions speak louder than words, are Cityfibre still going to cover 8 million homes by the end of 2025?

  7. Avatar photo GASTON says:

    Mais oui peeps. Netomina will turn CityFibre into a stale baguette.

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