Speakers:
James Robinson, Senior Analyst – Assembly Research
Thibault Contat Desfontaines, Co-Head of Infrastructure Equity, Europe – UBS
Graham Sargood, Chairman – Ogi
Wil Wadsworth, Group CFO – Netomnia, YouFibre & brsk
Rob Hamlin, Chief Strategy Officer – CityFibre
There are pros and cons for businesses and consumers over fibre, but network operators face serious questions – including:
- How can they effectively achieve ROI in markets where competitors are digging the same route?
- What needs to happen in terms of restructuring of alt-nets, rollups or refinancing to maintain competition whilst improving the long-term outlook for these companies?
- Once acquisition is achieved, how to successfully integrate assets into a larger existing footprint.
When it comes to the UK market, the alternative fibre network has reached a critical juncture. Industry leaders are now saying scale is essential for survival but acknowledge several barriers in the way of consolidation.
Graham Sargood, chairman of Ogi, said: “I personally think if you haven’t got over a million homes, you actually can’t move up the value chain,” adding that scale enables operators to attract B2B customers, with larger footprints becoming “attractive to some of the larger B2B enterprises”.
Additionally, the operational efficiency gains from scale are significant. Wil Wadsworth, group CFO of Netomnia, YouFibre and brsk, explained: “When you are building a network, scale also matters from an economics perspective, because the cost of materials, the cost of build, the productivity and efficiency of engineers all improve with more and more scale.”
Signs of progress
Despite concerns about viability, Rob Hamlin, chief strategy officer at CityFibre, painted a more positive picture.
“If you add up all of the customers we’ve connected, you now get to about three million customers that have left the incumbent networks,” he said, adding that CityFibre itself is now “taking over 100,000 connections per quarter”.
Customer migration is accelerating, as Hamlin explained: “They’ve left BT and VMO2 because they are gaining better products, economics and quality of service [elsewhere].”
The alternative network (alt-net) sector has achieved remarkable build-out, with Hamlin noting: “We have, with private finance, built to about 19 million premises across the UK. That’s nearly similar full fibre coverage to Openreach, who has all the incumbency advantage.”
Wadsworth added: “All of that additional ARPU and revenue that’s coming in is almost going straight to the bottom line. So having scale, having more customers filling up the network, for me, is only beneficial.
“It also de-risks your business, because when you have a national footprint, a national network, a national customer base – if one particular part of your business is underperforming, it’s less impacted.”
Why consolidation isn’t happening (yet)
Despite progress being made across the UK, the predicted wave of consolidation has been slower to arrive than expected.
Sargood explained: “Anytime you do an acquisition, you’re spending a quarter of a million pounds plus on diligence. And if you buy a company that’s got 100,000 homes, they’ve already sunk £50 million and more to build the network, plus the cost of running it.”
To meet challenges head on, the panel proposed a regional consolidation strategy. “I think there are three clear distinct markets in the UK. I think there’s the London market, the rural market, and the rest of the UK,” Wadsworth explained, suggesting that consolidation within these segments first would make “the ultimate consolidation a lot easier”.
He added: “A lot of those lenders are not just invested in one but multiple platforms. So, I can’t see somebody coming along with a big enough check to buy the business and refinance all of the debt.”
Thibault Contat Desfontaines, co-head of infrastructure equity at UBS, offered some perspective from more mature European markets. “We almost have 60% penetration for Altitude Infra, the company we invested in France,” he said.
He puts this down to regulatory certainty, adding: “You have 30-40 year concession models. So it means you have time to deploy some capital.”
A key differentiator has been France’s copper decommissioning strategy, Desfontaines explained. “By 2030, the objective is to have no more copper in France,” which is “pushing people to switch from copper to fibre”.
What needs to happen
Despite such challenges, the panel acknowledged how resilient the sector is. While the business case for consolidation is there and the operational performance is improving, transformation will not be fast.
Hamlin set out a vision for where the sector needs to go: “We all need to engage in that opportunity and see if we can make that happen because we all stand to benefit. The future regulatory phase needs to see stability and the regulator standing firm so that customers have a stable market.”
But Sargood was more cautious about how quickly things will change: “I think it’s very much a play internally within the UK now, and I think it’s going to be slow because of that.”
However, he sees smaller operators continuing as they are: “Companies will survive and will probably continue to be drip-fed by investors. It’s a testament to the industry that they are still going.”
