Consolidation in the altnet market is driven by the acquisition of underperforming assets and value-accretive mergers between remaining players, write Ben Terry and David Blakey
Data demand, availability and usage across the globe is at a record peak, and with it so is the demand for reliable, high-speed fixed broadband connectivity.
While the UK historically lagged behind most European countries in full-fibre network deployment, over recent years significant progress has been made, catalysed by the emergence of alternative network providers (altnets) who now account for almost half of the UK’s full-fibre coverage.
A challenging macro backdrop and investment climate however has necessitated a pivot in strategies for most altnets, with the need to focus more on securing customer take-up and demonstrating a clear path to profitability.
In many instances, altnets have significantly slowed down, or even halted, their network roll-outs to fully prioritise the commercialisation of their existing networks.
However, Altnets should be well-positioned to take advantage of current market tailwinds, such as the growing demand for data, Ofcom regulation around one touch switching, and customer dissatisfaction with incumbents, to disrupt the fixed broadband market and capture their fair share.
That said, we are starting to see a divergence in the commercialisation performance between altnets of all sizes and the emergence of real winners in a very fragmented market.
While some factors influencing performance appear to reflect an altnet’s relative investment in its people, processes, and systems, other factors appear to be more intertwined within the fabric of these businesses and could act as future growth inhibitors.
In parallel to this – particularly as investment continues to become more selective – the opportunity for consolidation is growing.
What the shape and pace of this consolidation looks like however is still uncertain, but many discussions are underway. Currently, consolidation appears to take two shapes, and there are specific questions investors should be considering in light of this.
The initial wave of consolidation has been largely triggered by acquisitions of underperforming and/or distressed altnets, with depressed valuations pricing network asset value, or capital invested only.
As the divergence in performance grows, and funding runways for those that have failed to reach profitability run out (particularly given increased selectivity amongst lenders), further asset-focused consolidation should be expected.
For the remaining altnets, value-accretive consolidation is a growing consideration, to attract additional funding and/or better position investments for an eventual exit by investors.
This type of value-accretive consolidation however has so far been limited. While many discussions are underway, the major sticking points appear to be, firstly, agreeing the valuation principles that define the ‘relative value’ of each company, and secondly, exit horizon alignment for, in some cases, multiple and varied institutional investors within a single altnet.
For example, should value be given only to the existing network and customer base, or include future funded network build and customer growth? Should all customers be valued equally or does current average revenue per user (ARPU) or future ARPU potential need to be taken into consideration?
Will private equity investors compromise on their anticipated exit horizons when invested alongside infrastructure and open-ended fund investors?
These negotiations are complex and slow as these types of questions are addressed, requiring sensible investor discussions and accommodations on both sides to generate a win-win outcome.
As consolidation advances, for smaller altnets with less than 200k homes passed there is a risk of being left behind and/or becoming less attractive to consolidation platforms.
For these players, combinations with similar-sized altnets is, in our assessment, a practical and necessary step to improve the path to exit for their investors. For mid-sized altnets with between 200k to 500k homes passed, while the underlying benefits of consolidation remain, the risk of being left behind is somewhat lower.
Here, investors should remain open to exploring opportunities but not be spooked or forced into any near-term M&A, instead maintaining focus on operational execution and reaching profitability. Ultimately, achieving these operational milestones will provide optionality for investors and ensure they are well-positioned over the long-term.
We expect discussions amongst investors to continue and an up-tick in consolidation activity over the coming 12-24 months. There are both pros and cons that come with consolidation and these need to be considered in the context of an altnet’s network size, commercialisation performance, and funding availability.
At Amber, we continue to focus on helping altnets with operational delivery, enabling them to successfully achieve a balance of cost-effective build, strong customer take-up, and excellent customer service to be well-positioned to succeed in this unpredictable consolidating landscape.
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