Openreach and BT better watch out for... CityFibre after surprise £537m takeover deal
Director Mark Collins on becoming a key challenger in full fibre
Broadband minnow CityFibre's acquisition by Connect Infrastructure Bidco for a staggering £537m has positioned it centre stage to take on industry goliath BT/Openreach, company director Mark Collins has said.
In a surprise move, CityFibre this week announced it is being bought out by infrastructure investment funds – Antin Infrastructure Partners and West Street Infrastructure Partners, the fund managed by Goldman Sachs.
It revealed the takeover plans in its full-year 2017 results (PDF), posting a 126 per cent increase in sales to £35m, while its net loss widened to £16.6m, up from £12.6m the previous year.
Given its relatively modest revenues and losses, could this deal smack of an overvaluation? Unsurprisingly, Collins, director of strategy and public affairs, doesn't think so.
"We're an emerging, infrastructure-based business. So it's difficult to create a valuation based purely on profit. The real value is the infrastructure in the ground and the capital we've raised in deploying that infrastructure to date.
"Goldman Sachs are very experienced infrastructure investors. What they are looking at is the potential, longer-term value. Therefore they have concluded that represents the right value based on its future."
Since emerging in 2011, CityFibre has raised £325m by floating on the junior Alternative Investment Market in 2014. It aims to connect urban areas in 42 cities with speeds of up to 1Gbps and reckons the takeover deal will help it serve 20 per cent of the full-fibre market in Blighty.
But as well as giving the business access to far greater funds, Collins believes it is also a strong signal to the market that CityFibre isn't going anywhere.
"The one piece that holds us back from going faster is the element of confidence [whether] CityFibre will be around in the future, and that we have the resources," he said. "[The] acquisition will have an accelerator affect on who wants to work with us."
Prior to the deal, CityFibre signed a joint £500m deal with Vodafone UK, intended to roll out its ultrafast network to at least 1 million homes in up to 12 of CityFibre's existing cities and towns by the end of 2021, with plans to extend that to 5 million homes across 50 towns and cities by 2025.
BT's Openreach has also said it wants to connect three million premises to full fibre by 2020, up 50 per cent on its previous goal.
While that might sound like good news for Blighty's woeful full-fibre footprint of 3 per cent, it also raises the possibility of over-build issues. Providers could end up targeting the same lucrative areas to invest in fibre, rather than creating a more geographical spread.
Collins believes that over-build won't be a threat in the long term, "but I think in the short term, while there is a land grab for territories it could happen in some areas."
He believes that regulatory pressure could help prevent that happening at scale.
Openreach will become "more concerned about the pace and support CityFibre is getting," he believes.
"I think the announcement should put pressure on Openreach to do more and puts more pressure on Openreach's ability to react, although that ability is limited because it answers to BT Group.
"BT has conflicting priorities – mobile, spectrum, sports rights, pension obligations – so Openreach is constrained by BT Group's ability to invest in full fibre."
Nevertheless, he thinks Openreach will move to a more collaborative market approach – with CityFibre already working with the company to potentially lay fibre in its ducts and poles.
"It's coming to terms that CityFibre is going to be key feature of the full-fibre landscape. [BT is realising] they don't have to be the UK's only builder of digital infrastructure. And we are moving to a market where there will be more collaboration." ®