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A recent report by banking giant Credit Suisse warned that “Cheap creditFor UK broadband infrastructure, which is helping to deploy a new generation of gigabit-capable fibre-to-the-premises (FTTP) networks, it may be facing a growing squeeze that could affect future builds.
For some time now we have been highlighting the growing anticipation of consolidation in the alternative network (AltNet) space, driven by a number of factors. Firstly, there is an increasing level of overbuild between networks, which forces operators to speed up and drive down prices to drive take-up – this means it will take longer for investors to see payback (payback periods for FTTP can last 10-15 years). .
On top of that, some AltNets are overbuilding in less competitive areas, where the local market may struggle to sustain more than one or two operators in the first place (eg sparse suburbs, small towns and sometimes rural villages), which expands. . Economically rational outside his comfort zone. Further use of existing cable ducts and poles (PIA) reduces the risk, but not completely.
Lest we also forget that Openreach is putting more pressure on their smaller rivals by accelerating their own deployments and continuing to undercut the price of their FTTP products for ISPs ( here ), now the subject of a competition complaint by Cityfibre ( here . ). Virgin Media (VMO2) is also expected to step up and expand their fiber build in the near future, which is another challenge.
Finally, there is the issue of inflationary pressures and rising interest rates, which a recent Credit Suisse report predicted “2023 is likely to get worse(eg the impact of this is usually seen in increased energy costs, increased wage costs and other leasing costs). “This should be partially offset by price increases and headcount reductions. But the net effect is likely to be negative” said the report.
A Credit Suisse spokesperson told ISPreview.co.uk:
“In our view higher interest rates are likely to lead to consolidation in the altnet space in the UK over time. Few – but not all – fiber challengers have financing that is open to higher rates. And the fiber buildout has shifted investor focus to the penetration of deployed networks, and many altnets still have very low penetration rates.
However, how that consolidation plays out is less clear. Some altnets have owners with low return thresholds or are well insulated from rising rates, so can be held for a while. And more expensive financing to build means more expensive financing to acquire. Also some networks may be incompatible.”
Some altnets refer to “Very low penetration rate” above is key as operators need to demonstrate respectable growth in take-up by consumers and businesses to satisfy their investors. Providers that fail to achieve this will face pressure from their investors, which tends to tighten the purse strings. In response, operators may slow their rollout to focus on building take-up.
However, if the required take-up fails to materialise, the operator’s backers may turn to the option of consolidation, although this too has limitations. Currently the level of overbuild between networks is still quite low and therefore the asset value of fiber in the ground remains high, which is good for those seeking consolidation (ie investors still have a good chance of getting a return).
On the flip side, trying to sell a network that has already been overbuilt by many competitors will be more challenging (decrease the value), and then there is the issue of compatibility. Not all FTTP builds adopt the same hardware, software and approach, which can introduce barriers to consolidation (ie the buyer has to factor in additional costs due to the need to upgrade/adapt the network).
In short, the availability of cheap financing for fiber optic deployments is likely coming to an end in the UK, which is about the same time that investors start to see results from the many fiber deployments they are already supporting. One way or another, this will have little consequence, hence why we expect to see more consolidation. Credit Suisse’s recent opinion only reinforces this expectation.
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