Acuity Insight: Fibre to the Premises, Welcome to the Landgrab

High quality internet access is no longer a luxury for most and is increasingly becoming one of life’s non-negotiables – that’s the business case for Fibre-to-the-Premises (FTTP). Flexible working, streaming entertainment, and the emergence of smart technology mean that fibre internet is the electricity rollout of our times – it’s the key for Britain to fully participate in the connected global marketplace. UK Chancellor Philip Hammond recognises this too, as he recently announced plans to increase the government target from 10 to 15 million homes connected by fibre broadband by 2025.

“The Chancellor’s announcement is welcome news and addresses our calls for a national, full fibre plan, which is desperately needed to secure our future economic growth. However, we must not underestimate the sheer scale of the challenge,” Matthew Hare, founder of Gigaclear, said in a statement. Hare added that only if the practical challenges that restrict rollout are addressed can the UK enjoy fibre broadband on a truly national scale.

Today, only 4% of the country – one million UK homes – are able to access speedy FTTP fibre-optic broadband, according to the newest Ofcom numbers released in April, with only a quarter of those actually taking a fibre service. This leaves a significant untapped opportunity for providers willing and able to meet this need.

As BT has snoozed, smaller players rush in

Acuity are extremely active supporting FTTP operators across Europe. Together with the £538m deal that saw CityFibre being taken over by a consortium of infrastructure investors in April, and a plethora of other transactions, FTTP is officially hot property.

CityFibre is one of a number of newer players in the FTTP market that’s competing with the big names such as BT and Virgin Media. CityFibre has made great progress, as its existing network is now capable of reaching four million homes and 280,000 businesses across 42 cities. CityFibre has signed a 20-year deal with Vodafone to provide fibre to a million UK homes by 2021. Companies like TrueSpeed, Call Flow, Hyperoptic, Gigaclear and Community Fibre, are already investing the capital needed to build their own networks in towns and villages across the country.

As lots of little Davids forge ahead with their network investments, the sector’s Goliaths are slowly waking up to this opportunity; Virgin Media is aiming to provide fibre to two million homes, and BT Openreach is now aiming to pass three million by 2025. TalkTalk has also thrown its hat in the ring, having made a deal with M&G to invest £500m on building FTTP networks past three million homes over five years.

This landgrab opportunity was arguably created by BT snoozing on the task for years, considering the legacy copper network to be good enough – or some would say the company was just pandering to investors who didn’t want to invest the cash. While praising Openreach CEO Clive Selley for pivoting to fibre, Ofcom CEO Sharon White said in a speech in April that the patience has run out – the time is now to get onboard. White stressed that the UK cannot afford for BT to follow in the steps of Kodak and Blockbuster as companies that failed to keep up with the changing times:

“If incumbents who rely on copper don’t change course, they risk losing swathes of customers to full-fibre rivals,” said White. “Incumbents face a choice in my view – fibre-up, or risk fading away.”

Investors are paying attention

The unprecedented market opportunity – combined with willingness from the regulator to create favourable conditions – means the time is ripe for investors. Multiple government-led funding initiatives have already been launched, including the Digital Infrastructure Investment Fund and Broadband Delivery UK, enabling a total of £1.1bn being made available.

“There is a huge growth opportunity here and we will be supporting companies across the UK as they seek to invest and build capacity,” digital minister Matt Hancock said at April’s Full Fibre Investment Committee. “One of the biggest roles Government can play is making sure that your plans aren’t held up or made more expensive by deep-rooted issues like navigating wayleaves, dealing with restrictive planning laws, and inconsistent access to public sites.”

Private investors have also made significant capital available for high quality teams keen to execute ambitious roll-out plans. We expect the FTTP landgrap to fully materialise over the next five years, although the movement has building a head of steam for the past few years already. Last year, Acuity helped fibre provider TrueSpeed to secure £75 million from Aviva Investors. This means the company can now reach 75,000 homes and businesses over the next five years, all without having to re-finance. This is significant, as small companies in this sector often find themselves hampered by only being able to access small amounts of funding at a time as they build their asset base.

Sector consolidation up ahead

Acuity is active across the sector as interest remains strong from many funds, with only a limited number of quality opportunities available to invest in. A key part of the investment story for many is an expectation that the fibre sector will consolidate over the next five years; this will be driven by founders seeing the opportunity to realise value from their businesses, creating synergies and strong regional or nationwide network providers capable of delivering wholesale and other services. £2.5 billion in private sector altnet investments for altnets have been made within the past year, according to an April report by Point Topic, although this does not represent the entire investment landscape.

In conclusion, we believe the case for high quality fibre broadband rollout has never been more clear. We’re seeing an exponential growth in connectivity need, from consumers and businesses alike. There are limited (if any) competing solutions, and the rollout of 5G mobile networks creates a compelling upside for fibre providers as they will be needed to deliver the demanding backhaul which will be required by 5G.

“The UK fibre scene has enjoyed a huge step up in investment through 2017, and 2018 promises to be more exciting still,” says Marcus Allchurch, Partner at Acuity Advisors. “I have every confidence that we will see a huge increase in last-mile fibre networks over the coming years which will enable new ways for the people of the UK to work and relax. It’s great to see the government encouraging this, but we need to ensure that the great entrepreneurs – Matthew Hare, Greg Mesch, Dana Pressman Tobak, Evan Wienburg – who have created this opportunity do not see their markets swallowed by subsidised rollouts from incumbents playing catch-up.”

This is an extremely exciting time for the FTTP market: this clear business case is now undeniably now proving itself. FTTP investment continues at pace to the benefit of businesses, investors, as well as the country as a whole. Looking back, we expect that 2018 and 2019 will be the vintage years for fibre investment in the UK, meaning now is the time to pile in.

Marcus Allchurch, Partner, Acuity

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