Private equity has pumped a lot of money into fiber network operators in recent years. The trend was driven by the realization that the company that first brings fiber to a market has a tremendous competitive advantage.
According to Alix Partners, however, private equity is beginning to rethink its approach to fiber network operator investment.
“Two or three years ago, everything was nice,” said Andrej Danis, partner and managing director for AlixPartners, a financial advisory firm focused on market disruption. “There was a low cost of capital. You were putting money in. Everyone was happy.
“Twelve months ago, or a bit more, the cost of capital increased suddenly and now the mathematics don’t make sense.
“Internal rate of return (IRR) started to deteriorate. You already rolled out a lot of households, but you aren’t getting all the cash flows from these customers. Also, we saw that many [buildouts] ended up costing way more than initially expected.
“So, this created a crunch where we see… investors looking at this now and saying ‘It was always good to buy a fiber company and diversify their assets, but now I’m stuck with it and what should I do?’”
Fiber operators that pose the greatest concern are those that, as of now, are not sustainable, said Danis, who sees a period of consolidation coming to those companies.
He said there are several hundred companies with revenues between $10 million and $100 million whose private equity investors will seek to act as consolidators or to sell off their investments to a consolidator.
Private equity investors wanting to play the consolidator role will need to be able to minimize disruption and quickly absorb acquisitions, Danis said.
As they do this, he said, “the most difficult part is the network.”
On the flip side, Danis had three key pieces of advice for network operators that prefer to be acquired.
“Avoid getting distressed,” he said. Distressed companies include those whose businesses are not sustainable because they are not generating positive cash flow.
His other two recommendations: focus on monetization and on building networks in such a manner that they can be easily absorbed by an acquirer.
Private Equity Fiber Investment
Another factor to consider is scale. As Danis sees it, a company that has pockets of fiber networks that are not contiguous can be difficult to scale.
A related concern is that it would be more difficult to move non-contiguous assets into a trust to obtain lower-interest financing based on asset-backed securities (ABS).
But how can a network operate reconcile the need for contiguous service areas with the need to build out in areas that don’t already have fiber?
According to Danis, some amount of overbuilding an existing fiber operator may be the right choice, even though it will be more difficult to compete in those areas.
He also noted that consolidators may be open to swapping certain markets with other consolidators. He cautioned, though, that he doesn’t expect to see much of that happening until some point in the future.
A final piece of advice from Danis: Fiber operators interested in seeking deployment funding through the $42.5 billion BEAD program should proceed cautiously because, if they are awarded funding, they could be in danger of becoming distressed if they miscalculate the business case.
