New owners of CityFibre will need deep pockets in competitive broadband sector

(c) Sky News 2018: <a href="http://news.sky.com/story/fibre-firm-snapped-up-by-goldman-backed-investors-11345108">New owners of CityFibre will need deep pockets in competitive broadband sector</a>
 

The takeover of a mid-cap company doesn't always have long-term consequences on the competitiveness of the UK economy.

Yet that is what some people in the City are saying about the £538m takeover of CityFibre.

Access to ultrafast broadband, delivered by the industry gold standard of "fibre to the premises" (FTTP), is seen as a key way of boosting productivity in the economy.

That's where the takeover of CityFibre comes in.

The company, which was only founded in 2011 and which builds fibre-optic broadband networks, is being snapped up by a consortium of infrastructure investors.

The new owners have deep pockets.

They are West Street Infrastructure Partners, the infrastructure investment arm of Wall Street banking giant Goldman Sachs (NYSE: GS-PB - news) , and Antin Infrastructure Partners, a private equity firm whose previous investments have included the motorway services chain Roadchef and the rail leasing company Porterbrook.

They will need those deep pockets.

CityFibre, which only floated on the stock market four years ago, is a veritable David in competition with Goliaths such as BT Openreach and Virgin Media.

Loss-making CityFibre has made remarkable progress during its short corporate life.

Its national network is now capable of providing four million homes and 280,000 business in 42 UK cities with ultrafast broadband, and it has some influential partners.

The most significant of these is Vodafone which, in November last year, signed a 20-year deal with CityFibre to roll out full fibre connectivity to one million UK homes between now and 2021.

The agreement also provided scope to extent that partnership to a further five million homes across 50 towns and cities by 2025.

The consortium buying CityFibre is not the only one interested in investing in fibre.

M&G (Shanghai: 603899.SS - news) , the fund manager owned by Prudential (SES: K6S.SI - news) , struck a deal with TalkTalk Telecom (LSE: TALK.L - news) in February to build a network connecting three million homes and businesses with ultrafast broadband over the next five years in a commitment likely to come to £500m.

BT Openreach, meanwhile, is investing to bring ultrafast broadband to three million homes and businesses by 2020.

That, in time, could extent to 10 million homes and businesses by 2025 but would come at a cost of up to £6bn.

Virgin Media, meanwhile, is aiming to reach two million homes with FTTP as part of its £3bn Project Lightning network expansion.

There are also a number of 'altnets', of which CityFibre is the largest, including Hyperoptic, Gigaclear and B4RN.

So competition in the sector is intense - and which is why the City is divided on what happens next.

Chris Stone, CityFibre's chairman, insisted it could have had a strong future as an independent listed company but admitted that, as a private business, it might be easier to obtain finance to back its investment plans.

He said: "This... is a good solution for CityFibre's long-term funding.

"Under private ownership, CityFibre will be able to gain alternative and potentially easier access to the financing required for its announced fibre to the home deployment.

"This will strengthen the company's ability to deliver on its vision to provide full fibre infrastructure to 20% of the UK market."

But will the takeover mean tougher competition for BT Openreach - or less?

Nick Jones, partner and head of technology at Cavendish Corporate Finance, argues the former.

He said: "Now (Frankfurt: 11N.F - news) that funding is no longer a restriction, CityFibre will be provided with exposure and growth opportunities in a UK broadband industry which has, historically, been dominated by BT Openreach.

"With (Other OTC: WWTH - news) only 3% of UK households able to access superfast broadband, compared with 79% in Spain, there is a huge opportunity for altnets like CityFibre to deliver what traditional providers have failed to achieve."

But Guy Peddy, the telecoms analyst at investment bank Macquarie, takes a different view.

He said: "The risk, for the UK, is that we expected CityFibre to be a vehicle to consolidate the smaller FTTP builders in the long term.

"This consolidation is important to deliver unified platforms for service providers.

"The disappearance of CityFibre could make this tougher to deliver in the long term, in our view.

"This is a positive for the simplified platform offered by Openreach and help to validate its FTTP model."

Mr Peddy said there was now a danger that competing companies could waste money by over-building.

It's a valid point - and one that may yet pique the interest of ministers and regulators.

Karen Bradley, the former secretary of state for digital, culture, media and sport, and Ofcom chief executive Sharon White, summoned representatives from BT Openreach, TalkTalk, Virgin Media, Sky (Amsterdam: BK8.AS - news) - owner of Sky News - Vodafone and a number of the altnets, including CityFibre, to a meeting before Christmas to discuss the lack of investment, until now, in FTTP.

This is an issue set to climb up the political agenda.

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