CityFibre set up for big broadband push with ￡2.3B in new funds
Digging up UK streets to lay fiber, the broadband successor to the copper lines of the twentieth century, is not a get-rich-quick business. BT, the UK's telecom incumbent, is spending billions on a nationwide rollout and can draw on the cash earned from its millions of broadband and mobile customers. But CityFibre, which leads a hungry pack of "altnet" challengers, warned investors in its 2023 annual report that it would run out of money by September this year. The funds it had previously secured in debt and equity would be "fully utilized" by that date "in all scenarios," said the company.
Work had started back then to secure additional funds, allowing CityFibre to finish what it started. But it was only today that the company was finally able to provide some positive news for those who want it to survive and flourish. After negotiations with its financiers, it has been given access to new funds of about £2.3 billion (US$3.1 billion) in total. It includes £500 million ($674 million) in equity from long-term shareholders, including Goldman Sachs and the UAE's Mubadala Investment Company, another £900 million ($1.2 billion) in debt and a so-called "accordion" facility of £800 million ($1.1 billion) for takeover activity.
The move potentially has major implications for the UK broadband market, positioning CityFibre to play a key role in seemingly overdue merger activity and establish itself as a big rival to BT. Today's altnet sector is a fragmented jumble of networks, many of which target a limited number of households in specific communities. In a report published in May, Neos Networks, a wholesale operator of broadband infrastructure, said numerous altnets "are now struggling to generate the revenue needed to ensure longer-term sustainability." A mopping up of assets by a well-funded CityFibre could look welcome.
CityFibre's own accounts and recent financial updates illustrate the difficulties faced by BT's rivals. In 2023, the company made close to £100 million ($135 million) in sales, more than three times what it generated the year before, but suffered a net loss of more than £419 million ($565 million), up from £94 million ($127 million) in 2022. While it has yet to publish an annual report for 2024, it boasted revenues of £134 million ($181 million) last year in a February update and claimed to have turned profitable with adjusted earnings (before interest, tax, depreciation and amortization) of £5 million ($7 million). But it seems unlikely to have stemmed its net losses.
The curse of the overbuilders
One of the big problems for CityFibre, along with other altnets, has been the disappointing response to its offer. Unlike BT, which operates both wholesale and retail arms, CityFibre has a wholesale-only role, building the networks used by consumer-facing telcos such as Vodafone to provide broadband services. Yet of the 4.3 million premises CityFibre had "passed" at the end of 2024, just 518,000 were hooked up to a connection. This take-up rate of 12% compares miserably with the 36% for BT's full-fiber rollout.
It is also well below the 35% a company needs to be commercially viable, according to Bain & Company, a firm of management consultants. The implication is that a typical neighborhood cannot feasibly support more than three competing networks, and yet some parts of the UK host four or an even bigger number. This "overbuild" phenomenon is partly why the average take-up rate for UK altnets is so low. Point Topic, an analyst company specializing in broadband, put the figure at just 16.5% for December 2024.
But there have been some positive recent developments for CityFibre. It has signed a major deal with Sky, a pay-TV giant and big player in the UK broadband sector, which recently claimed to have started offering the country's fastest broadband service on CityFibre's networks. VodafoneThree, the operator formed from the merger of Vodafone and Three, is another important client.
While currently dwarfed by BT, with its fiber footprint of more than 18 million homes, CityFibre is also much bigger than most other UK operators except Virgin Media O2, which was for a long time BT's only significant rival. CityFibre is targeting a footprint of 8 million premises and has been viewed as a potential third national network for several years. The backing provided by the likes of Goldman Sachs and Mubadala is a huge endorsement at a time when funds appear to have dried up for other altnets.
"The financing is certainly counter-trend to the current desert of funds available to altnets, and will not change this paradigm in our view given CityFibre's unique wholesale business model, which is now dependent on others struggling to raise funds to enable its consolidation ambitions," said James Barford, an analyst with Enders Analysis, in a LinkedIn post. "With cash and a solid business model, we expect CityFibre to make rapid progress with consolidation, but it is all far from over, with years of deals to come, and there will still be opportunities for others to play their part."
Indeed, consolidation is unlikely to be straightforward in such a fragmented market of overlapping networks. Finding suitable takeover targets that expand CityFibre's footprint without affecting its business model could be difficult. After CityFibre completed the takeover of a company called Lit Fibre in May last year, described as the first of several deals it expects to close, it ended up selling the service arm back to Lit's co-founders just a few months later. It could be a sign of what now lies ahead.
What's more, there will be limited interest in buying networks that overlap with CityFibre's, unless the rival company has technology or expertise that CityFibre craves. Remarking on low take-up rates and the multiplicity of UK networks, Lee Myall, the CEO of Neos Networks, reckoned some companies might simply go out of business. "There's no doubt there will be some casualties, particularly at the investor level," he told Light Reading last month. CityFibre, at least, will probably not be among them.
