Fiber networks were once regarded as a high-risk asset class. Yet as fiber technology has proved its worth over the past decade, so these assets have grown to become some of the most popular among private equity and institutional investors seeking the stable, long-term cash flows that infrastructure can offer. In 2021, 94 deals were made for fiber assets, approximately 80 percent of which (75 deals) were for fiber-to-the-x (FTTX) networks—the term used to describe a range of network architectures that primarily connect households to broadband services.1 Thirty-six of those deals disclosed the amount paid, which totaled $33 billion. That compares with 84 deals the previous year, with about $30 billion paid for 29 of them (Exhibit 1).
Deals have become increasingly expensive due to their popularity, however. Between 2018 and 2021, earnings multiples averaged 16.8, compared with 19.7 in 2021.2 Multiples at these levels can make the business case hard to prove in certain markets, where subscriptions would have to exceed those witnessed to date. When it comes to greenfield rollouts, for example, McKinsey analysis suggests that in some markets, 80 percent of all households would be required to subscribe to the provider’s network to achieve an internal rate of return above 10 percent over 25 years.
Higher interest rates and hence increased cost of capital, along with the fact that many of the fiber assets that are most attractive to investors have already been sold, raise still additional considerations for would-be investors, making it reasonable to ask whether the fiber popularity tide could be about to turn. In the first nine months of 2022, deal activity was down slightly (46 deals compared with 49 in the first nine months of 2021), while the overall value of those deals dropped by as much as 21 percent (Exhibit 2). Yet average multiples crept higher still, reaching 22.5 in the period.
These numbers are highly influenced by the mix of deals. Earnings multiples have typically been in the range of 25 to 33 for wholesale fiber companies such as Open Fiber Italy, Orange Concessions France, and Uniti Australia, but lower for smaller, regional companies that have retail arms, such as TalkTalk in the United Kingdom and Vocus in New Zealand. Notwithstanding, our own research and experience suggest there remains scope for many more value-creating deals.
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To begin with, there is strong underlying growth in the sector. Data traffic is expected to expand by around 20 percent annually in the next five years,3 and fiber is arguably the only fixed-broadband technology currently capable of delivering the speed and capacity expected by governments, businesses, and consumers.4
Fiber companies also offer steady EBITDA margins—typically above 40 to 50 percent for those providing broadband to consumers, and as high as 70 percent for those that offer wholesale services. But perhaps the biggest consideration is that millions of households still do not have a fiber connection. That represents a huge capital deployment opportunity.
Fiber technology is universal; fiber markets are local
Fiber investment opportunities vary widely depending on the target market (exhibit). The competitive dynamics, regulation, and capital expenditure needs will vary in different local markets in any given country, depending largely on the extent of the fiber built. Markets typically fall into one of three broad categories:
Greenfield markets: Capital spending requirements in these markets are still significant, accounting for $253 billion, or 60 percent of total fiber spending envisaged in coming years to connect households. Emerging markets in Asia, Africa, and South America, where less than 30 percent of households have access to fiber, are considered greenfield, as are a few Western ones, such as Germany, Greece, and Belgium. Here, extensive legacy networks and regulatory frameworks have hindered fiber build-out.
Acceleration markets: These markets have significant fiber coverage. Between 30 and 60 percent of households have access to fiber provided by one or more large players. Investments to the tune of some $131 billion are required to connect the remainder. Several European markets fall into this category, including the United Kingdom and Austria, as does the United States.
Mature markets: More than 60 percent of households have access to fiber in these markets, which means the opportunity for investment lies in connecting households in rural areas and converting those still using hybrid fiber-coaxial networks—an opportunity worth some $39 billion. Separating assets is also an opportunity in mature markets.
Our analysis of 87 countries suggests that while some €900 billion has already been spent laying FTTX networks, at least another €400 billion is needed to connect all households in those same countries.5 Household access to fiber services is, of course, higher in some countries than others and can be broadly divided into three groups—greenfield, acceleration, and mature markets (see sidebar, “Fiber technology is universal; fiber markets are local”). Yet opportunities also lie in FTTX deals that create more value from fiber already laid.
For private infrastructure investors that are considering the sector, some opportunities remain to buy fiber companies outright, but this is not the only way to acquire assets. We’ve examined four different types of deals also worth assessment. Each is attractive for different reasons, is suitable in different markets, depends upon different factors for success, and faces different challenges. We have seen these deal types create value in markets where other types of deals may be prohibitively expensive.
Four value-creating deal strategies
Four deal strategies merit consideration: partnerships with incumbents or new fiber players, the acquisition of challenged fiber players, the consolidation of smaller players, and the acquisition of an incumbent with a view to separating out the fiber assets.
1. Partnerships or joint ventures with incumbents or others to deploy more fiber
- The attraction: Deals with an incumbent come with a ready-made deployment plan and an established base of paying customers. There could also be a valuable match of capabilities: the incumbent’s operational experience and market knowledge—of the regulatory environment and deployment topography, for example—and the private investor’s capital deployment discipline. Deals with other types of companies that do not yet have their own fiber infrastructure—a mobile or cable company, for example, or a utility—can also prove attractive because of the advantages these companies often enjoy in local markets, not least of which is an existing customer base.
- Relevant markets: All. But these deals are most likely to appeal to operators in greenfield and acceleration markets that are cautious about spending more capital to upgrade existing networks, particularly at a time when 5G requires heavy investments.
- Key success factors and/or challenges: Joint ventures with an operator come with the security of an anchor tenant and hence stable returns, though these might be relatively low, given competition among fund managers searching for investment opportunities and the returns required by the incumbent operator. In addition, exit opportunities could be limited, as some operators might struggle to buy out investors or be unwilling to lose control of part of their fiber infrastructure through a stock market listing. Previous fiber investments, and hence experience, could help investors secure deals. Note, however, that experience gained in one geography is not always easy to transfer for a variety of reasons, such as different regulations and the local market’s readiness for high-end broadband services.
Recent examples of these kinds of deals include Telefónica’s partnerships with investment company CDPQ in Brazil to form FiBrasil. Launched in July 2021, FiBrasil rolled fiber out to 500,000 households in the course of six months and plans to reach another 5.5 million homes and businesses within four years.6 In Colombia, also in 2021, Telefónica joined forces with KKR to form ON*NET Fibra, aiming to connect 4.3 million premises in 90 cities over three years. In October 2022, it announced it had already connected two million homes.7
2. Acquisition of challenged fiber players with a view to improving and expanding existing operations
- The attraction: An opportunity to bring private equity investors’ traditional strengths to bear, improving the performance of fiber companies that are struggling to meet the commercial and operational targets initially set, often because of increased competition and slower-than-expected consumer uptake.
- Relevant markets: Acceleration markets where there is either a significant opportunity to deploy more fiber or to increase uptake of existing fiber. (In greenfield markets there are few fiber players to buy, while in some mature markets, previous consolidation means there aren’t many challenged players remaining.)
- Key success factors and/or challenges: Requires expertise in fixed network operations and a strong turnaround plan, starting with an understanding of the root causes of the company’s performance issues and how they can be addressed. Strong knowledge of not just the national but also the local telecom market is a must.
There have been few deals of this nature to date. However, just as they once featured in the cable and fixed telecom sectors, so they are likely to grow in number as the fiber market matures.
3. Consolidate smaller fiber players
- The attraction: Consolidation creates economies of scale, be it nationally or internationally.
- Relevant markets: Mature and acceleration markets where the primary remaining opportunity lies in building scale. In mature fiber markets, where numerous small fiber companies remain, this strategy could drive the next wave of deals. In the United Kingdom, for example, there are more than ten such companies, while Brazil has more than 5,000, the vast majority of which have only 5,000 subscribers or less.8
- Key success factors and/or challenges: Fiber company mergers have more limited synergies than mobile company mergers given the fixed, local infrastructure that tends not to overlap geographically. Investors therefore need to be sure of the value that might lie in operational improvements such as integration of the network architecture, or in the synergies in customer service and operating platforms.
Examples of this type of deal include the acquisition and merger of Germany’s Inexio and Deutsche Glasfaser by private equity firms EQT and Omers.9 EQT has also bought and merged multiple fiber companies in the Netherlands,10 and FiberCop, owned by TIM, KKR, and Fastweb, has done the same in Italy.11
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4. Acquire an integrated operator with a view to separating the network from the retail business
- The attraction: The combination of a stable, revenue-generating platform and a clear value-creating opportunity to grow a wholesale business as a neutral carrier.
- Relevant markets: Mostly acceleration and mature markets. Many incumbents and other integrated telcos have already sold their towers to investors. Separating out the fiber network could create the next wave of deals.
- Key success factors and/or challenges: This type of deal would be highly complex, would likely incur significant one-off costs, and would take time (between two and five years) to complete. Additionally, some question the tangible value of separating out fixed assets. There may be value to be gained by introducing wholesale services in some markets. But if these already exist, the acquisition and separation is an arbitrage strategy achieved at considerable expense.
The separation of Telefónica O2 in the Czech Republic into O2 and CETIN is a key example. The combined market capitalization of the separated companies more than doubled in five years.12 Other separations are under way or being considered, such as those by TDC in Denmark,13 Síminn in Iceland,14 and Telecom Italia.15
Keys to success: The basics
The success of many of these deal types will depend on getting some basics right. Investors will need a thorough understanding of the local market context, particularly when laying new fiber. In one market, for example, the collapse of a major construction company exacerbated a labor shortage, making it hard to deploy capital quickly. In other markets, consumers and businesses have proven slow to switch to fiber, still not yet embracing the use-cases that fiber enables such as high-quality video or fast-paced gaming, seemingly satisfied with digital subscriber and hybrid fiber-coaxial lines.
No matter the deal type, investors will also need a value creation playbook that goes beyond efficiency in capital deployment if they are to meet their internal rate of return objectives. The ability to combine new assets with those already owned—a customer base or legacy network, for example—or experience separating assets could prove important, as could the ability to lower operational and maintenance costs and drive fiber uptake with commercial excellence.
In addition, all investors should maximize the value of the infrastructure by looking beyond household connections. There are opportunities in fiber-to-the-office or fiber-to-the-business, metro fiber networks, backhaul for mobile, and edge computing, for example.
There are risks too, of course. Companies’ rush to build fiber and regulators’ efforts to promote competition by encouraging multiple fiber networks could result in overcapacity and overlapping networks. And while fiber might be today’s fixed-broadband technology winner, future competition from new technologies cannot be ruled out. In some mature markets in the United States and Europe, where cable penetration is high, Docsis 4.0 is potentially a cheaper way to upgrade the network, even though more upgrades might be required to keep pace with fiber’s expected future performance. LEO satellites have also met with some success, as has 5G fixed wireless access (FWA) in areas with limited fiber. In India, Reliance Jio recently announced plans to reach 100 million households through 5G FWA—deployment at a scale that could significantly change the technology’s economics.16 Still other technologies may yet materialize. But the magnitude of the opportunity in fiber markets is one that merits exploration around the globe, tailoring strategies to local market conditions to capture maximum value.
