‘It can be spaghetti out there’: can Cityfibre take on BT?

The UK’s altnet industry is a tangled mess of “spaghetti” – at least, that’s how the boss of Cityfibre put it earlier this year.

Altnets, or alternative networks, such as Cityfibre, Gigaclear and Community Fibre, have emerged as competitors to the UK’s broadband giants Virgin Media O2 and Openreach. Despite their smaller scale, they have made steady inroads by offering fibre broadband packages.

However, these firms are now in a precarious position, “fighting for survival,” according to telecoms analyst Paolo Pescatore, as they grapple with soaring build costs, tough competition from established players and the need to attract enough customers to satisfy jittery investors.

Cityfibre’s financial pressures are mounting. With debt approaching £5bn and operating losses of £114.8m in 2022, more than double the figure reported for 2021, the company’s long-term viability is under scrutiny.

That said, in May, the company reported with much fanfare that it had achieved positive earnings before interest, tax, depreciation, and amortisation (EBITDA), ahead of its target to breakeven in the first half of the year.

But the company still has a long way to go. It is in the midst of a heavy investment phase, with a target of reaching 8m premises by 2025.

It also seems as if consumers aren’t rushing to take up the company’s offer. It’s takeup rate is just 10 per cent.

That’s causing concern among some analysts.

Head of telecoms at Enders Analysis, Karen Egan, said the current take up rate “will certainly not justify the investment made in the company thus far.”

Cityfibre’s Sky deal

On Tuesday, Cityfibre secured a deal to supply Sky with wholesale broadband services, delivering a blow to its BT-owned rival Openreach. BT’s market value plunged by around £1bn following the news.

Chief executive Greg Mesch hailed the deal as a “huge vote of confidence,” arguing it cements Cityfibre’s position as a credible alternative to BT’s Openreach and Virgin Media O2.

Egan said the deal could “massively improve” Cityfibre’s prospects, especially in rural areas where Openreach is unlikely to venture anytime soon.

Cityfibre already has similar agreements with Vodafone and Talktalk, and Pescatore believes the new Sky deal will “help it keep afloat for a bit longer.”

However, he warned that “big volumes” are necessary for sustainability, and take-up remains sluggish compared to the rapid pace of roll-out.

But will the Sky deal be enough to resolve Cityfibre’s financial headaches?

Matt Britzman, a senior equity analyst at Hargreaves Lansdown, said that Cityfibre remains a “struggling business, desperate to show its lenders that it has something tangible in the works.”

Is consolidation the way forward?

In general, the industry agrees that consolidation is inevitable as too many altnets are chasing too few pounds.

Fierce competition from Openreach and Virgin Media O2 heightens the risk that Cityfibre could become another casualty in the altnet consolidation wave.

Speculation has been rife about a potential takeover of Cityfibre by Virgin Media O2-linked Nexfibre, which could establish a formidable competitor to Openreach.

However, it is still too early to call, according to Enders’ Egan. Nexfibre’s network is still largely reliant on cable, which Sky is “unlikely to be interested in,” she said, making a deal unlikely in the short term.

It can be spaghetti out there and trying to put that spaghetti together can take you as long as just building it yourself.

And Cityfibre, by far the UK’s largest altnet, appears to be positioning itself as a consolidator. It has reportedly already expressed interest in swooping on a number of smaller altnets, with potential targets including Hyperoptic, Netomnia, and Gigaclear.

But the path to consolidation is not straightforward. A major drag on consolidation is a capital formation issue, as companies have invested at different rates, Mesch said at a June Deloitte and Enders conference.

Another is that network architectures are different. “So every acquisition we look at, we have to look at what they have put in the ground; it can be spaghetti out there,” he explained, “and trying to put that spaghetti together can take you as long as just building it yourself.”

In the end, Mesch believes that the creation of a third large network to rival Openreach and Virgin Media O2 would be the best outcome for the UK. “I think consolidation is inevitable,” he said, “but how it sorts itself out is another matter.”