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Alternative network providers have proliferated in the UK over the past 15 years, spurred by the promise of winning broadband business in the race to roll out full-fibre across the country.
But although some have made their mark in reshaping the market, the majority have failed to fulfil their original targets as they take on incumbents BT and Virgin Media O2.
Collective losses among the so-called altnets hit £1.3bn in 2023, according to a survey of the companies’ most recently published accounts by research group Enders Analysis, which warns the picture will not improve this year. James Barford, director of telecoms, said “2024 might well be worse due to increasing interest costs”.
Investors have poured billions into backing dozens of these challenger businesses but they have been hit by a rise in interest rates, increasing costs and financing difficulties, just as many struggle to persuade customers to ditch the incumbents in favour of them.
A senior executive at an asset manager that invests in digital infrastructure said they were “very concerned about the state of the UK altnet market”, saying “a large chunk of them are uneconomic” due to limited take-up by customers. They predicted there would be “a lot of failures” and lenders “sitting on fairly material losses”, with investors currently holding on to avoid writedowns.
Some fear a predicted wave of consolidation between full-fibre providers will be at valuations below the capital invested.
Vicente Vento, founder and chief executive of investment management firm DTCP, which is an investor in London altnet Community Fibre, warned that banks in the past few years had “financed projects that probably in hindsight shouldn’t have been financed”.
“The main differentiation that we’ve seen is there’s been assets that have been building projects, and then there are companies that have turned into businesses,” he added.
A report published by Enders Analysis in October said weaker than expected penetration was a critical driver for the collective losses.
They estimated a 40 per cent take-up rate — in other words, that at least four in 10 homes or businesses subscribed to an altnet’s services once they were available to their home or premises — was required for a reasonable return, but predicted that most altnets were expected to reach less than half of that within five years of installing their infrastructure.
Among the altnets with the highest penetration, Community Fibre by October had more than 310,000 customers but this was out of 1.3mn premises passed, while another London-based operator, Hyperoptic, had by September passed more than 1.73mn premises but only gained just over 340,000 customers.
One senior infrastructure investor — whose company has backed a UK altnet — agreed there had been a “gold rush” period during which the challenges of building, operations and penetration were underestimated.
They added that some businesses should not have been funded and may even go bankrupt, with their assets likely to be bought by rivals at a lower price than the cost to build.
“There is a sentiment problem,” they said while retaining a degree of bullishness over eventual customer adoption. “There’s no question that the characteristics that attracted us to them in the first place still remain because these are expensive things to build but they’re not expensive things to run.”
The investor added a “big focus in the industry is on cash flow break-even — making sure these businesses can self-fund themselves without having to rely on external sources of capital”.
Ben Terry, a senior investment director at investment manager Amber Infrastructure — which is a majority shareholder in south coast-based toob, a minority shareholder in Community Fibre and former investor in rural provider Airband — said investors’ ability to ride out the headwinds would be determined by factors including performance, access to further capital and the relative returns in comparison to competing infrastructure investments.
He expects altnets to continue to prioritise commercialisation over infrastructure rollouts in 2025 as part of attempts to demonstrate “a clear trajectory to profitability and self-funding”.
Consolidation, he added, was “firmly on investors’ agendas and many discussions are under way” but sticking points included valuations.
Causes for optimism in the sector include incumbent BT’s Openreach reporting losses to competitors, the introduction of an industry-wide policy mandated by regulator Ofcom dubbed “One Touch Switch”, which aims to make it easier for customers to change providers, and a flurry of new debt raises being secured this year.
Max Gilbert, managing director at investment bank Houlihan Lokey’s technology group — which has advised on deals including altnet Lit Fibre’s sale to CityFibre — said investor sentiment was unlikely to materially improve in the near-term.
However, he added the sector had “gone through a reset period” and a “meaningful number” of altnets were expected to be break-even in terms of ebitda during the course of the next year.
Others take a more pessimistic view. An executive at a digital infrastructure investor said it had passed on about 10 different proposals to invest in UK altnets over the past three years because of what they argued were risks in their assumptions on pricing, profitability and competition.
They added consolidation was inevitable but “nobody wants to take a bath”. One altnet it examined in the past 12 months it valued at half the amount of invested capital.
Cesar Bravo, a director at Hamburg Commercial Bank, an altnet investor, said it had taken a step back from the market without giving specifics but was now looking at potential deals and seeing key performance indicators increasingly baked into covenants from the beginning.
“It’s a sector that still carries strong fundamentals and there will be businesses or investment opportunities that will still be attractive.”
