- Fiber-to-the-home builders want to avoid overbuilding because the returns aren’t worth it
- Instead, fiber broadband companies are showing strong M&A intent
- Analysts in the FTTH business also abhor overbuilding, much preferring the consolidation trend
Three different analyst groups predict massive consolidation in the fiber-to-the-home (FTTH) market this year and next.
According to a new AlixPartners survey of 100 fiber operators and investors, 66% of respondents are slowing or stopping new builds to protect unit economics. Survey data shows that half of operators have reduced investment in new market expansion, while another 16% have stopped entirely.
Meanwhile, these same operators show strong M&A intent, with 73% saying they were likely or very likely to engage in deals over the next year, while 53% of investors and 50% of lenders believe they are likely to participate in an M&A transaction this year.
Ninety-five percent of the AlixPartners’ respondents believe M&A activity will focus on companies with fewer than 500,000 fiber passings, and half expect the highest activity among those with fewer than 100,000 passings.
“This focus on mid-scale acquisitions reflects a shift toward optimizing smaller, under-scaled assets,” wrote AlixPartners in its survey report. “Many of these operators compete in markets with limited presence from national fiber incumbents, making them attractive consolidation targets.”
“Market consolidation is not just likely—it is inevitable,” concluded AlixPartners. “Smaller providers will merge, be acquired or exit. The next phase of fiber growth will not be defined by new entrants, but by strategic integration among existing players.”
An urge to merge, rather than overbuild
Analyst David Barden with New Street Research said most fiber operators don’t want to build in markets where there’s already a fiber operator. And this makes perfect sense, of course. What business wants a lot of competition?
Barden wrote, “It’s almost a unanimous opinion among broadband operators that three-gigabit-player markets don’t make economic sense. As it should be, in our view.”
That’s because it’s tough to make adequate returns on investment (ROI) with three players. After removing fixed wireless access (FWA’s) share of the market, a three-way split of the rest of the market means that each operator probably ends up with penetration less than 30%, hardly a worthy return.
TD Cowen analyst Gregory Williams wrote, “Competitive dynamics have become paramount, especially with FWA in the mix, and thankfully we're seeing good discipline around overbuilding each other.”
“Most investors think that there will be a big wave of M&A in the fiber space,” wrote Barden. “We think so too.”
In fact, Fierce has been writing about this FTTH consolidation for a while.
Barden set out the steps of fiber consolidation, which follows quite closely with what the consultants at Alix Partners have been saying.
Small fiber operators with less than 300,000 locations are acquiring even smaller mom and pop operators with less than 50,000 locations. “This will only speed up as more small operators become distressed and become willing to sell themselves,” wrote Barden.
Once the small fiber operators pass over 500,000 locations, they will look to gain more scale by acquiring operators with less than 250,000 locations. And once they reach scale of more than 1 million locations, they become a desirable acquisition for big players such as AT&T, Verizon and T-Mobile. Big cable companies will also likely acquire some fiber operators on the edges of their footprints.
TD Cowen’s Williams said of the FTTH market, “As a business of scale, we should expect M&A to pick up, especially as PE-backed assets are looking for mandatory exits.”
M&A is also being driven by distressed operators that lack access to capital. “Some believe the rollup era will take longer than we appreciate,” wrote Cowen. “There are hundreds of small providers, and there are natural barriers on simply how many deals you can do.”
The MNOs
All three U.S. mobile network operators (MNOs) are focused on additional fiber. AT&T is targeting 60 million homes passed with fiber, while Verizon is targeting 50 million FTTH locations.
Williams said there’s a lot of talk that T-Mobile is also looking at more joint venture opportunities to increase its fiber. But that seems “perplexing” given the massive head start of AT&T and Verizon and the number of JVs that T-Mobile would need to move the needle. He warned that if T-Mobile really wants to go big on fiber it would “easily tap out its messaged $22 billion M&A envelope.”