Analyst Warns Mergers Between Smaller UK Broadband Altnets is Not Enough

A new research note from analyst firm Enders Analysis has warned that mergers between smaller alternative gigabit broadband networks, such as the one that occurred on Monday between FullFibre Limited and Zzoomm (here), will not be enough for the sector to become “sustainable” and “further financial distress may be required” for some realism over valuations.

ISPreview has often had to report on the challenges being experienced by altnet operators over the past couple of years. This has been driven by rising build costs, strong competition from rivals (i.e. overbuild and the challenges of growing take-up in that environment) and high interest rates (i.e. surging debt repayments and making it harder to securing fresh investment).

In response, many altnets have moved to protect themselves by switching their focus from rapid network expansion to strong commercialisation of what they’ve already built (i.e. growing take-up), which is a sensible approach. But consolidation has long been seen as one of the ways for the market to move through the current challenges, although this hasn’t been happening as quickly as expected.

For example, over a year has now passed since CityFibre’s CMO, Dan Ramsay, rather boldly predicted that the c.100 alternative broadband networks in the UK market at that time would eventually become one single operator (here). CityFibre had also presented itself as an operator that would be leading the consolidation charge, yet since then they’ve only managed to acquire Lit Fibre (here). But 2025 may yet be different (such deals often take a long.. time to reach agreement).

Instead, Enders Analysis correctly notes that many of the mergers we’ve seen, thus far, have actually been the more predictable agreements, such as between operators with a shared investor in common (e.g. the merger between Netomnia and Brsk (Advencap) or the consolidation of Jurassic Fibre, Swish Fibre and Giganet into All Points Fibre by Fern Trading). But a lot of these have also occurred between smaller to mid-tier scale operators.

The latest deal between FullFibre Limited and Zzoomm looks set to create a much larger altnet (i.e. 600,000 premises passed RFS and 65,000+ customers), which would make them the 5th largest altnet overall, just ahead of Gigaclear. But Enders Analysis warns that even this still leaves such operators “vulnerably low scale with further consolidation necessary” and that warning goes for some of the bigger altnets too.

James Barford, Enders Analysis, said:

“While consolidation has been widely expected in the altnet sector, the general assumption has been (by ourselves and others) that the consolidator candidates are the larger players that have been pitching themselves as consolidators and have already made acquisitions, i.e. CityFibre (c.4 million homes passed), Netomnia (c.2 million) and nexfibre (c.2 million). These companies would have almost certainly been willing to make offers for mid-sized altnet targets such as Zzoomm and FullFibre, so this does beg the question as to why they did not succeed.

The most likely answer in our view is that the valuation was key. nexfibre tends to offer cash, but has been quite vocal about valuation expectations needing to be realistic, i.e. is unlikely to offer a high price, albeit the price is paid in a robust currency. CityFibre and Netomnia tend to offer shares, so here the relative valuation is key (between CityFibre/Netomnia and the target), and the larger acquiring companies would likely want a premium for their own value given that they already have considerable scale. Hence the appeal of a merger of equals—no hit has to be taken to their perceived (and likely unrealistic) value.”

Enders notes that such mid-tier mergers will deliver some synergies (e.g. cutting cost overlaps and marketing/customer acquisition best practice), but they’ll also be hit by the slow and costly process of network integration. The resulting company may also “still be too low scale to achieve sustainable profitability in our view” (e.g. altnets several times the size of Monday’s merger parties remain below or barely at EBITDA breakeven). In short, the analyst states that these sorts of mergers risk not being able to “solve the core (linked) problems of lack of scale and lack of financing“.

The analyst reasonably concludes that “much more consolidation is required for the sector to be sustainable in our view“, but unless the issue of “unrealistic” valuations is solved through another means, then “further financial distress may be required for realistic valuations to emerge“. However, it is worth stressing that there are still niche cases, where flexibility does exist for success to be found by doing things differently. But those tend to be more the exception, than the rule.

Enders concludes by urging many smaller and mid-tier altnets not to get too comfortable with drip feed financing to fund day-to-day operating losses and mounting interest costs. “We would urge them to act faster [on consolidation] to maximise the chance of decent long-term returns, even if this means a paper loss in the interim,” concluded the analyst. Waiting too long may risk inviting the debt holders to take control, further eroding the chances of a positive equity return.

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