Amber Infrastructure executive discusses telecom M&A climate in the UK

TMT Finance interview Khalid Naqib, Senior Investment Director, Amber Infrastructure

Amber just announced a new £25m funding round for Community Fibre, backed by the National Digital Infrastructure Fund (NDIF). What can you tell us about the company’s ambitions and growth plans following the fundraising?

Community Fibre has an ambition to cover half a million homes in London by 2022. The focus for the company has always been on providing ultrafast full fibre internet connections to social housing at the same as serving private landlords, new developments and also the B2B market. Community Fibre plans to bring fibre to a further 100,000 homes by the end of next year. We expect more funding thereafter.

We have a lot of confidence in Community Fibre. It has an excellent leadership team and is known for being the fastest and one of the most trusted ISPs in the UK. It is also a true full-fibre provider with no copper in its network architecture. Amber established NDIF last year to invest in digital infrastructure.

Could you give us a bit of background on the fund and tell us about your investment strategy?

The UK government recognised a couple of years ago that the UK’s digital connectivity was behind the rest of Europe and that full fibre connectivity was becoming increasingly critical to the economy’s productivity and competitiveness, particularly as data and applications increasingly migrate to the cloud. Demand for data bandwidth is outstripping the capabilities of the legacy copper technology in the final access networks that connect most homes and businesses.

Government saw Openreach was moving too slowly, because of its own financial and regulatory constraints, and the only businesses that were focused on installing full fibre were the much smaller alternative networks, or ‘altnets’, and many of those had difficulty in accessing capital at scale, despite the large amount of infrastructure capital looking for a home. NDIF was created last year to answer this need. We are set up for this purpose, and we are the only specialised digital infrastructure fund in the UK.

At Amber, we are traditionally infrastructure investors. We established the fund with cornerstone investors, including HM Treasury who committed to invest at least £150m on a match funded basis. We will be looking to fundraise further later this year.

In terms of strategy, we are looking at businesses that are going after the most infrastructure-like layers of the UK’s future telecoms network, be it rural, urban, strategic B2B or otherwise. Some of those are very niche-specific, but valuable in their own right. We are also looking at businesses within the wider fibre telecoms ecosystem that are going to enable and be part of that long term fibre future. We have a lot of flexibility in how we invest, with tickets as small as £5m-£10m but we’ll also looking at much bigger deals. We can invest across the capital structure with both equity and debt instruments. We will look at both organic and inorganic growth strategies.

The past few months have been very active in the UK and European telecom infrastructure M&A space with the sale of Cityfibre, euNetworks and Interoute. As an investor, what do you think makes this sector so attractive and how do you see valuations and trends changing in the next 12 months?

Historically, telecoms assets have been very much part of wider TMT plays in content, retail, etc., with the cyclical ups and downs that come with that. The exponential growth in connectivity demand from consumers, cloud computing and 5G has changed the nature of demand for TMT assets, and therefore the way investors look at them. Telecoms infrastructure is now clearly seen as core economic activity, as important as gas, water or electricity. This wasn’t the case 10 years ago.

This sector has traditionally been the focus of private equity investors. Infrastructure funds have woken up to the fact that these types of assets, once established, are likely to provide long term revenues with a high degree of certainty, akin to more traditional network utilities. In the infrastructure world, we usually look at slightly less return but more stable long term profiles. That’s probably the end point for many of these altnets, once they build out, we would expect them to shift from high growth, high capex businesses to steady revenue asset businesses.

There is clearly a fair amount of fragmentation in the sector at the moment, with a lot of new entrants, which will be a great opportunity for consolidation at some point. We are witnessing a sort of a land grab where the dominant incumbent is constrained from moving quickly and smaller players are trying to move first to claim parts of the unexplored territory where FTTP hasn’t arrived yet.

Do you still expect a strong pipeline of M&A and financing deals for the rest of 2018?

We have a number of other deals we are working on in the fibre space and we’re hoping to announce these over the next few months.

I expect to see some further moves towards consolidation or buyout by infrastructure funds. There is still a lot of long-term money looking for a home and some of the valuations we have seen recently suggest that there is a lot of demand for the right assets.

In the UK, there are some large fibre players that are currently owned by traditional TMT owners that might want to sell in this type of environment.

How do you see the UK broadband market developing? What do you hope to see from the regulator and/or government?

The drive to upgrade the UK’s digital infrastructure has been driven chiefly by government policy, whether it’s for fibre, FTTH or 5G. Ofcom has spent the last 25 years regulating BT largely on a price and performance basis and has done a very good job in bringing competition to the telecom sector.

I think what’s now happening is a shift and recognition that the regulator's role needs to evolve from focusing on regulating the legacy monopoly of BT to helping to increase and stimulate coverage for the upgrade to the next generation of infrastructure across the UK.

The land grab we talked about is, for now, uncoordinated. I would not be surprised if the government continues to explore various methods of intervention to create more market coordination.

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