Macquarie bets on fibre

Macquarie Capital, the institutional equities unit of Macquarie Group, has been ramping up its focus in an ever-increasingly competitive UK digital infrastructure space, having made key investments this year including into UK rural broadband provider Voneus.

The investment – an initial injection of £10m (US$12.1m), which could reach £30m in phases to support full-fibre/Premises (FTTH/P) roll-out and debt refinancing. Fresh from working on the eventual sale of UK fibre operator CityFibre to Antin Infrastructure Partners and Goldman Sachs-led West Street Global Infrastructure Partners, former CityFibre corporate finance director and UK Treasury adviser, Oliver Bradley, joined Macquarie earlier this year as managing director of digital infrastructure investing. Bradley caught up with Taku Dzimwasha to discuss how he sees the latest opportunities in the sector developing.

UK fibre: investment boom

The UK has lagged behind other European nations in terms of full fibre penetration, with the nation only this year being included in the European Union's FTTH Council Europe country ranking, which lists the countries with the strongest subscriber penetration. According to the council, the UK only has a 1.5% penetration rate, this compares negatively to league leader Latvia, which has a 50.3% penetration rate. The penetration deficit has led to a boom of FTTP Internet service providers (ISPs) including Cityfibre, Hyperoptic, Gigaclear, Community Fibre, and Voneus, to name a few.

With the Voneus investment, Macquarie Capital is keen on capitalising on the growth opportunity presented by the push to roll out full fibre, according to Bradley. "At Macquarie Capital we’re always looking for ways that we can add value, targeting companies and projects in the early development stages, in jurisdictions where the regulatory environment is supportive of the things that they want to achieve," he says. "Ultimately, we’re looking for projects that are on the way to becoming high quality but aren't quite there yet and require our expertise and development capital to make these projects happen." It is not only Macquarie that has identified the opportunity. Others, such as M&G Prudential's Infracapital which invested in rural fibre provider Gigaclear and CityFibre's current owners have invested significantly in broadband infrastructure providers. "One of the main attractions for infrastructure funds in terms of investing in fibre in the UK is the fact that a lot of it is greenfield as opposed to brownfield," says Bradley. "However, some of the largest deals we have seen are existing businesses which offer a mixture of the two - sometimes referred to as yellow field."

Emerging asset class

The Voneus transaction was just one of many fibre transactions executed this year in Europe, with TMT Finance reporting on the completed acquisition of Altice Europe’s 49.99% stake in France's SFR FTTH by a consortium including OMERS Infrastructure, AXA Investment Managers Real Assets and Allianz Capital Partners for E1.8bn and EQT Mid Market's Nordic wholesaler IP-Only by EQT Infrastructure. As previously reported, financial advisers on the SFR transaction were Lazard on sell side and Barclays and Goldman Sachs on the buy side; and on the IP-Only transaction, JP Morgan acted on the sell side and Deutsche Bank and Morgan Stanley on the buy side.

In recent years, there has been a noticeable reduction in the level of corporate M&A activity in the fibre space. A large majority of the transactions that have occurred have been led by financial sponsors. In particular, there has been a significant emergence of infrastructure funds looking to invest in fibre, according to Bradley. "Fibre is an asset class which appeals to infrastructure funds who have capital to deploy because they see it as a business sector which is on its way to becoming a utility, like water, gas and electricity," says Bradley. "The key difference is that those traditional utilities are mature as infrastructure investments, whereas fibre creates a great opportunity to deploy capital and generate a better risk-adjusted return."

The rise of altnets

Many of the infrastructure investors that have entered the fibre industry have preferred to invest in alternative networks (altnets) rather than established providers. Traditionally altnets, particularly in the UK, struggled to get access to capital because they were viewed as being too small and risky for institutional investors and banks. In particular, the latter mainly offered SME-type loans which are cash flow based, however, building a fibre network means that you are going to be cash flow negative for the first few years and, therefore it is difficult to secure a loan, according to Bradley. "Infrastructure investors and lenders in the utilities space are ideal partners for these altnets because they can get their heads around the concept of projects where you invest over a few years and then you get the revenue later," he says.

As the altnets in the UK have expanded the market has become somewhat fragmented with FTTH providers catering for specific regions while new altnet players such as TalkTalk's FibreNation, Toob and Zzoomm are set to begin rolling out their own networks. Meanwhile, BT's Openreach and Liberty Global's Virgin Media have pledged to expand Some market commentators have suggested that the market may become saturated, however, in the short term the demand is such, says Bradley, that there is enough room for all the players in the market. "In the longer term there might be some consolidation between some of the alternative operators because you do get synergies from scale, as we saw with the UK’s cable providers when tens of companies eventually became Virgin Media," he says. "However, fibre networks can, of course, operate independently if there is sufficient consistency to enable internet service providers (ISPs) to access wholesale across different networks."