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UK government's fiber push calls for PE, infrastructure fund investment

The U.K. government's urgency to roll out "full-fiber" broadband across the nation could boost private equity and infrastructure fund investment in local alternative network providers, analysts said.

Prime Minister Boris Johnson's unexpected pledge to deliver fiber to the home "for all" by 2025 was widely criticized as unrealistic when first announced in the summer as the previous deadline was 2033. Since then, government ministers have stuck to the target but accepted that it is ambitious and that alternative technologies such as 5G broadband may better suit harder-to-reach areas. Next-generation wireless 5G networks are set to offer download speeds many times faster than the current 4G LTE wireless networks.

To help internet service providers advance their fiber plans by eight years, the government said it would move ahead with measures to ease the rollout and announced additional funding to strengthen the investment case in rural areas. Yet analysts said public funding is unlikely to be sufficient for alternative network, or altnet, providers to British Telecom and Virgin Media, which have readily accepted help from private investors for expensive rollouts.

The favorable regulatory and legal environment has encouraged investments and transactions. Hyperoptic Ltd, Gigaclear Ltd. and CityFibre Infrastructure Holdings Ltd., which target specific regions of the U.K., have recently been acquired by investment groups. TalkTalk Telecom Group PLC's Fibrenation also is reportedly raising £1 billion to expand its network and is being circled by a small group of buyers.

"Financing for these altnets is essential as rollout is capex intensive," said Richard Morgan, a principal at consulting firm Analysys Mason. U.K. telecom regulator Ofcom has made it easier for altnets to use existing passive infrastructure, such as BT's Openreach ducts and poles, but smaller operators could still struggle to keep up, he said.

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Altnets are highly unlikely to get the required capex from the government, said Dan Howdle, consumer telecom analyst at broadband comparison site Cable.co.uk. Public funding will likely be largely directed at BT, which is best placed to roll out a national fiber network due to its existing copper network having a fiber backbone, Howdle said.

"I can't see any of those smaller networks finding the capital they need," Howdle said. "Openreach is likely to be the only one [with scale]."

Nationwide internet service providers, such as BT, TalkTalk and Virgin Media, have another advantage, according to Kagan Media Research Analyst Natalie Colakides. Kagan is a research group within S&P Global Market Intelligence.

"As operators gain scale, [broadband] prices fall and so take-up will rise," Colakides said.

Whether altnets can take business from the dominant players is a "case of who can scale out their deployment the fastest," Morgan said. The challengers have mostly chosen to stay away from larger cities and instead target areas less likely to face full-fiber competition from the likes of BT, he noted.

While the government wants to prioritize such areas, it is not yet clear how future subsidies will be awarded, Morgan said.

"It's worth noting that [BT's] Openreach did very well in the first round of government investment, which supported the upgrade of its copper network by taking fiber closer to homes and offices to provide superfast speeds," Morgan said. "There will, of course, be a lot of altnet companies competing for the new funding to deploy gigabit-capable networks in rural areas."

In its annual report, TalkTalk said, "alternative network investment is only viable where networks can secure high, fast take-up. That, in turn, requires scale customer bases, which can be migrated quickly and cheaply onto new networks, giving investors the confidence that take-up thresholds can be met."

Regulator Ofcom said in May that full-fiber, or fiber to the home, is available to 7% of properties. The National Infrastructure Commission, tasked with advising the government, said in 2018 that 100% full fiber delivery "will take 10 to 20 years." The industry awaits further detail from the government on what incentives will be available to those targeting underserved areas.

"The problem with having a high fiber goal without a detailed plan is that all are focusing on urban areas while rural [areas] remain unattractive, risking two companies rolling out in the same area while others remain disconnected," Colakides said.

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