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Restructuring in focus as UK altnet challenges grow

With UK fibre network operators now facing much closer investor scrutiny, they are now having to ponder tough choices – ranging from cost cuts to collaboration with rivals, PwC restructuring specialist Issy Gross tells Rory Gallivan

 The UK fibre sector has secured billions of pounds of investment in recent years as infrastructure funds look to tap into the government’s efforts to catch up with other European countries in full-fibre penetration.

Illustrating the effect of this investment, according to the FTTH (fibre-to-the-home) Council Europe, full fibre coverage in the UK had reached 12.4m homes in the UK, or 42% of the total by September 2022, an increase of 4.3m homes the previous year.

But as reported by Infralogic in recent months, some altnets are struggling to raise the funds they need. One player, Downing-backed Broadway Partners, which was seeking to build fibre networks in rural Scotland and Wales, appointed administrators in May.

The challenges in the market are in contrast to the situation as recently as last year.

“Up until about 12 to 18 months ago the market was really buoyant and there was a lot of appetite for assets across the sector, says Issy Gross, a PwC restructuring and insolvency partner focused on the infrastructure sector.

“At points the mentality could have even been described as 'build it and they will come’, with altnets focusing on the infrastructure build and rolling out the physical fibre networks as opposed to customer acquisition,” she adds.

“Things have changed” in the altnet sector and there is much more focus on factors such as how many of their potential customers fibre companies have actually signed up and average revenue per user (ARPU) says Gross.

Both of these are often dependent on large marketing spend or altnets entering into wholesale agreements.

Most altnets, aside from owning their own fibre networks, are also internet service providers (ISPs) meaning they have consumer-facing brands that bill customers directly. Wholesale arrangements with other ISPs can help altnets increase their take-up rates but also mean their revenue is shared with the ISP they wholesale to.

Gross also notes that investors are also moving beyond the “homes passed” metric to focus on premises that are “ready for service” (RFS). The latter is a more precise definition meaning that homes are ready to be connected with full fibre within days, whereas homes passed can mean that a there is a connection to a street but much more work is required to connect each house. 

While most altnets are still some way from achieving profitability, metrics such as ARPU and homes RFS can at least give investors a clearer idea of when this might be achieved.

“Capital providers are now much more focused on the all-important question of current and realistically forecast cash generation,” says Gross.

Aside from specific issues related to fibre, the sector is also affected by wider economic issues and in particular the higher interest rate environment.

Lender caution

On top of this, says Gross, several lenders have large books of fibre exposure and in some cases are reluctant to increase this. While lenders such as debt funds and other banks are also looking to enter the sector, the debt they provide is likely to be more expensive, she notes.

Against this new backdrop, Gross and her team are increasingly being called in to assist altnets as they negotiate the new challenges.

“We come in and from day one we look at the whole business – for example what is the cash flow, what is the cash runway, what are the dynamics among shareholders, who wants to put more equity in and who has leverage where – we then look at the different options for the company, of which there are always several” she says.

Cost management is a critical consideration, says Gross, and in some cases this means jobs cuts. This has been a feature of the sector recently with players including KKR Infrastructure’s Hyperoptic among those announcing redundancies recently. But Gross notes that a wide range of other options including exploring M&A activity and joint ventures are also open to altnets as they seek to adapt to the new climate.

Joint ventures include possibilities such as altnets combining in specific geographies where they overlap or entering into partnerships with each other to make the most of central services, says Gross.

“Joint ventures are becoming an increasing theme and a number of conversations about this are ongoing,” she says.

But although it might seem like an obvious strategy given that altnets have essentially been established to provide an alternative to BT Openreach and Virgin Media rather than compete against each other, executing such arrangements is not without its challenges.

“It can be quite complicated because for example you have to get all shareholders on board and valuation discussions can be complex when trying to evaluate different business models against each other,” she says.

“There can also be technological challenges such as whether the two altnets are using the same IT systems or physical build strategies,” she notes.

So far there has been little sign of this kind of cooperation between altnets, although Fern Trading, part of Octopus Investments, has combined its four UK altnets into a single entity to “create a national wholesale network”. 

Toob-Cityfibre tie-up

Although also not a joint venture arrangement, a recent agreement between the UK’s biggest altnet, Antin Infrastructure Partners-backed CityFibre, and Amber Infrastructure Partners-backed toob could also be an indicator of future collaboration between altnets. Under a deal agreed last year, toob gave wholesaler CityFibre’s internet service provider (ISP) partners access to its network in the south of England, while toob, itself an ISP, gained access to CityFibre’s network in neighbouring areas such as Portsmouth.

A full-scale merger or even a regionally-focused joint venture between altnets with different owners would likely be more challenging to implement. But it is strategy that lenders are likely to be supportive of as a means to avoid competition, Gross notes.

Collaborating with a rival and other tough decisions such as job cuts are likely to be hard to stomach for altnets,  but they need to be aware that “insolvency is always the worst outcome”, she says.

And although they are increasingly experiencing challenges in fundraising and other areas, the tougher environment does not necessarily mean altnets need to scale back their growth ambitions, says Gross.

“Slowing down your rollout is not generally a company's first choice, but several are having to do this given the current environment; before taking that decision though, one can always look at how you can maintain the same rate of expansion more efficiently,” she explains.

Ensuring that shareholders and lenders as well as contractual counterparties are on board with altnets’ plans to deal with challenges is “an important priority for any party” says Gross.

She adds that altnets should be upfront about challenges they face and avoid having their “heads in the sand”, because lenders and other stakeholders are much more likely to be supportive if the company has a plan for dealing with its challenges.

“This is obviously a balance, as a plan needs to be formed before it can be outlined but the days of easy waiver requests and releases of drawstops (from lenders) are over,” she says.

Discussions with lenders can range from seeking debt extensions of around three to six months – to “avoid a cliff edge” as Gross puts it – to more long-term measures. Gross is keen to emphasise that the best outcome when altnets experience challenges is for all stakeholders – including management, shareholders and lenders – to come to an agreement for a way forward.

Despite the challenges altnets are facing, aside from Broadway Partners, there have so far there have no major casualties in the sector.

But amid continuing tough economic conditions and increased scrutiny of altnets’ performance, the sector is likely to be keeping Gross and other restructuring specialists busy for the next few years.