- AlixPartners says consolidation is happening and will soon accelerate in the fiber market
- Likely prospects are small startup fiber companies that mid-tier broadband providers will pluck
- But the small startups need to show that they’re profitable
There are more than 400 small fiber providers in the U.S. that are ripe for picking by investors or larger fiber companies when the “inevitable” major fiber consolidation wave occurs, according to the consulting firm AlixPartners.
Andrej Danis, partner and managing director of AlixPartners, will speak at Fierce Network’s upcoming Broadband Nation Expo, which will be held October 9-11 in Washington, D.C.
The firm conducted a survey in August of 60 executives at different fiber companies in the telecom space. According to the survey, 93% of respondents said consolidation is happening or will happen soon.
Danis said that, based on public data, there are about 1,900 small fiber companies in the U.S. But about 1,000 of those are electric co-ops or they’re linked to energy players. The remaining 900 are either owned by private equity firms or are small start-up fiber companies.
He said that realistically there are about 400-500 fiber companies available for the picking, because some of the 900 “will never reach critical mass.”
Conversely, “Every single one which is bought by private equity is available to be bought,” he said. That’s because PE is already getting impatient with the slow pace of reaching profitability in broadband, and it’s always looking for a good exit.
AlixPartners helps buyers figure out strategies to obtain the best price for a company they want to buy, and it helps sellers streamline their businesses to make them appealing to buyers.
“At some point it makes sense to have infrastructure companies becoming one and merging together,” said Danis. “Consolidation is inevitable. Resistance is futile.”
Growth versus profitability
Fiber startups tend to be founded by technical people who focus on deploying fiber and serving as many subscribers as possible. Danis said, “Many of those fiber companies are focused on growing and building, but they don’t have a good monetization engine in place.”
According to AlixPartners’ survey, 75% of executives still prioritize growth even though investors prioritize profitability.
For profitability, it’s a different mindset, said Danis.
Investors are interested in profit, which can come from increased penetration or reduced costs. Unfortunately, it can be difficult to expend the capital to increase penetration, especially with the recent high cost of capital. “That means they have to reduce costs,” said Danis.
But if they enter a death spiral, they don’t look very appealing to buyers. AlixPartners helps would-be sellers demonstrate their self-sufficiency.
AlixPartners has identified three buyer archetypes
First, there are the large, national tier-one operators, which are demonstrating a good appetite for fiber companies. Recent M&A activity in the sector includes Verizon’s $20 billion all-cash acquisition of Frontier, T-Mobile’s joint ventures with Lumos and Metronet, and AT&T’s planned expansion of its joint venture with Gigapower.
But these companies are not interested in small fiber startups. Danis said it would be impractical for the big guys to run through all the regulatory approvals and due diligence to buy small companies. “For them it’s noise,” he said.
The second type of potential buyer is mid-tier fiber companies. These companies operate at a level between the major national operators and small regional providers. Often, they have a strong regional or service focus with stable access to private equity and investor funding. They generally acquire smaller players with revenues under $500 million to quickly expand their network infrastructure and market share.
And finally, there are the small operators with less than $500 million in revenue, who tend to hyper-focus on a singular strategy or region.
Danis predicts that the consolidation wave will involve the mid-tier companies buying the small operators and integrating them into a company with streamlined processes. Then, those mid-tier companies will approach the Tier 1s with an offer to sell.
Fierce Network is gearing up for our big Oct. 9-11 in Washington, DC, where leaders in broadband will gather for the biggest national event to talk about BEAD. Don’t miss the opportunity to meet with your industry peers! Be sure to .
