19 June 2024

UK FTTH altnets Netomnia and Brsk have agreed to merge operations, creating a fibre builder with 1.5 million homes passed and 140 000 customers. Both parties retail fibre services using their own brands (YouFibre and Brsk, respectively). Brsk is the smaller party in the deal – half the size of Netomnia.

This deal has an obvious rationale in that both parties share a common investor (Advencap), who alongside the major Netomnia investor DigitalBridge will commit additional equity funding as part of the deal. However, there is also a solid technical rationale for the deal as neither party has overbuilt the other – so there will be no stranded assets – while taking very similar approaches to their network build-out.

Netomnia and Brsk are different to the largest UK altnets in that they have a very low cost per home passed, around GBP250 compared to the GBP500 for CityFibre / Hyperoptic / Community Fibre. This is primarily due to their extensive reuse of Openreach’s duct and pole assets and focus on suburban areas in which such reuse is able to be carried out efficiently.

This strategy has meant that Netomnia is one of the most capital-efficient altnets on the market, continuing to attract funding in the current wary market (it raised an additional GBP150m in debt in March 2024). However, there is always a trade-off – it is not clear to what extent Netomnia and Brsk have been able to build contiguous coverage within each targeted town or region, rather than cherry-picking the cheapest postcodes. This may affect the post-merger Netomnia’s ability to grow further at the same efficiency, though it has stated its ambition to cover three million households by the end of 2025.

So, a deal with obvious commercial and technical rationale – but is this really the starting gun on wider UK altnet consolidation?

We believe that consolidation will be required in the UK fibre market – at current interest rates, the economics of multiple overbuilt networks are just not sustainable. We previously wrote about consolidation in the light of the potential Vodafone-Three merger here.

The Netomnia deal creates a fourth altnet of reasonable scale in the UK market (see figure below). With its finances in a solid position, it should now be considered as a reasonable platform for further consolidation. This could be in wrapping up further small altnets, as a ‘pre-packaged’ target for e.g. CityFibre, or in a merger of equals with e.g. Community Fibre where there is limited / no overbuild.

However, it is worth noting that Netomnia – like many altnet peers – is languishing at take-up rates of around 10%, far below the 30% that Openreach is achieving on its full-fibre programme. Netomnia will need to improve its take-up rate if it wishes to expand into more costly-to-build areas and scale its business.

A key tool for altnets here is attracting large wholesale customers (especially Sky, Vodafone and TalkTalk). However, such customers do not want agreements with many small suppliers of fibre wholesale services. CityFibre, for example, has not been able to seal a deal with Sky despite having by far the largest homes passed of any altnet. A merger of large altnets would make this wholesale strategy much more likely.

Despite these underlying trends, the extent to which this deal can be seen as a starting point for a wider wave of consolidation is limited. This merger had both a common shareholder to drive a solution as well as a solid technical rationale. Without such tailwinds, altnets may still require sufficiently high valuations to prevent M&A occurring given their heavy investment to date.

In this context, we expect that further pressure on altnets throughout the rest of 2024 and into 2025 from Openreach and VMO2’s nexfibre (due to open to wholesale customers next year) will start to drive more M&A activity. For fibre builders open to creative deal-making, the best time to consider M&A may well be before these pressures leave assets stranded.