Virgin Media O2 fuels UK fiber M&A chatter with NetCo plan

Liberty Global and Telefónica joint venture Virgin Mobile O2 (VMO2) has unveiled plans to establish a new fixed-line "NetCo" that will underpin two key ambitions: to act as a wholesale challenger to incumbent BT Openreach; and to provide a platform for the potential consolidation of the highly fragmented fiber-to-the-premises (FTTP) market in the UK.

To be sure, the announcement has been greeted with some interest by those tracking the UK and European fiber markets, with Julian Watson, principal analyst for wholesale telecom at Omdia, far from the only market expert to predict that the move will intensify altnet M&A activity.

Indeed, VMO2 has already started the consolidation ball rolling with its recent purchase of broadband provider Upp from investment company LetterOne. At the time, Matthew Howett, the founder and CEO of analyst firm Assembly Research, described the Upp acquisition as the "first domino to fall in terms of an altnet being bought by one of the big players."

Paolo Pescatore, founder and analyst at PP Foresight, noted that there are currently over 150 altnet providers in the UK.

"As things stand, the fixed-line market cannot support all players as there are too many chasing too little revenue. Consolidation is inevitable given the overbuild that is taking place," he said.

Kester Mann, director, consumer and connectivity at CCS Insight, agreed, adding that "creating a new network company with a dedicated team could enable VMO2 to pursue merger and acquisition opportunities in the fixed-line broadband market. With dozens of alternative providers, the UK is ripe for consolidation and such a move would bring VMO2 crucial scale benefits."

Mann also particularly highlighted the fact that VMO2's plan to move into the fixed-line wholesale market "creates fresh opportunities for new and existing service providers and long overdue competition to Openreach."

NetCo blueprint unveiled

In detail, VMO2 announced on Friday that it has joined forces with shareholders Liberty Global and Telefónica to create a "distinct national fixed network company" that is currently dubbed NetCo.

Its overarching ambition is to establish the "biggest dedicated fixed network challenger in the country, offering clear wholesale choice at scale for other providers as a major alternative to BT's Openreach."

Essentially, the new entity will be responsible for the future deployment and marketing of VMO2's fiber network. Furthermore, as underlined by Lutz Schüler, CEO of VMO2, the NetCo will provide what it describes as "new financing optionality" and a platform for potential altnet consolidation opportunities.

So far, the JV has confirmed that the new entity will be a fully consolidated subsidiary of VMO2, with a "neutral impact on the company's leverage and credit structure."

It will take over VMO2's cable and fiber network assets covering 16.2 million premises across the UK, and focus on completing the ongoing cable fiber upgrade program. VMO2 will in turn become a wholesale customer of NetCo.

Meanwhile, VMO2's mobile assets will not form part of the NetCo, while nexfibre, a VMO2 affiliate backed by Liberty Global, Telefónica, and private equity firm Infravia, will continue to operate separately with a focus on fiber network expansion into greenfield areas.

Ultimately, the separate NetCo and nexfibre aim to pass up 23 million homes with their combined fiber networks, up from a collective "full fiber" footprint of about 4 million premises today.

Next steps?

More is expected to be revealed in the coming months. Mann noted that attention will now turn to "which providers would consider signing up with the new entity, how it could be regulated and whether there will be any response from Openreach."

According to Omdia's Watson, the mention of "financing optionality" suggests that NetCo "might be open to private investment, as was the case with its nexfibre JV," which in turn could accelerate consolidation in the FTTP market.

Watson also pointed out that as a retailer, VMO2 "is the most complained about broadband, landline and pay TV provider (mostly around its complaint handling). It'll be interesting to see whether other major ISPs are interested in hopping on to the NetCo network."

As for Openreach, Watson said the BT network and wholesale business "will review its deployment priorities, but continue to articulate what it sees as its USPs to customers: nationwide scale, transparent long-term pricing through Equinox, rapid deployment, and transparency over service provisioning."

In terms of other altnets, Watson commented that it does look to be "quite bad news for CityFibre, which serves the smaller ISPs and only has a 10% penetration rate."

CityFibre has itself expressed M&A ambitions, as outlined by a recent report from Bloomberg (paywall applies). Last year, CityFibre's chief strategy officer Rob Hamlin also said he thinks the UK would be better served by a larger challenger fiber network.

Pescatore suggested that the UK market is "slowly moving towards two or three, maybe four, main fixed-line infrastructure players."

"We are in a golden era of connectivity and moving people to fiber is in everyone's interests as the merits of the technology outweigh copper. However, the market as things stand cannot support all players," he said.