At CityFibre's office in London's plush West End, the phones have not stopped ringing since the fiber network operator sealed a £90 million ($131 million) deal for assets owned by KCOM, another infrastructure player, at the start of the year.
"It has felt a bit like being fired out of a cannon," says Will Brayne, CityFibre's head of marketing and communications. (See CityFibre Takes On BT With $136M KCOM Acquisition.)
As arguably the UK's preeminent "gigabit" player, CityFibre is building fiber network infrastructure in some of the UK's biggest cities and towns. The goal is to provide a higher-speed, competitively priced alternative to BT Group plc (NYSE: BT; London: BTA) in various broadband markets. Unlike the UK incumbent, CityFibre does not sell directly to end users, instead partnering with retail operators to serve businesses, public sector organizations and even residential customers. But its wholesale ambitions are lofty. (See CityFibre's Gigabit Vision.)
Right now, the gulf between BT and CityFibre is similarly vast. In its annual results for the year ending in March, BT's sales had risen to nearly £19 billion ($27.6 billion), and its Openreach access network unit alone generated more than £5 billion ($7.3 billion). CityFibre made just £6.4 million ($9.3 million) in 2015. But the purchase of fiber networks from KCOM Group plc in 24 cities and towns has given the small company a big shove. "This is starting to put us on the map as a national-scale alternative to Openreach," says Mark Collins, CityFibre's director of strategy and public affairs.
Indeed, the KCOM move enlarged CityFibre's "footprint" by 22 cities and towns, with the only network overlaps occurring in Sheffield and York. And since it absorbed KCOM's infrastructure -- a process that was "very easy," according to Collins -- CityFibre has increased that footprint by another two locations to a total of 37 metropolitan areas. Importantly, the transaction also included a long-distance network that has enhanced CityFibre's appeal. "Previously, large providers in multiple cities were saying it's not worth innovating in one city when they had to use BT in others," says Brayne. "This has tipped the balance."
The £180 million ($261 million) financing package CityFibre raised to fund the KCOM deal should also aid future expansion. Including £80 million ($116 million) in new equity and £100 million ($145 million) in debt facilities, the funding support gives CityFibre the wherewithal to extend its footprint to 50 cities by 2020, according to Collins, compared with a pre-KCOM target of 25 by the end of 2018. Birmingham and Liverpool, where CityFibre is not currently active, are likely to be immediate priorities.
In the meantime, KCOM is delivering a major boost to various performance measures. That is partly because the post-transaction KCOM has become an important "anchor tenant" for CityFibre, selling connectivity services that use CityFibre's infrastructure. Over a five-year period, KCOM business is expected to generate at least £25 million ($36 million) in so-called total contract value (TCV). But CityFibre claims to have signed additional contracts worth £15.7 million ($22.3 million) in the four months since the KCOM deal closed, putting overall TCV at £40.7 million ($59.1 million) so far this year. In 2015, TCV was just £23.2 million ($33.7 million).
Thanks largely to KCOM, CityFibre has also turned a corner on profitability, reporting positive quarterly EBITDA for the first time ever in the January-to-March period (but declining to publish the actual number). Analysts expect revenues will more than double this year, to £14.7 million ($21.3 million), after growing by 68% in 2015. Full-year EBITDA is forecast to reach £2.4 million ($3.5 million), which would mark a considerable improvement on the loss of £2.9 million ($4.2 million) in 2015.
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