CityFibre Takes On BT With $136M KCOM Acquisition

UK fiber network operator CityFibre has made a £90 million (US$136 million) acquisition of KCOM infrastructure assets that will strengthen its potential to become a credible alternative to BT in the UK wholesale market for fixed-line services.

CityFibre has been rolling out high-speed fiber infrastructure in a number of UK towns and cities, including a pilot fiber-to-the-home (FTTH) network in York, and already offers a variety of dark fiber services to enterprises and retail service providers. (See CityFibre's Gigabit Vision, UK Needs Fiber Infrastructure Rivalry – CityFibre and CityFibre Aims for BT's Wholesale Business.)

But the takeover of a major part of KCOM Group plc 's business could make it a bigger threat to BT Group plc (NYSE: BT; London: BTA) in future and is likely to be welcomed by organizations clamoring for wholesale alternatives to the former state-owned monopoly.

Formerly known as Kingston Communications, KCOM is one of a small number of telecom operators in the UK that owns extensive network infrastructure.

Although it has a much smaller footprint than BT or cable operator Virgin Media Inc. (Nasdaq: VMED), KCOM controls about 1,100 kilometers of duct and fiber network in 24 UK cities, as well as 1,100 kilometers of national long-distance network, which it is selling to CityFibre.

KCOM's networks in Hull and East Yorkshire, its traditional heartland, are not included in the transaction.

The takeover will boost CityFibre's existing fiber footprint by about 300%, giving it a presence in 36 cities and the ability to connect more than 7,000 mobile cell sites, 24,500 public sector sites and 245,000 businesses.

Crucially, it will also allow CityFibre to support FTTH deployments to about 3.5 million homes, or 14% of the country's total.

CityFibre is currently providing the FTTH infrastructure being used by its partners, broadband retailers Sky and TalkTalk , to offer FTTH services to consumers in the city of York and is keen to extend this kind of arrangement into other parts of the country.

It believes that by offering a much higher-speed network than BT, but at competitive wholesale rates, it can lure business away from the incumbent.

Another area of focus is on providing fiber-to-the-tower (FTTT) services for mobile operators needing higher-capacity backhaul services. CityFibre is currently offering FTTT services to the MBNL infrastructure venture between EE and Three UK , the UK's largest and smallest mobile network operators respectively, but this agreement could be threatened once BT has completed its £12.5 billion ($18.9 billion) takeover of EE. (See BT Locks Down £12.5B EE Takeover Deal.)

Nevertheless, while EE seems likely to make greater use of BT's network for mobile backhaul services, other mobile operators may be unhappy their wholesale provider is morphing into a mobile rival, opening up a considerable opportunity for CityFibre. (See CityFibre Sees Backhaul Interest From O2, Vodafone.)

Vodafone UK , the UK's number-three mobile operator and one of the biggest critics of the BT/EE deal, recently signed a "master services agreement" with CityFibre that could pave the way to the rollout of FTTT services in future. (See Vodafone UK Looking Into 1Gbit/s 4G and BT Split Could Spur Vodafone to Invest in Fiber – Colao.)

Competition watchdogs are set to make a final decision on the BT/EE deal, having given provisional approval to the takeover in October, and CityFibre's acquisition of KCOM could alleviate some of their concerns by giving rise to a stronger infrastructure rival.

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In a statement, CityFibre said it had raised £180 million ($273 million) in financing to fund the KCOM takeover and subsequent development of its network.

That £180 million ($273 million) includes £80 million ($121 million) of new equity and £100 million ($152 million) in debt facilities.

CityFibre expects to complete the financing and acquisition transactions in mid-January.

"This is the most significant event to take place in the UK's digital infrastructure market in a decade," said Greg Mesch, CityFibre's CEO, in the company's statement. "The UK now has a secure independent infrastructure alternative."

Despite the bullish talk, however, CityFibre's share price had taken a beating on the London Stock Exchange during morning trading on Monday, losing about 18% of its value.

The drop could reflect concern about the dilution of stock as well as the level of debt that CityFibre is taking on to pursue its ambitious strategy.

In the first six months of the year, CityFibre made just £2.7 million ($4.1 million) in turnover (although this did represent an increase of 115% on the same period last year) as well as an EBITDA loss of £1.8 million ($2.7 million) -- only a slight improvement on the figure of £2 million ($3 million) in the first half of 2014.

Investors might also be worried about the investments needed to transform KCOM's assets into networks capable of delivering superfast broadband services to UK homes and businesses.

In a separate statement on the transaction, KCOM said it would use the proceeds to reduce its own net debt and that it had entered into an agreement with CityFibre regarding support for existing commitments and giving it continued access to the assets post disposal.

"Today's announcement unlocks considerable value in relation to an under-utilized asset, built more than ten years ago and which is no longer core to our strategy," said Bill Halbert, KCOM's CEO.

— Iain Morris, , News Editor, Light Reading