CityFibre Sees Backhaul Interest From O2, Vodafone

CityFibre has played down the impact a BT takeover of EE would have on its dark fiber business, claiming the looming deal has made 3, O2 and Vodafone even keener to use it as a backhaul provider.

The small UK operator, which is setting itself up as a wholesale rival to BT Group plc (NYSE: BT; London: BTA), was earlier today reported to have complained to competition authorities that a merger between the fixed-line incumbent and mobile giant EE would be detrimental to competition. (See BT Locks Down £12.5B EE Takeover Deal.)

Last November, CityFibre agreed to a major dark fiber deal with MBNL, the joint infrastructure venture between EE and Three UK , and is already rolling out services in Hull. (See CityFibre Aims for BT's Wholesale Business.)

But it fears that EE will not be allowed to maintain or expand the agreement following a tie-up with BT. "If BT owns EE is EE going to have the option of buying a lot of dark fiber from me?" says CityFibre CEO Greg Mesch. "I don't know but it seems unlikely and we've said that's one reason why the transaction is bad."

Nevertheless, while takeover activity could jeopardize the deal with EE, it could persuade 3, Telefónica UK Ltd. (trading under the O2 brand) and Vodafone UK to replace BT with CityFibre and avoid paying a mobile competitor for backhaul services. "The other three mobile operators are now even more eager to buy from us than they were previously," says Mesch.

Pointing out that BT has not yet acquired EE, and that CityFibre has another "national framework provider" in the shape of 3, Mesch expects to begin offering dark fiber services to MBNL in other parts of the UK later this year.

Even so, Mesch is clearly hopeful that he can yet persuade authorities to make MBNL maintain its dark fiber deal with CityFibre. "They have indicated they will look to protect companies like CityFibre that are investing in infrastructure," he says.

The rollout of Gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

Mesch was speaking with Light Reading on the same day CityFibre reported full-year results for 2014, with revenues more than doubling to £3.8 million ($5.7 million), but the operator's net loss widening to £7 billion ($10.4 million) from £6.3 billion ($9.4 million) in 2013.

That setback was blamed chiefly on costs related to CityFibre's listing on the AIM stock exchange in early 2014, and Mesch insists the business is moving in the right direction.

"Out of £10 million [$14.9 million] in expenses, £3.8 million [$5.7 million] was related to the IPO and like-for-like overheads only went up about 33%, while revenues went up 100% and the gross margin about 120%," he says. "We will turn the corner this year and start aiming for EBITDA breakeven."

CityFibre flagged an EBITDA loss of £3.6 million ($5.4 million) in 2014 but analysts expect it to turn EBITDA-positive next year. While Mesch seems broadly satisfied with that prognosis, he says that a change in FTTH ambitions or M&A activity could alter the outlook.

The company is rolling out an FTTH network in York in partnership with broadband retailers Sky and TalkTalk and is looking to replicate that scheme in other UK cities. (See TalkTalk's Small Fiber Beginnings.)

Besides working on FTTH and mobile backhaul projects, CityFibre is deploying gigabit networks outside London, where it says there is a lack of infrastructure that retail ISPs can use to serve businesses and public sector organizations.

Most of the operator's revenues came from projects in Peterborough, Coventry and York but CityFibre has also launched gigabit projects in Aberdeen and Edinburgh and aims to be active in 25 cities by 2018.

Its goal is to serve about 7.5% of businesses in these gigabit cities in the next five years and it already claims to be catering to around 2.5% of businesses in Peterborough, where it has only just finished building its network.

Rolling out fiber is a costly endeavor and CityFibre's capital expenditure on networks soared from £0.7 million ($1 million) in 2013 to £4.7 million ($7 million) last year, but almost all of this spending is supported through "anchor contracts," insists Mesch.

CityFibre had £33 million ($49 million) on its balance sheet at the end of 2014 and is currently in discussions with banks about access to debt funding. "With a proper amount of debt we will be fully funded for the 25 city rollouts," says Mesch.

CityFibre's share price had dropped by nearly 3% during afternoon trading on the AIM stock exchange at the time of publication.

— Iain Morris, , News Editor, Light Reading