Greg Mesch, the boss of the UK's CityFibre, is tickled by coverage of his firm's £200 million ($262 million) takeover of FibreNation this week -- a deal that has brought a commitment to extend full-fiber networks to 8 million properties, up from a previous target of 5 million, and piled pressure onto BT-owned Openreach.
"As you said, we were a headache and we've now punched them in the kidneys," he chuckles, referring to some pugilistic imagery in Light Reading's original take on the news. "But we do want to be nicer now."
It's no wonder. BT is not just CityFibre's largest individual competitor but also a prospective future customer, says Mesch. The former state-owned monopoly -- which Britain's Labour Party threatened to nationalize before it lost December's general election -- is both wholesaler and retailer, offering broadband services on its Openreach-branded network. But if that network is genuinely separate from the rest of BT's business, the retail unit should be free to buy from anyone, Mesch reckons.
"I think it would be super smart and it happens in other markets," he says. "BT's directors should be saying we should be looking at using other people's fiber."
CityFibre's appeal as an infrastructure alternative to Openreach and Virgin Media, the UK's national cable operator, is certainly growing. In terms of fiber ambition, its latest rollout target moves it far ahead of Openreach, which aims to cover about 4 million properties by next year (but has talked of 15 million by 2025 if the regulatory conditions are acceptable). To support its plans, CityFibre has promised to invest as much as £4 billion ($5.3 billion) in construction, up from £2.5 billion ($3.3 billion) under the initial scheme. Financially backed by Goldman Sachs, CityFibre and its so-called "anchor tenants" do not have to worry about funding.
The £1.5 billion ($2 billion) increase is a sign of investor confidence in the business and its performance over the last two or three years. "We came up with a build rate and a target cost per property and those are perfectly in line," says Mesch. "I think our investors are delighted with the performance or they wouldn't be comfortable upping their commitment from £2.5 billion to £4 billion."
When it comes to residential broadband, CityFibre has already been able to attract some of the UK's best-known telecom brands as clients. Vodafone became the first anchor tenant in late 2017, partnering CityFibre on the plan to bring gigabit-speed services to 5 million UK homes. That deal was renegotiated this week, allowing CityFibre to make the network available to other service providers "sooner than planned." TalkTalk, from which it bought FiberNation, has now provided firm commitments to use CityFibre's networks for residential and business services.
Adding BT would be a different matter entirely. Following regulatory intervention, Openreach has been "legally separated" from the rest of BT, and today functions with its own management team at some distance from retail and other units. Yet it remains a part of BT Group, resisting critics who want to see it become a completely separate entity. "It is 100% still owned by BT and its budgets are still set by BT," says Mesch, appreciating the obstacles to a deal between BT and CityFibre.
What he is obviously desperate to avoid is a return to the old days of one telecom infrastructure monopoly. The task of blanketing the UK with fiber is too big to leave to one company, he tells Light Reading, insisting the country would be in a "terrible position" if BT were the only fiber builder. As CityFibre starts to look more like a credible rival across swathes of the UK, the dangers of that infrastructure monopoly seem to be receding. But significant challenges remain.
One is access to Openreach's ducts and poles, or what regulatory jargon calls "passive infrastructure access." Despite government efforts to improve conditions for Openreach customers, Openreach's systems have not been set up for "scale," says Mesch. "Take a city that might have 20,000 poles. We need to reserve all 20,000. Their systems make me reserve a pole at a time." Historically, FiberNation has faced the same problem, but the takeover could help by giving the two companies a single, louder voice.
Mesch also acknowledges that CityFibre has witnessed "a little less productivity per city" than it would like, blaming "labor issues" for the situation but denying that is down to any lack of expertise in the UK market. "We don't have a shortage of fiber splicers and people to put it in. We just have a shortage of sheer volumes." CityFibre now estimates that its investment program will create about 7,000 construction jobs outside London. It is setting up a "Northern Center of Excellence" to provide a boost.
The talk of "scale," a word that figures prominently in the Mesch lexicon, raises questions about further takeover activity. Might CityFibre itself end up as an acquisition target? "We are a private company owned by infrastructure funds and they will be here for quite a while, unlike a private equity firm with a three-year target," says Mesch. "But anyone could look at acquiring us, I suspect."
Outside private equity, the list of obvious candidates is relatively short. A deal with Liberty Global -- the owner of Virgin Media -- is likely to be "difficult," while competition authorities would probably oppose any sale to BT, says the CityFibre boss. New anchor tenancies could also complicate any sale to a large customer such as Vodafone.
A likelier medium-term scenario is that CityFibre continues to pounce on other infrastructure assets in a market that looks ripe for consolidation. "Would we acquire other players? We would certainly consider that," says Mesch. The parallel he draws is with Virgin Media, which owes its status as a national broadband force to several rounds of merger activity. CityFibre is now charting a similar course.
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— Iain Morris, International Editor, Light Reading