VMO2 reportedly eyeing £3 billion CityFibre swoop

Virgin Media O2 (VMO2) might be willing to splash the cash to boost its fibre footprint.

The Liberty Global-owned UK cableco is exploring the possibility of acquiring altnet CityFibre, according to unnamed sources cited in a Telegraph report (paywall) on Saturday. As always, a generous pinch of salt is a recommended accompaniment to rumours like this.

With that said, the newspaper asserts that initial talks have taken place between Liberty Global CEO Mike Fries and his CityFibre counterpart, Greg Mesch, and that a takeover bid could be worth up to £3 billion.

It is hard to gauge the likelihood of a deal being done here.

On the one hand, acquiring CityFibre would considerably accelerate VMO2’s fibre upgrade plan. At the moment, around 14.3 million of the 16.1 million premises passed by VMO2’s fixed networks are connected by hybrid fibre coaxial (HFC). But that is changing. In the summer of 2021, the cableco announced a plan to upgrade its cable network to full fibre. Snapping up CityFibre, which has passed more than 2 million premises with FTTH – and has a £4.9 billion plan to reach 8 million by 2025 – would certainly help with that.

However, VMO2 said recently it met its fixed-line rollout target last year, adding 519,000 premises to its footprint. It also said it remains on track to complete its fibre upgrade by 2028. So it isn’t as if VMO2 is falling short of its objectives and desperately needs to spend £3 billion to play catch-up.

Furthermore, VMO2 is not a wholesaler, so there are no synergies to be captured by acquiring one in the form of CityFibre.

As for CityFibre, it is owned by a private equity consortium led by Goldman Sachs. Owners like this are out to maximise a return on investment first and foremost. Shaking up the UK wholesale telecoms market is a means to that end, not its raison d’être. Given Goldman et al paid $750 million to acquire CityFibre, an exit potentially worth £3 billion would be a healthy return.

In addition, the current economic climate has made network deployment more costly. A Telegraph report in February revealed that CityFibre is shedding 400 jobs in an effort to cut costs. The article cited a memo to staff by Mesch, in which he stressed the importance of taking responsible financial and operational decisions during times of economic difficulty.

In normal times, one logical exit point for Goldman would be the completion of CityFibre’s network in 2025, but in this time of uncertainty, it might be keen to lock in a decent return now rather than wait any longer.

Then again, full fibre broadband is one of the safer long-term bets an investor can make, what with the veracious appetite for data and connectivity among consumers and businesses alike. Backers the size of Goldman Sachs should be able to withstand a few economic bumps in the road while CityFibre ploughs on with its deployment.

Indeed, there still seems to be plenty of willingness from lenders to finance fibre. Separately on Friday, UK altnet Netomnia announced it has secured £230 million of debt financing from a group of six banks: HSBC UK, ING, NIBC, RBC, Standard Chartered, and UKIB.

Netomnia is the country’s fourth-largest altnet, with a network that passes 410,000 premises. It currently serves 28,000 customers, and it offers retail ISP services via its sister company YouFibre. It has a target of covering 1 million premises, although it isn’t clear when it hopes to reach this particular milestone.

“We are very pleased to welcome this new group of lenders to Netomnia and are thrilled they have chosen to support the continued acceleration of our business,” said Netomnia and YouFibre CFO Wil Wadsworth. “The enthusiasm from these institutions to support our business is a testament to our successes at Netomnia and YouFibre, and our unique approach to building our full fibre network and providing best-in-class Internet speeds and services to customers across the UK.”

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