Market Insight

CityFibre acquires KCOM’s regional network infrastructure

December 14, 2015  | Subscribers Only

Alzbeta Fellenbaum Alzbeta Fellenbaum Manager – Research and Analysis, Service Providers & Platforms

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CityFibre announced the purchase of KCOM’s network assets outside of Hull and East Yorkshire for £90 million. The deal involves the transfer of assets including 1,100 Km of ducts and fibre in 24 UK based-cities and 1,100 Km of long distance network infrastructure connecting these cities to data centres across the country and Internet peering points in London.

According to their agreement, KCOM will continue to use this network to honour its existing commitments to subscribers in these regions for a minimum 5 year term. KCOM will guarantee minimum revenue of £5 million per year and will have an option to extend the term to 15 years.

KCOM will use the proceeds to pay off its £13 million net debt (as at end-September 2015) and for dividend provision. According to KCOM’s press release, the company will also be in a position to pursue further investments and ‘focus on growing areas of strategic importance’.

Once the deal is approved by shareholders on 12th January 2016, CityFibre’s coverage will triple, comprising 36 UK cities, 7,000 mobile cell sites, 24,500 public sector sites and 245,000 businesses. The deal will also facilitate the wholesale provision of ultrafast broadband to 3.5 million homes – representing approximately 15% of the UK market. By 2020 CityFibre is planning to cover 50 cities, which will extend its coverage to 20% of the market.

OUR ANALYSIS

The deal is a significant one for a number for different reasons and when looking at their different tactics, both parties have a lot to gain.

KCOM can sell a 10 year old network that no longer forms a core part of its current strategy with minimal upheaval to its existing customers. It can then use the proceeds to pay off its debt and reinforce its position in Hull and East Yorkshire where it offers its ‘Lightstream’ fibre-optic broadband service.

CityFibre will be that much closer to fulfilling its ambitions of becoming a noteworthy competitor to BT Openreach, and the additional network will fit comfortably with CityFibre’s strategy of targeting mid-sized cities and major towns across the UK, including York, Peterborough, Coventry, Aberdeen, Edinburgh and Glasgow.

However, both CityFibre and KCOM will have to overcome different challenges for the deal to ultimately pay off. CityFibre will finance this deal via a new £100 million debt facility, and is therefore under pressure to create revenue streams by cultivating relationships with potential service provider partners, whereas in contrast KCOM will have to contend with other competitors - such as CityFibre which is installing its own fibre network in Hull.

Geography
UK
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