Europe’s once-in-a-generation fibre opportunity

In years gone by, partnerships between telecoms corporates and infrastructure funds made little sense. European corporates such as BT, Deutsche Telekom and Telefónica held significant market share and healthy enough balance sheets, while conservative infrastructure investors had little incentives at the time to invest in what would have been considered core-plus infrastructure.

Yet it is now uncommon to see a fund without an equity stake in a telecoms-based company, capitalising on the various markets that make up the digital infrastructure industry.

The combined forces of market liberalisation and a wider reach for infrastructure funds have created a more specific investment hole that the latter has become happy to fill, by pouring capital into specific broadband projects alongside market experts, at times with a slight helping hand from governments.

Aside from the progress made by the Nordic countries and two-thirds of Benelux, Europe is struggling to implement effective broadband capacity and speeds. According to a broadband speed league table produced by broadband advice website Cable.co.uk, the UK, Spain, Italy, Germany and France all sit behind the Chinese-controlled Macau peninsula, ranked in 20th spot. When it comes to implementing full fibre internet infrastructure, Germany, Italy and the UK all suffer from penetration rates of less than 3 percent.

Plans have been afoot in various European countries to remedy their below-par connection rates. President François Hollande kicked off France’s €20 billion programme in 2013 to achieve 100 percent largely fibre-optic coverage by 2022 – brought forward to 2020 by President Macron – with €13.3 billion funding provided by the state. The scheme has brought together the likes of Cube Infrastructure and Orange, the latter of which operates about 70 percent of existing fibre-to-the-home connections.

In the UK, the government has provided £400 million ($571.6 million; €463.1 million) funding to set up three separate vehicles to invest in full-fibre projects and companies, managed by Amber Infrastructure, M&G and Infracapital.

The latter has been at the heart of some of the most interesting developments in this respect, both at home and abroad. It remains in advanced discussions with UK-based broadband provider TalkTalk over a £1.5 billion joint venture to deliver full-fibre rollout across the UK to more than 3 million homes and businesses, while it ventured further afield, forming a partnership with Nokia in Poland to provide fibre-optic networks to over 400,000 homes, winning a tender driven by Poland’s Ministry of Digitalisation and subsidised in part by European Union funds.

“[Infracapital] have significant experience in the telecoms infrastructure sector,” explains Matthieu Bourguignon, Nokia’s senior vice president in its global enterprise division. “We felt they could complement our proposal in this area, where we were very interested in providing fixed line broadband networks. Infracapital is bringing a major part of the investment and Nokia is responsible for the design, the build, the operate and the long-term maintenance.”

Bourguignon emphasises that the partnership, though, is not intended to act as a direct competitor to Poland’s traditional telecoms operators.

“In this particular case, it was an opportunity for Nokia to bring our expertise to bring broadband in some areas where no service provider wanted to work alone,” he says. “I would see this more as a complementary solution rather than as direct competition.”

Could such a strategy be replicated elsewhere in this case? “If we could meet the same conditions where we could apply the same kind of vehicles, why not?”

A similar approach has been taken at Dutch fund manager Primevest Capital Partners, which recently spun out from Rabobank’s Bouwfonds investment management team and is investing a €500 million Communications Infrastructure Fund, principally targeting individual projects in the German market.

“Our investors don’t want to operate networks and compete with the traditional players in the market,” maintains Bas van Dongen, partner at Primevest. “They don’t want exposure to investments in active equipment, that’s the domain of the network operators. In fixed-line infrastructure, there are very limited opportunities to buy larger portfolios of ‘passive infrastructure assets’, the only way to build up a portfolio is a buy-and-build strategy, with individual projects working together with different partners.”

CAN’T OR WON’T?

Bourguignon and van Dongen are clear: their investments are filling holes where network operators and service providers had not yet done so and were unlikely to do so. The question that remains is whether this is because of fundamental market barriers or more of an unwillingness to deploy capital at this stage.

“No single operator can provide this kind of investment to build a network in such a big region and sometimes rural areas,” according to Bourguignon. “Companies like Infracapital and Nokia have different business mechanics than an operator, for which the business case for providing broadband services in such areas might be harder to justify.”

This point was emphasised by Deutsche Telekom last year, after the group came under fire from critics for what they said was a lack of willingness to invest in full-fibre networks across Germany. Attributing such accusations to those who “just sit back and bellyache,” the company doubled down on its strategy.

“If we are fixated on [fibre], those in the countryside will remain left behind for years,” it stated. “It is simply impossible to roll out fibre lines to homes everywhere in the country. Neither the construction capacity nor the funding is available for that. Plus, there is quite simply no demand for it.”

Van Dongen believes the structure of the market brings a subtler answer for such traditional and dominant incumbents. “It’s not that they’re not willing to invest, but what is the right timing? If there’s no competition, why should you invest?

“However, because demand is growing exponentially and incumbents don’t invest enough to keep pace with that trend, you see a lot of new parties trying to fill the gap,” he adds. “As a response to that, incumbents are increasingly considering cooperation models to be able to roll-out fibre more quickly as well. With the right investment strategy and positioning in the market, operators can more easily find their way to institutional investors by investment funds like PCIF.”

It’s not just operators trying to work out the best models, but governments too. The UK has been putting together evidence from the industry over the last six months to “establish what, if anything, government can do to promote the right conditions to achieve widespread coverage” of full-fibre access. The launch of its Future Telecoms Infrastructure Review acknowledged that, with its 3 percent fibre penetration rate, the UK has one of the lowest in the OECD.

“We do not want to see a monopolistic market in these new technologies,” said Matt Hancock, Minister of State for Digital, at the review’s launch.

Despite the progress made by Infracapital and others in this respect, the UK and other major European markets still lag behind as mainstream market operators insist a proven investment case is yet to be made – an impasse that needs more than a full-fibre connection