Hundreds of Small FiberCos Ripe For M&A; Large Players Aim to Expand Networks, Improve Margins, Grow Customer Base, Scale Infrastructure – 2024 AlixPartners Telecom Survey

• 93% of FiberCo executives say sector is, or will soon begin, aggressively consolidating, with most expecting trend to accelerate over next 15 months
• Roughly 400 of the 1,900 small-scale fiber companies in U.S. are potential M&A targets
• 75% of fiber executives prioritize growth over profitability – a trend that could fuel concerns held by private-equity investors
• Network planning and engineering overwhelmingly seen as offering greatest FiberCo integration synergies, followed by construction and deployment
• Optimized organizational structure, including headcount reduction, seen as biggest integration lever for margin expansion
• Network management/footprint integration poses biggest post-merger challenge
• Permitting is biggest barrier to fiber deployment, followed by access to financing; 98% of respondents plan to participate in U.S. government’s BEAD program—offering more than $42 billion to expand fiber networks
• 2024 Telecom Survey follows AlixPartners’ separate customer segmentation study that showed consumers unclear on fiber’s benefits, prone to churn
• Sellers in this market must concentrate on understanding their appeal to buyers and ensuring their operational and capital structure sustainability
• Buyers in this market must develop an effective acquisition engine that can systematically assimilate new assets and quickly scale operations

NEW YORK (October 8, 2024) – Hundreds of smaller fiber companies are poised to become M&A targets in coming years as the pace of consolidation in the telecom industry gains steam, according to a 2024 Telecom Study published today by AlixPartners, the global consulting firm. 

Investors and operators are looking to sidestep risk and seize opportunity as they confront difficult permitting conditions, tighter financing, and a host of other challenges. Accelerated dealmaking is increasingly seen as a route to margin expansion, achieving network and engineering synergies, and optimizing construction and deployment, the survey found. 

There are roughly 1,900 small-scale fiber companies in the U.S., about 1,000 of which are either electric co-ops or already linked to bigger energy players. AlixPartners estimates that roughly 400 of the remaining roughly 900 small-scale fiber companies are meaningful candidates for M&A. 

The study is based on responses fielded in August among 60 senior executives and investors at U.S. telecom companies, along with qualitative in-depth interviews with private-equity firms and FiberCo investors. Some 93% of executives polled think consolidation is already underway or expect it to accelerate by 2027. Of those respondents, 70% see the trend gathering momentum within 15 months. 

“Industry leaders clearly aim to expand their footprint by swallowing smaller operators and incorporating tech infrastructure and customer bases for cost-effective growth,” said Andrej Danis, a partner and managing director at AlixPartners’ who leads the firm’s U.S. Telecommunications and Digital Infrastructure Practice. “Many smaller fiber companies, recognizing the resources required to effectively monetize network assets and build a commercial engine, realize they will be better off selling part or all of their business to focus on a finite set of priorities.”

For fiber companies to thrive, however, Danis said there needs to be a clear mindset shift. Three quarters of executives we surveyed prioritize growth over profitability. “This is a strategy fraught with significant risks,” he said, sending the wrong signal to potential buyers and sellers. “In our one-on-one conversations with private equity stakeholders, profitability arose as the main concern.” 

AlixPartners’ executive survey followed on the heels of its separate broadband segmentation study fielded earlier in the summer among 1,000 ISP customers. Nearly 40% of customer respondents indicated they don’t fully understand the benefits and functionality of fiber internet, suggesting operators will struggle to charge necessary premiums for superior performance.

Operators are also facing several other hurdles to capturing growth by way of deploying fiber, AlixPartners found. Worsened economic conditions have led to price inflation and the high cost of capital; deployment is plagued by overspending, delayed projects, and disorganization; and revenue growth is constrained by lower-than-expected growth and an immature go-to-market strategy.

"There is also the issue of adoption. Access to fiber internet expanded from 46% to 56% of the U.S. population between December 2021 and June 2023. But during the same period, adoption rates for fiber remained relatively flat at just over 12%—implying that 88% of deployed fiber-to-the-home (FTTH) infrastructure is currently underutilized."

As M&A heats up across the industry, more FiberCos are planning to sell than buy. 68% of executive respondents are more likely to position their company as sellers as the market consolidates, and 70% expect to see large regional and national operators buy and integrate smaller FiberCos. 

With that said, we believe this is a buyer’s market. Those that set up an effective acquisition engine—centered on clear capabilities and capacities, operational proficiency, and a streamlined system design—will be best-placed to assimilate new assets into their existing culture and operations. 

Executives expect these mergers to create several synergies. 43% of respondents overwhelmingly cite network planning and engineering as the top among them, according to the survey. This was followed by construction and deployment (17%); finance and accounting (12%); and information technology (8%).

Consolidation is also seen as offering several levers for margin expansion, with nearly two-thirds of respondents citing organizational structure optimization, i.e. headcount reduction, as a key opportunity. Customer acquisition cost reduction; and integrating technology while simplifying or sunsetting legacy systems also ranked high. 

Assimilation also comes with risks, however. Areas of the business that respondents see as particularly vulnerable include network management and footprint integration, (with 57% respondents citing); information technology (47%); network planning and engineering (43%); and construction and deployment (40%).

“Buyer success will depend on how efficiently they acquire and assimilate fiber assets, Danis said. “There are many targets and a finite number of acquisition platforms—speed-to-value will be critical.”

AlixPartners believes consolidators need to develop new integration playbooks that position them for an assimilation model that enables a fast, repeatable, low-cost/low-risk integration. Sellers in this market must concentrate on understanding their appeal to buyers and ensuring their operational and capital structure sustainability.

About AlixPartners
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.
 
Contact:
John Stoll: [email protected]