Ofcom extends probe into Openreach’s proposed wholesale discounts after BT’s CEO causes huge backlash
Virgin Media O2 is exploring a takeover bid for challenger broadband provider Cityfibre that could be worth up to £3 billion, according to a report in the Daily Telegraph.
Apparently initial talks have taken place between Mike Fries, CEO of Virgin Media O2’s parent company Liberty Global, and Cityfibre’s CEO, Greg Mesch.
Cityfibre is the largest alt-net fibre providers: it has passed around 2 million homes and intends to pass 8 million properties in 2025 – but is running at a loss.
What’s the thinking?
An acquisition or merger would help Virgin Media O2 expand its network and upgrade its entire network to full fibre, replacing the cable infrastructure. It is estimated that about 50% of Cityfibre’s all-fibre network overlaps with that of Virgin Media O2, which might ring alarm bells with competition watchdogs whose approval will be required if the talks progress.
Virgin Media O2 is a 50:50 joint venture between Liberty Global and Telefonica, which was formed on 1 June 2021. It is thought to be working with US-based LionTree about possible acquisitions of other, smaller alt nets.
Rethinking competition?
Jefferies, the US investment banking and capital markets firm, says in research note: “Cityfibre is pivotal to the policy goal of network competition. Ofcom’s regulatory framework is seeking to establish alt-nets as enduring competitors against Openreach and VMO2. Ofcom says that an endgame of three competing networks across one-third of UK premises would be acceptable.”
It adds, “A 13 Mar[ch] study by thinkbroadband (The State of Broadband Report) verified FTTP availability from Cityfibre across 2.2 m[illion] premises, and found that the next 8 largest alt-nets (excl. VMO2) were available across 3.4m premises in aggregate. Accordingly, a VMO2-Cityfibre combination would eliminate 40% of today’s alt-net presence (excluding the minor players). That would be a serious matter for Ofcom.”
Ofcom might need to rethink its ideal competitive situatiion, giving the huge shift in macroeconomics since the framework was conceived.
Under pressure
The alt-nets are facing pressure on a number of fronts. The era of access to ‘cheap money’ has ended with rising inflation, making the funds required to build out networks even more expensive.
In February Cityfibre announced it would reduce its workforce by about 20% to cut costs: it lost nearly £50 million in 2021. On the upside, it secured £4.9 billion in debt financing last summer and has a strong presence in the market, providing services to Vodafone and TalkTalk, among others.
Second, BT’s access arm, Openreach, resisted building out all-fibre broadband in favour of FTTC that made use of its copper infrastructure, the former monopoly has been building out full-fibre a more rapid pace than its rivals expected.
Is Equinox 2 equitable?
Third, Openreach’s Equinox 1 pricing deal, which lowered its wholesale prices to service providers, making the alt-nets a less attractive proposition was approved by Ofcom and Equinox 2 is in the offing.
Cityfibre’s legal challenge to Equinox 1 was not successful and Equinox 2 is in the offing, but BT’s CEO, Philip Jansen, appears to have unwittingly done Openreach’s rivals a favour. In early February he was quoted by the Financial Times [subscription needed] describing BT as “an unstoppable machine” whose progress with all-fibre broadband would “end in tears” for its smaller rivals.
He went on to say, “There is only going to be one national network. Why do you need multiple providers?”
Last Friday Ofcom decided to extend its consultation on Equinox 2 by two months over concerns raised by the FT article, which had triggered a severe backlash from the alt-nets, although Jansen insisted he’d been quoted out of context.
To become apparent…
The head of Ofcom, Melanie Dawes, wrote in a letter to Jansen, “Were it to become apparent that BT is able…to distort competition in the market, we would not hesitate to take regulatory action to address it”.
It’s hard to see why it is not obvious to anyone, much less a regulator charged with levelling the playing field, that the former incumbent is in a position to distort competition.
The Telegraph article cites an unnamed source claiming that Cityfibre, which is backed by Goldman Sachs, could be worth more than £3 billion. Liberty Global is known to have cash reserves of $3.5 billion (about £2.9 billion).