U.S. Broadband Summit, Washington DC – Private equity companies have steadily become a mainstay in the broadband industry, as they seek a piece of the fiber pie.
Jonathan Adelstein, managing director and head of global policy and public investment at DigitalBridge, discussed how firms like his pick a fiber provider to invest in.
It’s not just about cost per passing and making sure “that’s under control,” cost per subscriber is a key factor as well.
“Because that’s where you actually generate revenue – how many subs do you get,” he said. “We look for quality management teams…ones that have discipline in where they invest and make sure they go into places that are going to have a good return.”
DigitalBridge also looks at a provider’s contract relationships, “making sure that they’re strong, that they can control the supply chain.” That way, it’s able to see if a company “can control costs.”
But cost per passing is still “really critical.” In an unsubsidized market – an area that may have some kind of internet connection but isn’t publicly funded – “you don’t want to go much above $1000, $1500 [per passing].”
“Generally speaking, private equity doesn’t like to go in very much above that, because it’s harder, depending on your assumption about penetration rates, to get the kind of returns you want to see,” Adelstein noted.
The ‘sweet spot’ in competition
In terms of competition, Adelstein said private equity firms are looking for a “sweet spot” in markets where there isn’t a “strong fiber competitor.” Ideally, they’re seeking markets with no fiber presence.
“You don’t want to see multiple fiber providers because ultimately, your ability to get the returns you’re looking for are dependent on penetration rates and ARPU,” he explained.
A market may have a cable presence, but Adelstein thinks fiber “can go head-to-head with cable pretty effectively.” PE firms also have to consider areas where a “cheap alternative” like satellite or fixed wireless access is available.
Commenting on the general fiber landscape, Adelstein said it’s “sort of a fight for who gets in first” – who becomes the first fiber provider in a territory.
“A lot of times, the first one in will get disproportionate market share and that will scare away other investors from going in there and overbuilding them with fiber,” he continued. “And it will also of course discourage maybe the large incumbent that has DSL in that market from going in at the same time.”
“So those are the places you want to be.”
The cost of fiber companies
Although the cost of capital “has gone up considerably,” Adelstein pointed out the cost of fiber companies “hasn’t gone down…yet.”
“These are very capital-intensive businesses that require huge investments upfront that are monetized over a number of years,” he said, which should result in “compressed multiples.”
He explained a multiple is the number of times you multiply a company’s earnings “for the actual sales price.” Investors use a provider’s fiber multiple to figure out how to value its fiber assets.
“Because capital is more expensive, we expect [multiples] to come down and they haven’t quite come down as much as we’d like to see as investors,” Adelstein added. “For sellers, it’s a happy situation, but there’s not a lot of things trading hands right now, partly as a result of a slight mismatch between those things.”
He predicts there will be “some dislocation in the market” resulting in “further reduction in multiples for fiber – but we’ll see.”