CoBank: Secular Tailwinds Support Current Fiber Optic Company Valuations

Fiber network consolidation has driven up the value of fiber optic networks for strategic buyers and infrastructure funds, says rural communications infrastructure financing company CoBank in a new report. As CoBank notes, the number of fiber networks available for acquisition has declined, causing the report authors to speculate that investors will turn their attention next to regional cable operators and potentially to rural local exchange carriers (RLECs).

Driving fiber consolidation and fiber network values is Americans’ growing demand for bandwidth, the report states. The authors cite research from Deloitte that forecasts the need for an estimated $130 billion to $150 billion in fiber infrastructure investment over the next five to seven years. Key demand drivers include broadband competition, rural coverage and wireless densification.

Building fiber networks takes a long time and as operators race to meet the expected surge in demand, a build/lease hybrid model will likely continue to play out over the next several years. Institutional investor interest in the fiber market should continue given the underlying demand drivers and predictable revenue streams these networks offer.

Given the relatively high entry barriers in the fiber market and consumers’ insatiable demand for data, there do not appear to be many glaring risks to fiber valuations. Oversupply is the most obvious one, but this is more region-specific than any kind of systemic risk, particularly given the proliferation of data usage.

Considering the amount of industry consolidation and scarcity of acquisition candidates, fiber-rich cable operators could become attractive assets for both institutional investors and strategic buyers. All of these factors paint a positive picture for future fiber valuations.

According to CoBank, fiber valuations have increased approximately 30% over the last 12 months, and some buyers have paid multiples above 20 times earnings before interest, taxes, depreciation and amortization (EBITDA).

The authors caution that “there is clearly a disconnect between public (e.g. fiber operator Zayo) and private fiber valuations.” The report attributes this disparity to “volatility in equity markets and waning investor confidence that have resulted in public valuations coming in much lower than private valuations.”

CoBank doesn’t see lower public company valuations negatively impacting those of private companies, however.

“Infrastructure funds have a much longer time horizon, and strategic buyers enjoy synergies that will allow them to pay a higher multiple versus myopically focused public equity investors,” the authors wrote.

Fiber Network Consolidation
The CoBank report references several key fiber network acquisitions by strategic buyers and foreign infrastructure funds, including:

  • Macquarie Infrastructure’s plan to purchase Bluebird Network in conjunction with Uniti Group
  • European-based EQT purchasing a majority stake in Spirit Communications and EQT’s plan to combine those operations with Lumos
  • Antin Infrastructure Partners purchase of FirstLight Fiber
  • Crown Castle’s purchase of Lightower, Wilcon Holdings and Fibernet Holdings

With so many deals in the rear-view mirror, CoBank noted that FiberLight, which has 14,000 route miles of fiber, is one of few remaining privately held fiber network operators that has yet to be acquired.

As a result, CoBank argues that strategic buyers and infrastructure funds are likely to begin taking a closer look at those regional cable operators that have been investing in fiber and at “progressive RLECs” that have been investing in fiber to offset their declining regulated revenues.

Although CoBank didn’t specifically identify the category, it would seem that statewide and regional fiber networks owned by RLEC consortia might be a particularly attractive category for such investors.

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References:

https://www.cobank.com/-/media/files/ked/communications/fiber-valuations-feb2019.pdf?la=en&hash=C8515454954DCF5FE00D3C231E80AC59BF7C9BDF

https://www.cobank.com/knowledge-exchange/communications/fiber-valuations

https://www.youtube.com/watch?v=GDqOw3jfsMshttps://www.youtube.com/watch?v=GDqOw3jfsMs

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