Does Virgin Media O2’s potential bid for premier altnet broadband provider CityFibre represent a defensive play or an aggressive broadside against the dominant player BT Openreach?
According to a Telegraph report, initial talks have taken place between Mike Fries, chief executive of Virgin Media O2’s parent company Liberty Global (NASDAQ:LBTYA), and CityFibre boss Greg Mesch for a £3bn tie-up, possibly through joint venture entity Nextfibre.
VMO2 is in the process of upgrading 13 million cable homes to high-speed fibre-to-the-premises (FTTP) infrastructure by 2028, and a combination with CityFibre would go a long way to making this happen, since it would materially extend VMO2’s existing coverage area.
It would also be something of a pincer movement against incumbent FTTP infrastructure provider BT Openreach and its contentious Equinox 2 wholesale discount offer, due to commence on April 1, which VMO2 and CityFibre have both been critical of.
Fries has called BT’s proposed price cuts to internet service providers under Equinox 2 “desperate and premature” and “an overreaction” to market competition.
CityFibre has been even more critical of Equinox 2, going as far as to (unsuccessfully) challenge Ofcom’s approval of the offer through the courts.
Mesch stated in December 2022: "BT Openreach is exhibiting a series of behaviours straight out of the playbook of a dominant operator using its market power and advantages to maintain its dominance.”
Ofcom has been largely supportive of Equinox 2, although the regulator last Friday announced a delay to its final decision by two months, which could throw a spanner in the works of its April 1 launch date.
Merger talks surprise analysts
Robert Grindle, head of European TMT research at Deutsche Bank, was somewhat surprised at the news of a possible tie-up, stating: “We expected Nexfibre to consider the acquisition of altnets to exceed the lower end of its target coverage, but did not expect a tilt at the largest altnet, CityFibre.”
“CityFibre's network would likely be more effectively utilised by a strong anchor tenant (in VMO2) and as such represents a very material threat to BT Openreach,” said Grindle.
But he also noted that the acquisition could be construed as “part defensive” and could even give rise to competition concerns “should any acquisition reduce potential fixed infrastructure competition”.
To address competition concerns, Grindle expects CityFibre to continue to operate as a wholesale-only entity on any proposed deal.