Private equity firms discuss the business model of fiber deployments

NEW ORLEANS — Even though the WIA Connect(X) show is focused on wireless infrastructure and towers, this year’s show includes a few panels discussing fiber deployments. And that makes perfect sense because, of course, fiber has always been a part of wireless infrastructure. And also, the wireless industry is interested in all the funding that will be flowing from the U.S. government.

The NTIA’s Broadband, Equity, Access and Deployment (BEAD) fund will make $42.5 billion of government money available to close the digital divide in unserved areas of the U.S. And that money has caught the attention of, not only traditional service providers, but also of private equity investors.

Panelists at one session today discussed “How Private Equity is Fueling Fiber’s Growth.” They were asked if there is a magic number that developers should target for the cost per home passed with fiber.

Beth Hoffman, managing director with Berkshire Partners said that a lot of it depends on the density of the market. The cost per home passed in a dense city like San Francisco could be as low as $700. But in many of the rural areas that BEAD is targeting, the cost will be in excess of $3,000 per home passed.

RELATED: Editor’s Corner: $42.5B won’t be enough to close the U.S. broadband gap

But there are numerous variables that can throw off business models.

Paul Pishal, business development director for Connectivity, Commercial & Industrial with Black & Veatch, said, “If there’s a river crossing, you’ll never get your return on investment.”

Warren Roll, managing director of Investment Management with DigitalBridge, said investors will also have to look at the prospects of churn versus penetration. For instance, would they give a higher value to a rural market with very little churn but also low penetration?
Patrick Fear, managing director with AB - Private Credit Investors, noted that the current macro-economic environment with high interest rates also plays a big factor. “With rates where they are, what’s the actual cash flow? Any business that’s using a meaningful amount of debt today is more at risk.”

Fear added, “It comes back to evaluating the competition at all times.” He said markets with a weak LEC or a weak MSO are “great places to come into.”

Although some of the traditional cable companies or telcos that are overbuilding their own footprints might disagree.

RELATED: AT&T CFO says its fiber build is pricier than expected

In February, AT&T’s CFO Pascal Desroches said of the company’s fiber build: “I think it’s fair to say that it’s probably costing us more than we thought when we started.”

On today’s panel Berkshire Partners’ Hoffman said, “I think several businesses are being surprised at the cost of homes passed. If you look at the footprints of fiber overbuilders they’re a bit of a patchwork. I think we’re going to see some asset swaps and regional consolidation.”

Open access

Finally, the panelists touched briefly on open access networks, where developers lay fiber with the plan to wholesale it to multiple providers.

DigitalBridge’s Warren said, “We’ve tried, and it’s been extraordinarily difficult to make the numbers work. I think there’s a lot of things that can go wrong.”

The hottest market for open access fiber is currently Mesa, Arizona, where multiple developers are scrambling to lay fiber, and several of them are building open access networks.

RELATED: How many fiber players is too many for one market?

Black & Veatch’s Pishal said, “We’re seeing a lot of interest in open access. There’s no shortage of service providers that don’t want to build a network and want to jump on.”

Hoffman said there’s no denying that the math makes sense to share infrastructure. But just as the big wireless carriers have been loathe to share RAN infrastructure, there is also reluctance among some companies to share fiber infrastructure.

“If they don’t have control over the service, that makes them nervous,” said Hoffman, who added that there will undoubtedly be some municipalities, such as Mesa, Arizona, which blaze a trail for open access.