Fiber Valuations to Remain Elevated for the Foreseeable Future

  • CoBank Knowledge Exchange
DENVER — Consolidation in the fiber industry, coupled with the numerous underlying demand drivers for fiber networks, have increased market valuations significantly over the last 12 months. New network architectures and emerging applications are expected to increase U.S. data traffic by 65 percent over the next three years. The pricing power fiber-rich operators enjoy, in addition to the operational expenditure benefits from deep fiber, make fiber networks an attractive investment, according to a new report from CoBank’s Knowledge Exchange Division.

Infrastructure Investments Favor Fiber
“Investments in U.S. fiber networks have become an area of focus for infrastructure funds looking to take advantage of the industry’s tailwinds and strategic buyers who want to diversify their business or gain operating leverage,” said CoBank’s lead communications economist Jeff Johnston. “As a result, fiber valuations have increased approximately 30 percent over the last 12 months, and we expect them to remain elevated for the foreseeable future.”

The U.S. needs an estimated $130-150 billion in fiber infrastructure investment over the next five to seven years to support broadband competition, rural coverage and wireless densification, based on a 2017 report from Deloitte.

There have been several high-profile acquisitions over the last few years by both strategic buyers and foreign infrastructure funds. This influx of foreign capital is not surprising given the data consumption trends in the U.S. versus other countries. The demand for these assets also stems from the expected surge in data traffic driven by 5G networks, IoT, cloud computing, next generation applications and fiber being deployed deeper into networks.

Additionally, thanks to cable operators’ broadband business they have been able to grow corporate EBITDA margins despite their shrinking video subscriber base. It’s these kinds of market conditions that are piquing the interest of institutional investors and strategic buyers.

Private Fiber Valuation Outshine Public Valuations
There is clearly a disconnect between public (e.g., fiber operator Zayo) and private fiber valuations. Volatility in equity markets and waning investor confidence have resulted in public valuations coming in much lower than private valuations.

“In our estimation, this disconnect will have minimal impact on private valuations as 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,” said Johnston.

Build/Lease Hybrid Models to Persist
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.

A video synopsis and the full report, “Fiber Valuations: Secular Tailwinds to Support Current Multiples,” are available at www.cobank.com.

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