Rural Broadband Valuations Remain High as Investment Activity Expands

  • CoBank Knowledge Exchange

DENVER — The abrupt shift to working from home and remote learning has significantly increased high-speed data subscriptions and traffic volume, representing a new catalyst for the broadband market. As investors look to gain exposure to steady tailwinds behind society’s digital transformation, merger and acquisition activity in the broadband market is robust and valuations remain high.

A new report from CoBank’s Knowledge Exchange assesses the broadband investment market, including valuations, target companies, market catalysts, risks and the impact COVID-19 could have on new sources of government funding. 

“Broadband data traffic growth was already booming before COVID-19, fueled by the shift to cloud computing, new 5G networks and the growth of next-generation applications,” said Jeff Johnston, lead communications economist with CoBank. “Sweeping societal changes resulting from the pandemic have rapidly accelerated that growth in data traffic.” 

$80 Billion Proposal to Bridge the Digital Divide

COVID-19 also exposed the vulnerability of those without broadband. As a result, Democratic lawmakers have proposed an $80 billion plan to bridge the digital divide. The possibility of new government financial support will intensify investor interest in acquiring broadband assets and service providers.

Federal broadband programs are typically grant based and tied to buildout requirements. Having a reliable cash flow stream from the federal government gives investors greater certainty about future business operations, which reduces risk. With less risk, investors may be willing to pay a higher price for a network. The potential injection of additional federal dollars will further support current broadband valuations and M&A interest.

Most of the mid-sized fiber transport operators have already been acquired, so investors have moved down market, targeting smaller rural operators who have replaced some or all of their copper networks with fiber. More recently, investors have shown interest in acquiring wireless internet service providers (WISPs).

WISPs have seldom been viewed as attractive acquisition targets because they are vulnerable to fiber over-builders that can essentially wipe out a WISP’s entire business. Historically, WISPs have used off-the-shelf Wi-Fi gear that operates on unlicensed spectrum. Balance sheets tend to be weak and cash flows have not been overly reliable.

However, the recent Connect America Fund Phase 2 auction awarded many WISPs large grants, which has reduced some of these concerns and enabled them to invest in fiber for backhaul and other opportunities. The grants, coupled with WISPs’ ability to build carrier-grade networks via new spectrum-sharing business models, have piqued investor interest.

Broadband Valuations to Remain Elevated

Valuations for broadband assets have remained elevated over the last 12 months, due in large part to infrastructure funds’ insatiable demand for telecom assets. Because these and other investors need to put a large amount of money to work, Johnston doesn’t see broadband valuations coming down anytime soon.

“Broadband assets are a very attractive investment,” he said. “Although no two deals are the same and factors such as edge out opportunities, competitive environment, customer profiles and federal grant commitments all impact the price an investor is willing to pay.”

 

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