Mark Kleinman: Britain’s fibre infrastructure proves hard to digest
Mark Kleinman is Sky News’ City Editor and the man who gets the Square Mile talking in his weekly Morning Wire column. Today, he looks at the UK’s altnet sector, a jilted housebuilder and Thames Water’s leaky boardroom.
Britain’s fibre infrastructure proves hard to digest
Time to hang up? That’s the way many investors feeling about Britain’s fibre broadband infrastructure, or altnet, sector. After ploughing billions of pounds into trying to conquer pockets of Britain in the last five years, few are holding out hope of a positive financial return.
Take G Network, occupier of much of Mayfair in recent years as it has sought to connect thousands of upmarket premises to ultrafast broadband.
The company has now passed 400,000 connections in central London, but has decided that the best path to a sustainable future is through consolidation.
G Network is working with Jefferies and Nomura on a sale process, and I understand that in recent weeks Community Fibre, another London player, made an offer worth about £300m for it.
The trouble for G Network’s stakeholders is that that sum is significantly less than investors including the Universities Superannuation Scheme have poured into it since its inception.
The company declined to specify exactly how much capital it had raised since being founded, but sources say it is in the region of £450m-£500m.
USS, whose investment track record must be poised for proper scrutiny given its large holding in Thames Water’s parent, injected another £85m into G Network just a couple of months ago.
On that basis, industry sources say, Community Fibre was given short shrift. A spokesman for the company told me: “Community Fibre is not engaged in any negotiations about buying G Networks.”
Nonetheless, there will be many more discussions like this taking place across the sector, with many players having ceased building altogether and focusing only on customer connections to preserve cash.
A report by Enders Analysis earlier this year titled “UK Altnets: The beginning of the end?”, captured the situation well. This week’s agreement between CityFibre and my employer, Sky, will – as well as hurting BT’s Openreach arm – accelerate the impetus to consolidate into fewer than a handful of players.
Just like the energy retail industry in the aftermath of Vladimir Putin’s invasion of Ukraine, most of the existing altnets will not survive. Investors have already had to write off billions of pounds, and that’s only the tip of the iceberg.
Ofcom, the industry regulator, will have watched the energy market crisis closely and no doubt have well-versed contingency plans for a wave of altnet collapses. On the industry’s current economics, it will need to use them.
Crest Nicholson asks For Whom the Bellway Tolls
Ask not for whom the Bellway tolls; it tolls for thee. With apologies to John Donne, the Renaissance poet, the sense of foreboding replete in his writing is probably not dissimilar to that pervading the Crest Nicholson boardroom now.
A four-month pursuit by Bellway, complete with multiple rejected offers and a progressively more conciliatory courtship, ended abruptly last week. Investors had assumed, with Redrow being bought by Barratt Developments and Cala Group seemingly on the verge of being sold by Legal & General (my money is on Persimmon winning that race), that the Crest takeover was a done deal.
In the housebuilding sector’s latest wave of consolidation – buoyed by yet another new government expressing determination to see a glut of new stock being built on its watch – none of the smaller listed players can afford to be sidelined.
But it’s Crest which has been left swimming naked when the tide has gone out. Bellway’s jilting of its smaller rival has sparked speculation about an undisclosed cladding liability which blew a hole in the financial assumptions underpinning the deal.
Bill Floyd, the new finance chief who joined late last year, revised Crest’s cladding provision when it reported results in June, with the new figures audited by PricewaterhouseCoopers. Assuming that figure is robust, it stands to reason that the noises emanating from elsewhere in the sector are exaggerated or downright disingenuous.
Yet doubts persist about whether Crest’s current provision is sufficient based on industry metrics used by other housebuilders. If not an undisclosed or undercooked provision, it’s hard to conceive of another reason for Bellway’s sudden withdrawal, and it highlights a flaw in London’s takeover rules.
Crest has effectively been stigmatised by the absence of an explanation from its suitor. That damages its prospects and its shareholders’ interests, since the innuendo and speculation which fills the vacuum implies there must be a huge black hole hidden on its target’s balance sheet.
Given the lengthy due diligence already undertaken by Bellway, the emergence of such a liability seems unlikely at a late stage of the process.
There are serious doubts about whether Avant Homes, Crest’s other suitor but seemingly beset by its own challenges, will return with a form
The Takeover Panel should look again to see if a fairer balance should be struck to avoid offeree companies being rocked to their foundations in this way.
The right pick to patch up Thames Water’s leaky boardroom?
Is Britain’s messiest boardroom about to get even more fraught? Less a year after Sir Adrian Montague, the City grandee, became Thames Water’s chairman, he was obliged to step down as chair of its parent company amid a probe by the industry regulator, Ofwat, into dividend payments between the two.
Now Ofwat itself is expected to authorise two appointments to the Thames Water board as part of the increasingly intensive regulatory scrutiny arising from the company’s litany of environmental misdemeanours.
It’s not an obviously appealing prospect for would-be candidates: the looming restructuring of Britain’s biggest water utility threatens to go on for years, or leave it under government control for some time.
Step forward, Jonson Cox? The former Ofwat chair has no ongoing involvement in the industry, having left the regulator’s board last year. He had previously been chair of Anglian and played a key role in engineering the turnaround of Yorkshire Water.
Poacher turned gamekeeper? Sure. What the government and Thames need most right now, though, are seasoned minds familiar with the Byzantine financial structures and operational complexities across the water sector.
I have no idea whether Cox would be interested, or whether he’s on Ofwat’s list of candidates, but he seems like an obvious person to turn to.