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CityFibre buys network from KCom to take on BT's Openreach

Discussion in 'Market News' started by Lily, Dec 14, 2015.

  1. Lily

    Lily Forum Member

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    CityFibre to fund £90m deal with combination of debt and share placing

    CityFibre, the Aim-listed broadband specialist, is hoping to take on BT Openreach’s national fibre optic network by buying assets from telecoms group KCom in a £90m deal.

    The company is effectively doubling its fibre optic presence by acquiring 1,100km of network assets in 24 towns and cities and a long distance network connecting 22 towns and cities. It excludes KCom’s network in its home base of Hull and East Yorkshire. KCom will have access to the full network for up to 15 years, paying £5m a year for a minimum of five years.

    We believe [the acquisition] will accelerate our growth target by five to seven years, creating a credible alternative to BT Openreach across the UK. Furthermore, we are delighted to have received the support of our existing shareholders to fund this transaction, and we welcome new shareholders to the register.

    Today’s announcement unlocks considerable value in relation to an under-utilised asset, built more than ten years ago and which is no longer core to our strategy. Over the first half of the financial year, there were encouraging signs that our business transformation is starting to deliver results and the proceeds from this transaction offer us the opportunity to accelerate investment in those plans, without the need for any material increase in our indebtedness.

    Against the backdrop of relatively low fibre penetration in the UK, CityFibre represents a unique pure play on a growth market. We have raised our target price from 114p to 138p.

    CityFibre becomes a national alternative to BT, offering a competitive opportunity on the existing model for business and residential service providers, mobile network operators, local authorities and datacentre operators. The deal adds to a successful year of organic development with announcements of key new relationships (eg Vodafone), new cities (Newport, Edinburgh, Glasgow), and proof points for existing networks (eg Peterborough, Hull, York, Kirklees), demonstrating the effectiveness of the business model – which has now been materially advanced by this deal.

    KCom retains access to the under-utilised network asset, managed by BT on KCom’s behalf since 2009, at a net cost of £4m per annum (after transfer of £1m of operational costs to CityFibre), while freeing up the balance sheet for greater flexibility to comfortably accommodate the commitments of the pension and the dividend in addition to growth opportunities: the sale reflects very positively on the book value of the network assets of £41.8m, reducing net debt to a proforma level of £13.0m (as at September 2015), freeing up the group’s financial position and opening up the opportunities for further investment in areas of strategic importance. Target 130p reiterated, and we look forward to reviewing our forecasts.

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