CityFibre Infrastr. (AIM:CITY) Strategic FTTH partnership with Vodafone

CityFibre (AIM: CITY) is pleased to announce the signing of a major strategic partnership with Vodafone (the ‘Agreement’). Under the Agreement CityFibre will provide full-fibre connectivity in the first phase to a minimum of one million UK homes in twelve existing CityFibre towns and cities, with the potential to extend this to up to five million UK homes (approximately 50 towns and cities and representing 20% of the current UK broadband market) by 2025.

Vodafone has made a minimum volume-based commitment for ten years, which scales over the period, maturing at 20% of homes passed. In turn Vodafone has been granted a period of marketing exclusivity, city by city, for consumer grade fibre-to-the-home (‘FTTH’) services largely during the construction period. Over 20 years the first phase of the Agreement for one million homes is estimated by the Company to be worth over £500 million1.

The Board of CityFibre believes the Agreement represents a transformative opportunity for the Group:

Proactive Investors correspondent John Harrington reports on the ‘transformational’ tie-up between telecoms giant Vodafone PLC (LON:VOD) and AIM-listed CityFibre (LON:CHFL).

·   Commitment by CityFibre to pass 1 million homes with full fibre connectivity across twelve existing CityFibre towns and cities and a framework for extension to 5 million homes, which would deliver 50% of the UK Government’s target for full fibre rollout to 10 million premises

·     Construction will commence in 2018, peak in 2020, and is expected to be largely complete in four years

·     Fibre-to-the-home/premises (‘FTTH/P’) network construction will leverage CityFibre’s existing core metro networks already present across 42 UK towns and cities, which the Company estimates provides an addressable market of approximately 4.383 million homes, 43,820 public sector sites, 7,300 mobile masts and 349,400 business premises

·    The Company expects the indicative cost to construct the FTTH/P network at maturity should be in the range of £350 to £480 per home passed (not connected)

·    Agreement de-risks CityFibre rollout of FTTH/P with minimum volume commitments for FTTH services from Vodafone in return for marketing exclusivity, city by city, for consumer grade FTTH services largely during the construction period

·     In addition to the specific economics of the Agreement, the FTTH/P network construction will unlock the benefits of ubiquitous fibre access in all the towns and cities where it is built. It broadens the range of CityFibre services and brings the network closer to potential customer premises, expanding the market opportunity across all market verticals. It will create an infrastructure that ultimately all consumer and business service providers can benefit from, and improves CityFibre’s economics to deliver

·    CityFibre targets a revenue yield on the net2 capital expenditure for the FTTH/P network of 18%-22% at maturity, being five to seven years following construction

·   CityFibre has commenced a formal tender process with key network construction suppliers to ensure deployment is delivered on schedule and to budget.

1 Based on build profile set out in the Agreement, including revenues from connections and ancillary charges and assuming the 20% minimum volume guarantee penetration rate is maintained throughout the subsequent ten years.

2 net of up-front fees paid by customers for fibre connections

Greg Mesch, CEO of CityFibre, commented:

“This agreement has unlocked the UK’s full-fibre future and is a major step forward in delivering our vision for a Gigabit Britain. With this forward-thinking commitment from Vodafone, we have a partner with which we can transform the digital capabilities of millions of homes and businesses and establish an unassailable wholesale infrastructure position across 20% of the UK broadband market.”



About CityFibre:

·   CityFibre is the national builder of Gigabit Cities. The Company’s strategy is to establish CityFibre as a leading alternative wholesale full fibre network provider to Openreach in its chosen markets. It has metro duct and fibre footprints in 42 towns and cities across the UK and a long distance network that connects 22 towns and cities to data-centres in London and the UK regions.

·   The Company has an extensive customer base spanning service integrators, enterprise and consumer service providers and mobile operators providing a portfolio of active and dark fibre services. The Company estimates that CityFibre’s networks have an addressable market of approximately 43,820 public sites, 7,300 mobile masts, 349,400 businesses and 4.383 million homes.

·   CityFibre is based in London, United Kingdom, and its shares trade on the AIM Market of the London Stock Exchange (AIM: CITY). Further information on the Company can be found at www.cityfibre.com

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

CityFibre strategic channel partnership with Vodafone

1. Overview of Agreement

CityFibre will commence construction in the first five to ten towns and cities in 2018, with the minimum first phase ultimately delivering full fibre access in twelve CityFibre towns and cities, passing one million UK homes. The names of the first phase towns and cities will be announced over the coming months. Construction of the first phase is expected to be largely complete in around four years. The total capital cost of the first phase is expected to be in the range of £500 million to £700 million. This includes the cost of the network rollout past one million homes, the cost to connect up homes requesting a service, the costs to connect up business premises within the footprint of the FTTH/P network construction, internal capitalised labour costs and Point-of-Presence (PoP) costs. The Agreement includes  a framework under which both parties could agree to extend the construction programme to pass up to five million homes by 2025. During the deployment of the first phase the parties will review progress and consider future towns and cities beyond the first one million homes; so the construction of subsequent phases could commence before completion of the first phase. At five million homes, fulfilment of the full framework would represent c.20% of the current UK fixed residential and business broadband market and meet 50% of the Government’s target of ten million homes with gigabit-ready full fibre access.

The FTTH/P network will be fully owned by CityFibre and ultimately made available to all service providers on a wholesale basis. The Agreement delivers a minimum volume-based commitment for ten years, which scales over the period, maturing at 20% of homes passed. In turn Vodafone has been granted a period of marketing exclusivity, city by city, for consumer grade FTTH services largely during the construction period. Over 20 years the first phase of the Agreement for one million homes is estimated by the Company to be worth over £500 million3 total revenues for CityFibre.

While the Agreement relates only to the delivery of FTTH, the rollout of full fibre local networks will deliver a greater capillarity to the CityFibre network providing significant cost advantages to the Company’s wholesale services for both dark fibre and active (mostly Ethernet) services across all CityFibre’s market verticals. The Company will continue to sell, largely through third party Channel Partners, into the public sector, enterprise and mobile tower verticals. Having dense fibre networks places CityFibre’s network infrastructure in closer proximity to all types of user premises and will deliver a cost advantage to the Company’s bidding on future business across all market verticals.

The Company will continue to extend its current metro footprint selectively, ensuring that each new metro project is anchored by long term contracts that deliver a satisfactory return on invested capital and that cover a substantial portion of projected capital expenditure. Similar policies on returns and capex coverage apply to both new-metro and densified-metro routes to network expansion.

The Company believes that this Agreement represents an attractive opportunity to extend CityFibre’s FTTH/P plans to develop full fibre infrastructure to more towns and cities, broadening its addressable market on terms that both de-risk the funding of the FTTH/P network construction and provide an attractive return on capital. CityFibre has already worked extensively with Vodafone on mapping out the initial FTTH/P network rollout, and will now set about to design, build, operate and own the network infrastructure. Given the expanded scope of the network construction, in 2018 the Company expects to incur c.£5 million of incremental operating costs related to resourcing, network planning and project delivery which will crystallise more rapidly than was anticipated in a more limited deployment scenario.

The FTTH/P rollout will be facilitated by CityFibre’s existing core networks (also known as ‘spines’). The cabinets for FTTH/P (where traffic is aggregated for between 350 and 450 connected premises) will sit directly on the core network. CityFibre’s existing ownership of core metro networks in each of the first twelve towns and cities is therefore expected to reduce construction time in each city by around 12 months, yielding savings of up to 25% on the overall construction cost. FTTH/P network construction costs are expected to be in line with the metrics previously indicated.

CityFibre has been in consultation with a number of major civil construction contractors, project management specialists and component suppliers to ensure ample resourcing for a deployment project of this scale and a formal tender process has now commenced.

3 Based on build profile set out in the Agreement, including revenues from connections and ancillary charges and assuming the 20% minimum volume guarantee penetration rate is maintained throughout the subsequent ten years.

2. Illustrative economics of FTTH/P

Following detailed planning of the FTTH/P infrastructure with Vodafone, CityFibre expects that construction will commence in five to ten towns and cities in 2018. The construction period will depend on the number of premises in each town or city, with an average duration expected to be in the region of 20 months to 24 months per town or city.

CityFibre will rollout FTTH/P on a cabinet by cabinet basis. Each FTTH/P street cabinet is capable of providing fibre connectivity to 350 to 450 premises per cabinet, being approximately 90% homes and approximately 10% SME businesses per cabinet. The total capital expenditure, based on self-build and the selected use of Openreach duct and pole access, is estimated by the Directors to be approximately £170,000 to £200,000 per cabinet area (net of up-front fees paid by customers for fibre connections), being approximately 75% to 85% fixed capital expenditure (enabling construction of the FTTH/P infrastructure to the boundary of all premises served by the cabinet) and 15% to 25% success based capital expenditure (for construction from the boundary into the premises that have subscribed for an FTTH/P connection).

The wholesale pricing set out in the Agreement reflects the size and duration of the commitment by Vodafone. CityFibre’s wholesale FTTH prices charged to channel partners will be competitive with existing wholesale products provided by Openreach on its hybrid copper/fibre infrastructure, including the 40/10 product. Wholesale rates should also be expected to scale with the volume commitments of channel partners. Providing a superior product at a competitive price to that for legacy infrastructure should encourage migration to CityFibre’s next generation infrastructure.

Assuming early subscriber penetration growing in line with the York FTTH trial and international benchmarks the Company estimates subscriber penetration should reach at least 50% within five years, with payback per cabinet (being the period of time it takes to generate gross margin from connections equal to the net capital expenditure required to construct the FTTH cabinet area) targeted to occur within seven to nine years of the start of construction. The revenue yield on net capital expenditure is targeted to be approximately 18% to 22% per cabinet area at maturity, being five to seven years following cabinet area construction. Revenue yield is defined as the recurring annual revenue generated per cabinet, measured against the capital expenditure per cabinet, net of up-front fees paid by the customers for fibre connections.

Overall, the Company expects the indicative cost to construct the FTTH/P infrastructure at maturity should be in the range of £350 to £480 per home passed (not connected) with variability around the particular topography and demographics of the construction areas (for example, multi dwelling units (‘MDUs’) compared to detached houses and block paving compared to soil). Capital expenditure within each city is not expected to be linear, and it should be anticipated that the average cost per homes passed metric will be higher in the earliest stages of each city network construction, dropping back to the indicated cost range at maturity in the final stage of the city network construction. As described above, Vodafone’s minimum volume commitment will mitigate CityFibre’s deployment risk.

In addition to the specific economics of the FTTH rollout the construction of the network will unlock the benefits of ubiquitous fibre access across the entire CityFibre business. Having dense fibre networks places the network infrastructure in closer proximity to all types of user premises and will deliver a cost advantage to the Company’s tenders for future business across each of the market verticals. Furthermore, the dense fibre network will facilitate a broader spectrum of products and services from the cheapest residential consumer Gigabit passive optical network (‘GPON’) type services to more expensive business GPON and enterprise leased lines and tower connectivity, where more stringent quality assurance metrics apply. In turn, the Company expects the FTTH/P network construction will expand the addressable market for CityFibre products and services across all market verticals.

Accordingly, CityFibre believes that rolling out full fibre networks will accelerate the take up of the Company’s services across enterprise FTTP, mobile tower/small cell connectivity, Public Sector Network (‘PSN’) and Internet of Things market opportunities. Furthermore, the Company believes that the ability to continue to grow these verticals, both within the towns and cities anchored by the Agreement with Vodafone, or in other towns and cities not covered by this Agreement, ultimately should deliver significant synergies across all market verticals.

3. York is currently excluded from the Agreement

The city of York is currently specifically excluded from this Agreement, as it remains subject to the FTTH trial with Sky and TalkTalk. The Company is pleased with the results of the trial and CityFibre is actively engaged with its JV partners to complete the FTTH/P network construction and fully deliver on its commitments to the people of York. CityFibre believes that opportunities exist both for York to become a part of the Agreement framework and for the JV partners to access CityFibre’s FTTH/P network infrastructure, as it opens up to a full wholesale model.

4. International FTTH penetration benchmarks provide further proof points

FTTH deployments in Europe demonstrate fast growth in user subscriptions to full fibre broadband services. According to the FTTH Council Europe, there will be more than 36 million FTTH connections in use across Europe by 2019, with penetration expected to exceed 40% of homes passed in several countries which were early adopters of FTTH. For example, household penetration in Latvia is expected to reach 60% by 2019, followed by Sweden (51%), Spain (50%), Norway (49%), Romania (48%), and Portugal (46%). Alternative fibre builders will deliver the highest proportion of FTTH lines. (Source: ‘FTTH in Europe Forecast 2016-2019: Behind The Numbers’, FTTH Council Europe, 16th May 2017).

5. Capital structure

CityFibre has a range of options available with which to fund the network construction including the proceeds of the recent equity placing and additional debt financing. In the first instance, CityFibre believes that the combination of the robust credit profile of the FTTH anchor tenant, as well as the quantum and duration of the minimum volume commitment of the Agreement will support the re-financing and extension of CityFibre’s existing debt facilities in 2018.

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