Overview
Analyst Survey 2025 (full report)
There was an extraordinary turnaround for many US telecoms companies in 2024. Firms that had been teetering on the edge of bankruptcy are now back on solid footing.
Historically, the industry has had a reputation for being a staid, slow-moving business. It’s a highly capital-intensive sector, and because it takes a lot of money to upgrade networks - and because returns can be underwhelming - there’s been a history of underinvestment across legacy firms.
But change is afoot, not least because of the growing demand for fibre optic cabling. Fibre is becoming increasingly important as more consumers expect it for their homes, but also as companies further integrate AI and machine learning into their business models, requiring enterprise grade long-haul fibre that can move vast volumes of data at speed. While these trends have not changed the underlying economics of the sector, and the hype around the future demand for AI may be a little frothy, it’s not an understatement to say the shift in market sentiment that has come on the back of these two pillars of demand has saved the industry - at least for now.
In particular, we’ve seen a real turnaround in the perception of companies that specialise in fibre to the home. This has always been an expensive process - it can cost up to USD $1,500 to run fibre to a residential property, and then around $600 to connect each customer to the network. Many of these businesses have struggled as they wait to realise returns on their investments. Frontier Communications, for example, filed for Chapter 11 bankruptcy in 2020, while Lumen Technologies went through an aggressive restructuring and debt exchange as recently as November when it couldn’t meet its repayments.
Stories like these are what have led to the hesitancy of big telecoms companies to step into fibre. But the growth in demand and cheap valuations has already led to some large M&A deals in 2024, with the potential for more to follow. Although the cash flow of the fibre firms may be challenged, they operate long-term, future-proofed technology that’s cheap to operate and easy to upgrade. These strengths, combined with a fall in values during the market trough in 2022 and 2023, made fibre companies an attractive buy for larger players.[1]
In the fourth quarter of 2024, Bell Canada announced that it was buying Ziply Fiber, while Verizon has launched its intention to acquire Frontier for $20 billion. These transactions have opened the floodgates, and now any fibre company that’s not already part of a larger TMT conglomerate is a potential candidate for a takeover.
The availability of capital, the relative political stability in the US, and the prospect of the appointment of a third Republican commissioner to the Federal Communications Commission in 2025 all suggest that the backdrop for getting new deals done is going to be much stronger.
We had always believed that the wider market was overly pessimistic about the valuations on these fibre names. Uniti’s unsecured bonds, for example, rose significantly in value from around $60 to nearly $90 last year. While these names have experienced a high degree of price volatility, the underlying trend has vindicated our view.
In general, there was a huge rally in distressed assets in the last half of 2024. Investors, fearful of missing out on any returns, have been piling into the more risky end of the ratings scale. This hype itself may now be a little overdone, and I believe as the dust settles in 2025 we’ll see a return to a focus on fundamentals and where the real strength of these companies lie.
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[1] The ratio of these companies’ earnings versus their value fell as low as five to six times during this period
