“Build it and they will come.”
These are, arguably, the six most offensive words in the metro lexicon. They are a throwback to the hubris of the late nineties, to the notion that you can speculatively build a brand new fibre network and then expect customers to pay a premium to join it. These days are long gone.
Despite an unshakeable conviction that bandwidth demand will continue to grow at an astonishing rate – the number of wireless broadband subscribers in the US, for example, is expected to swell fivefold to 30 million by 2014 – no one in the metro markets is ready to bet the farm on a single ill-judged punt.
Many of the fibre network chiefs currently hooking up urban America to the internet and beyond lived through the dark days of the crash. They remember scrapping their way through bankruptcy courts and fighting off vulture funds intent on picking off assets worth hundreds of millions, for just a few cents on the dollar. Older and wiser, they are driven by a mantra that imposes a rigid financial discipline: history must not be allowed to repeat itself.
Rarely does a digger roll out onto the streets before the ink has dried on a long-term contract with an anchor customer. And with an acceptable return on capital already in the bag, the salesforce can truly get to work, leveraging the company’s asset to sign up additional customers along the route in a virtuous circle of ever increasing organic growth. Today’s leading independent metro network providers avoid the pitfalls that led to the over-commoditisation of America’s long-haul fibre networks. But while metro providers have moved on, the wider investment community has not.
Here is a sector that it expected to grow at a rate of more than 40% for the foreseeable future; that is forecast to be worth in excess of $40 billion by 2014; and that has already proved itself to be all but resistant to recession – double-dip or otherwise. And yet the market’s only representative on the stock exchange, AboveNet, trades at a near 50% discount to its peers in the private sector. That is not a reflection of AboveNet’s standing among stock pickers – nine out of the 10 investment analysts who cover the company rate the shares as either a ‘buy’ or a ‘strong buy’.
Rather, the public markets still fester in the world of the telecoms crash. They do not see the huge barriers to entry that make today’s fast dwindling pool of independent metro players such a valuable entity. They cannot grasp the significance that network density and route uniqueness can bring to a fibre provider. Indeed, it is questionable whether they even recognise the fundamental tenet driving valuations in the private sector skyward: namely that voice transport is no longer a raison d’etre for a network supplier, but rather a single application in a rapidly growing portfolio of services.
The same cannot be said of the oft maligned private equity community. Financial buyers have proved themselves valuable partners, capable of understanding the Ethernet revolution and willing to bankroll an unprecedented wave of consolidation as the strong players work to find scale through merger. It is perhaps testament to their longer-term outlook that as many as 12 new funds are understood to be trying to establish a foothold in the sector. Such are the onerous regulatory requirements associated with IPOs these days that it is far from certain whether many metro players, or their backers, would consider an exit through the public equity market, even if valuations recovered enough to make it viable. If stock market investors are to avoid being starved of opportunities to back one of the fastest-growing sectors in the entire telecoms arena for yet another cycle, then they must finally lay the past to rest. When Wall Street eventually wakes up to the metro investment story, as it inevitably must, its denizens will find themselves in an unusual position: in the ensuing beauty parades, it is they, not the metro providers who will have to prove their mettle.
