Broadband M&A Set to Grow with a Stronger Market and “Killer Bundle”

DENVER (November 22, 2024)—Merger and acquisition activity in the broadband service sector is poised to pick up due to lower interest rates, moderating labor and equipment costs and national wireless operators’ insatiable appetite for growth. While the pace of dealmaking slowed considerably in the inflationary environment following COVID-19, changing market dynamics and a shift in strategic buyers is expected to trigger a resurgence of M&A within the sector.

According to a new report from CoBank’s Knowledge Exchange, buyers in the broadband space have expanded beyond cable companies and traditional telecom or pure-play fiber operators. National wireless operators have been actively buying fiber companies for growth and to complement their smartphone service with the new “killer bundle,” a smartphone plan bundled with home internet.

“We see M&A interest from wireless operators such as T-Mobile and Verizon as the main catalyst fueling deal activity over the next couple years,” said Jeff Johnston, lead digital infrastructure economist with CoBank. “Wireless networks have less operating leverage compared to fiber networks, so increasing their fiber exposure makes good business sense. And beyond the subscriber bundle benefits, fiber has much better margins than the capital-intensive wireless industry.”

Valuations for privately owned broadband providers have remained relatively flat over the last 12-18 months and are below their elevated levels of two or three years ago. But overall investor and strategic buyer interest in the private broadband market remains strong.

Five years ago, broadband valuation multiples based on Earnings Before Interest Taxes and Depreciation were trending up as infrastructure funds and private equity sponsors were on a shopping spree. Favorable market conditions led to bidding wars for broadband operators looking to cash out at very attractive multiples.

While the onset of COVID-19 initially made broadband investments look especially appealing, pandemic-induced inflation quickly hindered operators’ ability to execute their buildout plans. Additionally, the spike in interest rates made financing deals more expensive. The challenging environment led to a reduction in the number of M&A deals and lowered the prices investors and strategic buyers were willing to pay.

As M&A activity picks up, private broadband operators will continue to be attractive acquisition targets. Recent transactions show the valuation gap between private and public broadband operators continues to widen. Privately-owned entities are enjoying much higher multiples, driven largely by rural market growth, limited competition and higher customer satisfaction ratings.

“Smaller broadband operators, including those serving rural areas, have exceptionally high levels of brand equity, which is not lost on investors and strategic buyers,” said Johnston. “Owning an ISP that consistently delivers a high Net Promoter Score for customer satisfaction, as many rural operators do, is highly coveted.”

The national wireless operators’ move into rural markets should be beneficial to consumers living in those areas. Cost savings associated with the smartphone service and home internet bundle are generally quite favorable. More importantly, accessibility of wireless coverage in rural markets could improve in areas where rural operators were forced to shut down due to a lack of funding to support the “rip and replace” requirement in the Secure Communications Network Act.

Read the report, Broadband M&A Set to Grow with a Stronger Market and “Killer Bundle.”

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 77,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.