Much has been made of the "funding squeeze" for the UK altnet market in 2024, and whilst the interest rate cut in November may improve the short-term funding outlook, the overall direction of travel remains one of consolidation.
As the fibre market matures, many altnets are starting to grapple with the reality that wholesale is a capital intensive, low margin business. That reality is driving changes both in terms of investor behaviours and attitudes. Some altnets have struggled to secure the necessary investment required resulting in them entering into formal insolvency processes. However, even those who are well capitalised are coming under pressure from shareholders and investors to seek improved returns by consolidating investments and achieving economies of scale. Given the budget, and the business community more widely expressing concerns that the basic cost of doing business is set to increase, are we going to see more consolidation in the altnet market, or might there be more failure…
Consolidation
If a transaction is on the horizon, what can businesses do to get ready?
1. Prepare early
A sale process can take a significant length of time, and will be labour intensive. It is essential to be as organised as possible from the outset and think from the perspective of a buyer when addressing key areas of risk.
One way of doing so is to conduct internal due diligence to flush out any potential surprises before they surface further down the line under the watchful eye of the buyer. This is also a valuable information gathering exercise. Having information such as key contracts, financial, accounting and tax information readily available will help the diligence process run more smoothly and allow any issues to be identified and addressed at an early stage.
Having information collated and getting out in front of any issues will also facilitate a faster transaction, which can be crucial where companies are tight on funds and need to move quickly.
2. Review company structure
Consider what exactly is in scope for the transaction and what is for sale. Is it the entire operation or only a part of it, for example just your retail or wholesale business.
The buyer will acquire all assets, liabilities and obligations of the target company, so if not all of those are to be included you may need to take pre-transaction steps such as reorganising assets, re-housing certain subsidiaries or managing divestments. Undertaking those steps as soon as possible will ensure buyers understand and can diligence what is within scope.
It is important to factor any preparatory work into the timetable from an early stage to keep the deal on track. In particular consider your status under the Telecoms Code and how that might be impacted in any deal.
3. Valuation and structure of the deal
Make sure you understand the value of your business, and seek advice from corporate finance advisors as appropriate. A realistic asking price for the business means it should stand up to scrutiny and be supported by evidence in the due diligence process.
You should also work with corporate finance advisors on the structure of the deal itself before you look to negotiate the heads of terms. Are existing shareholders looking for an immediate cash exit, or can an earnout or other deferred consideration mechanisms be considered.
You should negotiate all material terms with input from your lawyer and take advice before signing any heads of terms. This will help reduce the risk of renegotiations later in the process and should make the deal process run more smoothly thereafter.
4. Assemble a deal team
That applies both internally and externally.
The management team of the target business will have a major role to play in any transaction, as well as having to continue managing the day-to-day running of the business. Key team members need to be identified and briefed on plans early in the process, and if necessary incentivised to ensure their interests align with shareholders.
Limit knowledge of the sale of the business to the management team and other key personnel as far as possible. When it is announced, you will want to do so in the right way and at the right time. It can impact relationships with employees and suppliers if information is shared prematurely.
You should appoint a team of trusted and experienced professional advisors at an early stage to manage the transaction. Having a negotiator in place from the outset helps to maintain the relationship with the buyer and to guide you through the stages of the transaction to completion.
5. Opportunism
Given the market conditions, you can well imagine that there are going to be opportunist purchasers out there looking to acquire assets from altnets who might be struggling financially.
For altnets who do find themselves in financial distress the tips above still hold good. If you have good records, up to date valuations and a well-informed management team who understand their business you can act quickly to ensure that, even if the company is unable to continue to trade, you can achieve best value for creditors and potentially save jobs through a managed insolvency process.
How Brodies can help
The Brodies corporate and commercial team has significant experience of advising on transactions, and we can deploy our market leading Telecoms sector knowledge to ensure specific issues are addressed appropriately. We draw on the expertise of specialists from across our firm and work in close collaboration with our tax, real estate, employment, banking, pensions, IP/IT and other colleagues to deliver a complete service.
If you have any questions in relation to the matters discussed in this blog, or wish advice in relation to your business please get in touch with Duncan Cathie, Lucy McCann or your usual Brodies contact, who would be happy to assist.
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