Tucows presents an opportunity to invest in a Publicly Traded Fiber Overbuilder
Overbuilders are companies that utilizes an existing telecommunications operator’s network (which includes telco and cable networks). These are often associated with advanced fiber-optic networks. There are hundreds of small fiber overbuilders that are building fiber, but most of them are small and few of them are publicly traded. These are independent telephone companies, cable companies and ISPs that are building fiber in their local markets.
The trouble with investing inbfiber overbuilders is that these companies tend to be small companies. The reason is that small fiber overbuilders require a large upfront capital investment so they have a natural debt ceiling that restricts their ability to raise money. Fiber overbuilders are hard to finance because they lose money for the first few years before they generate any cash. During their first few years the fiber overbuilder also has to cover operational losses, but they also normally have to begin making debt payments before they have generated enough cash to cover those payments. This then forces them borrow to cover debt payments – something that is hard to make work. There are not enough lenders willing to make the cash available to fund fiber overbuilders. And this means that builders must be very selective and only put their money where they can make the best returns.
As the problems with Google Fiber demonstrate, the best returns on fiber are made from being very selective in which markets to enter and cherry picking. This is when a fiber builder only builds to business districts or to a few key parts of a city. Building very selectively where the returns are the best is probably the best use of the limited capital that a builder has available.
As these small companies borrow money to build fiber they can quickly max out their ability to borrow more money. I have talked to dozens of small companies who have already built some fiber and that would like to build more – but once they get to a certain level of debt on their balance sheet lenders won’t extend them more credit.
Borrowing also requires cash equity. It is not unusual for a lender to want to see 10% to 20% of a project funded by equity before they will lend. Even a fairly modest fiber project can cost $30 million or more and that means that a builder would need $3 million to $6 million in cash equity to fund such a project. I don’t think most people realize that small companies rarely sit on that kind of cash. And even if they do, once they use their cash reserves for a project or two they are unable to finance additional projects.
I have seen numerous fiber business plans that cannot be funded because there is no easy way for the borrower to make it through the first three or four years. Many of these projects would eventually become great cash generators, but nobody is willing to take on a project that will run out of cash before getting to that better future.
Probably the biggest problem for small fiber builders is that there are not very many good sources of commercial debt for fiber builders. There was a time in this country when infrastructure construction was funded by the big banks. But those institutions – for a number of reasons – have largely bailed on funding almost all kinds of infrastructure. This affects not just fiber projects, but also roads, bridges, electric grids, water systems and infrastructure of all kinds.
There are a few sources for funding fiber projects, but the funding available represents only a small fraction of the demand that the public has for fiber projects. If every penny of funding that is available for fiber was to be borrowed the country would still largely be without fiber.
Interestingly, it’s now easier to fund rural fiber projects than it is to fund projects in larger towns (larger being towns over 20,000 population). There are a number of federal loan guarantee programs and other financing tools like new market tax credits that can help with rural projects that are not available to support fiber in larger communities. It’s certainly an interesting financial market that will fund fiber to farms before funding fiber to whole cities.
A lot of cities don’t understand the economics and want to impose a lot of restrictions on fiber builders. They want a builder to serve the whole city quickly; they want them to offer low-priced broadband to solve the digital divide and they even want them to finance a network and then open it up as an open access network for other carriers to use. The handful of fiber builders can be very selective and will shy away from markets that make these kinds of demands. Cities don’t seem to understand that in a world with very few fiber builders that those builders get to call all of the shots.