Add the two main groups of ISPs together, and our headline figure may prove conservative.
The ISP market in the UK has seen a spate of transactions over the last couple of years, with a mix of acquisition, divestment and consolidation. For example, O2 acquired Be for GBP50 million in June 2006.
In November 2005, PlusNet acquired Metronet for GBP1.7 million. Prior to that, in October 2005, BSkyB acquired Easynet for GBP211 million. At the time of writing, Tiscali and Homechoice are rumoured to be about to merge in a GBP100 million deal. It will be interesting to see how many more deals occur, and at what value.
Different types of player have been active in the UK ISP market for different reasons and these may hold a clue as to future developments.
- Mobile operators (such as O2) are looking to offer fixed–mobile convergence (FMC) or quadruple-play services – mobile voice, fixed voice, broadband and IPTV – through the acquisition of an existing customer base and experienced management team.
- Existing ISPs (such as PlusNet, Tiscali, and also ntl) are acquiring infrastructure and inorganically expanding their customer base, allowing them to better leverage economies of scale in a market where margins are low, particularly when reselling BT’s IPStream offering.
- Broadcasters (such as BSkyB), similarly to mobile operators, are looking to move into a sector where they have not historically been active, thus giving them a new distribution channel and the ability to offer new services to promote customer retention and acquisition.1
The valuation of ISPs is dependent on many factors. As shown in Figure 1, which shows a small selection of recent deals, the average value attached to a broadband subscriber in recent acquisitions across Western Europe is around GBP350 for ISPs who primarily resell the incumbent’s bitstream service. In comparison, unbundlers have attracted a higher valuation per subscriber, reflecting the asset value of unbundled infrastructure – in June 2006, Be was valued at GBP5500 per subscriber. Other factors that influence the valuation of an ISP include narrowband subscribers, core network infrastructure, ARPU, and competition in the broadband market.
Figure 1: Value per broadband subscriber for selected bitstream-based ISP transactions in Western Europe from August 2004
Recent industry rumours suggest that some very large ISPs in the UK are up for sale, including AOL and Tiscali. Together, these two ISPs accounted for approximately 2.5 million retail DSL subscribers as of March 2006 (both LLU and bitstream-based), or 20–25% of the total market. The combined value of these businesses could be in the range of GBP0.85–1.5 billion, based on the range of valuations seen above (and potentially higher if LLU infrastructure and narrowband subscribers have a significant value to the purchaser).
Furthermore, as of March 2006, there were approximately 1.7 million retail DSL subscribers served by smaller ISPs (such as Demon, Pipex, PlusNet, Tesco, and others). The combined value of these companies could be in the range of GBP0.6 –1 billion. Add these two groups of ISPs together, and our headline figure of GBP1.5 billion may prove conservative.
One potential complication is Bulldog’s wholesale offering based on its LLU network, which could markedly affect the entire ISP market. Recent consolidation is heavily driven by the low margins made by ISPs using BT’s IPStream service,2 and Bulldog’s pricing model – still to be clarified – could increase margins available to players. However, we expect to see more M&A activity in the ISP market both in the UK and worldwide as a result of further pressures on bitstream margins, increasing bandwidth requirements, and the need for more investment in infrastructure to meet these requirements and keep pace with the competition.
1 For example, BSkyB’s recent announcement regarding the launch of its low-priced broadband offering for Sky subscribers.
2 See ‘Unbundling lower prices and higher margins’, Analysys News, June 2006.